How much money is enough? Well, if we define “enough” as being independently wealthy, to where your money comes from assets and you no longer have to work, there's a formula we can use to get a ballpark answer.

This formula is known as the FIRE number. FIRE stands for Financial Independence, Retire Early, and the FIRE number is its linchpin. By forecasting how much money you'll need to safely withdraw each year without running out of funds, you give yourself an initial target. 🎯

It's kinda like coming out all over again! So let's rip the bandage off and get to work.

The 4% rule

In the calculator above, you can set your withdrawal rate to whatever you want. The default withdrawal rate is 4% because of something called the 4% rule.

In 1998, three researchers at Trinity University published a paper that would change retirement culture forever. It came to be known as the Trinity Study, and in it, the researchers found that, if you were to withdraw 4 percent of your portfolio a year, the odds of you running out of money after 30 years were almost zero (based on historical U.S. stock and bond returns).

The FIRE number formula projects your FIRE number based on expected future annual expenses. You take your annual expenses and divide them by 4% (0.04), or whatever your expected withdrawal rate will be.

Dividing by a percent is weird, though... another way to think of it is to (switches to nerd voice) turn the percent into a fraction, then cross-multiply. So, for dividing by 4% — which, as a fraction, would be 1/25 — you could just multiply by 25 instead and get the same result.

Let's do that. 😇

FIRE Number = Annual Expenses × 25

Examples:

• If you spend $50,000/year, your FIRE number is $1,250,000.
• If you spend $80,000/year, your FIRE number is $2,000,000.

Every $1,000 reduction in annual spending (about $87/month) lowers your FIRE number by $25,000, which can significantly shorten your time to financial independence.

Other considerations

You'll want to recalculate from time to time

Won't a Snickers bar cost $5 in 30 years? Probably.

Your life goals will also likely change over time. Maybe you wanted to settle down in a rural area, but have sense realized you'd rather work longer in order to keep living in a city.

Also, most of your money will remain invested, and the S&P 500 frequently does better than 4% a year, which means you'll likely blow past your FIRE number in those first few years after reaching it.

For these reasons, and many others, continue to think of the FIRE number as an approximation.

Other income sources

In the U.S., you'll be eligible for Social Security at 62 and Medicare at 65. You might also be at a workplace that provides a pension.

You might also want to keep working, but just switch to something lower-stress or something part-time. This flavor of financial independence planning is known as Barista FI, and it's become increasingly popular, particularly as people look to solve for health insurance costs. ⬥