Retirement at 67? Think again. An increasing number of people are choosing to retire early and live life on their own terms, thanks to the Financial Independence, Retire Early (FIRE) movement. The FIRE principle empowers individuals to make smart financial decisions that ultimately enable them to stop working sooner than later. At Smart Finance Freedom, we’re here to show you exactly how to calculate your FIRE number and pave your path to financial independence.
What is a ‘FIRE Number’?
Your FIRE number is the total amount of money you need saved to sustain your desired lifestyle throughout retirement without needing to work another day. It’s a straightforward yet powerful concept that can inspire you to transform your approach to finances. Here’s how to determine yours:
How to Calculate Your FIRE Number
Estimate Your Annual Expenses
First, you need to understand your current spending habits. Create a spreadsheet or use a budgeting app to track every dollar spent. Your total annual expenses should include everything from housing, groceries, and healthcare to entertainment, vacations, and incidentals.
To calculate your FIRE number, you need to extrapolate these expenses over the course of your retirement. Keep in mind that this is a future-oriented exercise. Although you might spend a certain amount today, consider how your lifestyle might change during retirement. Perhaps you’ll travel more, dine out less, or downsize your home.
Identify Your Safe Withdrawal Rate
Next, determine your safe withdrawal rate (SWR) – the percentage of your retirement pot you plan to withdraw each year. The commonly suggested SWR is 4%, a figure based on the Trinity Study which concluded that this rate can sustain a retiree for at least 30 years.
However, your SWR is deeply personal. If you wish to retire earlier or anticipate higher expenses, a lower rate such as 3% might offer more security. On the contrary, a higher rate may work if you plan to retire later or anticipate lower expenses.
Calculate Your FIRE Number
With these two pieces of information, you’re ready to calculate your FIRE number. Simply divide your annual expenses by your SWR (in decimal format). For example, if your annual expenses are $40,000 and your SWR is 4% (or 0.04), your FIRE number is $1,000,000. This means you’d need a million dollars saved before you can retire.
It’s important to remember that your FIRE number isn’t a static figure. Life changes, and so will your financial circumstances. Regularly reviewing and adjusting your FIRE number ensures it continues to align with your goals and lifestyle.
Strategize Your Saving
Knowing your FIRE number is just the beginning. It’s now time to strategize your saving and investing to accumulate this wealth. Some strategies might include reducing living expenses, maximizing income, or investing wisely.
Consider the power of compounding your money’s ability to grow over time through reinvested earnings. Even small, regular contributions to an investment account can amass significant wealth given enough time and the right conditions.
Many people pursuing FIRE also prioritize tax-advantaged accounts like 401(k)s and IRAs. These offer significant tax benefits that can accelerate your journey to financial independence.
Here at Smart Finance Freedom, we firmly believe that achieving financial independence isn’t reserved for the select few—it’s attainable for everyone. Calculating your FIRE number is your first step on this journey. With the right knowledge and guidance, anyone can blaze their trail towards early retirement.
Know your FIRE number, build your strategy, and unlock the freedom that comes with financial independence. Remember – you have the power to shape your financial future and redefine what retirement means to you. Embrace the challenge, relish the journey, and bask in the warmth of your financial freedom.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always consult a financial advisor before making major financial decisions.