The FIRE movement promises a surefire way to help you retire below the national average retirement age of 64 and be financially independent. But first, you need to know your FIRE number, or the amount of retirement money you need to have invested to live on the returns. Here’s how to calculate it. Consider working with a Financial Advisor how to create a financial plan that will allow you to retire whenever you want.
What is a FIRE number?
FIRE is an acronym that stands for Financial Independence, Retire Early. Those who follow the FIRE movement are working hard to change their lifestyle so they can retire earlier than most. Depending on when you start, your income, or your goals, you may become optional at work from quarantine.
Strict savings habits and strategic investment in the FIRE movement are designed to help you reach your FIRE number. It is the total value of the assets needed to live off passive income.
How to calculate your FIRE number
You will come across a few different numbers in the FIRE movement. For example, some proponents claim that the best decision is to have $1 million fixed. They believe that’s enough money to retire. From there, you can live on around $40,000 a year. Alternatively, there are equations you can use to find a more personalized number. The first and most popular equation is: FIRE number = 25 x your annual expenses.
This formula is based on the Trinity Study, the best known name from a 1998 article titled “Retirement savings: choosing a sustainable withdrawal ratepublished by three professors of finance at Trinity University. The study led to what we now call the 4% rule. Essentially, this rule supports the theory that if you withdraw 4% of your savings each year in retirement, adjusted for inflation each year after the first, then you will have long-term sustainable passive income.
So this first formula, known as the 25x rule, is an estimate of how much money you’ll need in total to safely rely on the 4% rule. However, this may not be the right rate for you.
An alternative formula is:
FIRE number = annual spend / safe withdrawal rate
Why is your FIRE number important?
A FIRE number, and hitting it, can matter for a multitude of reasons. For a person, it’s the difference between working long-term in a stressful business and working part-time in a passion project. On the other hand, it is the freedom to live paycheck to paycheck for the rest of their lives. Or the ability to look forward to their senior years.
Your FIRE number gives you a goal to achieve that allows you to live comfortably. You can fill in the time formerly spent on work. Instead, you can explore other sources of passive income.
Is early retirement right for you?
FIRE may not be the right path to retirement for you, even if you would like take early retirement. Some critics of the FIRE movement claim that it is only accessible to the upper class. In particular, there are concerns that the target group is predominantly white and male, with well-paying jobs. Even some supporters who don’t fit into the broader demographic agree that there’s a lack of diversity in the FIRE movement (although there are some prominent figures, like “Work Optional” author Tanja Hester, trying to change that).
The lack of diversity makes it difficult for those with complex lives to follow the same guidelines that others can easily find through FIRE. Your life may require a list of unique expenses that make it similarly difficult to cut back.
In addition, FIRE does not necessarily take into account unexpected expenses. You could experience a serious illness in the future or your investments could suffer. If this is the case, your advance planning may disappear since you have only allocated a limited amount for your retirement. However, while the FIRE move may not work for you, that doesn’t mean you should give up on retiring early. You just need to plan accordingly.
Conclusion
The FIRE movement is just one path to financial independence. For some, strict saving and budgeting habits can align well with their goals. For others, it may require too much restriction. So while working towards a secure retirement is worth it for some people, it might not be a lifestyle you can tolerate.
You can always take some advice out of the move without following it. Building your nest egg and keeping track of your annual expenses are good habits to get into. However, if you want an alternate path for early retirement, consider talking to a financial advisor. They can help you define your goals and develop a plan for you that takes into account your situation.
Retirement Planning Tips
-
Planning for retirement and achieving specific retirement goals can be difficult on your own. You may want to work with a financial advisor to help get you on the right track. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
-
Get a head start and learn how much you’ll need by using a retirement calculator. If you’re wondering how to achieve this goal, consider investing in an employer-sponsored business. 401(k) programme.Photo credit: ©iStock.com/kupicoo, ©iStock.com/Geber86, ©iStock.com/yongyuan
The post office What is your FIRE number for early retirement? appeared first on SmartAsset Blog.