How much you need to retire early (FIRE number)
Want to know how much money you need to retire early? This article is for you!
When it came to retirement, I assumed that people steadily saved a percentage of each paycheck into their 401K and that whatever they had by age 65 was what they had to make work.
When I later heard about early retirement, I assumed that people picked a number of savings they just felt would last them through retirement because the amount of money was just so large it’d be impossible to spend it all… right?
As I’ve gotten older and become more interested in finance - and the FIRE (Financially Independent Retire Early) movement in particular - I started to hear everyone talking about their “FIRE number” and this thing called the Trinity Study.
Lo and behold - there was a science behind the amount of money that people picked for retirement and a study actually proving they were unlikely to EVER run out of money, even in worst case market scenarios. Suddenly the whole idea of retiring early became less risky and more real.
So what is a FIRE number?
A FIRE number (or FI number as some like to call it), is the amount of money you need to have in your investment portfolio in order to retire early.
Reread that sentence carefully.
It doesn’t say “money… in cash tucked under your mattress” - no, it assumes that the money is invested and increasing in value from either growth or dividend income, but hopefully both.
You may be wondering - okay, so it’s the amount I need to have invested to retire early. How do we know what that amount is?
Glad you asked!
The Trinity Study (the 4% Rule)
The Trinity Study, completed by three researchers at Trinity University, was originally conducted to determine the success rate (where success was defined as any investment portfolio that had more than $0 left by the end of the study) over a normal retirement period.
That’s right - the study that frequently comes up in the F.I.R.E. movement was actually NOT intended for those who wanted to retire early.
It also assumed that investors were not attempting to leave any money behind from these portfolios for their children and were willing to use up their original principal in order to have a higher standard of living. They said “investors who wish to leave an estate” would need to withdraw at a lower rate.
The Trinity Study is often called the 4% rule because of the annual withdrawal rate recommended by it
The study also assumed that retirees would withdraw their money at the end of the month, giving more time for the portfolio to grow throughout the money until the money is actually needed.
The research, ending in 1997, covered 15 year, 20 year, 25 year, and 30 year retirement periods. They studied different portfolio types - some 100% stocks, some 100% corporate bonds, and others in-between those balances in increments of 25%.
The results of the study showed that the 3% withdrawal rate, or withdrawing 0.25% of your portfolio per month, was the safest. These portfolios NEVER reached $0 in a 30 year time-period, even adjusted for inflation, when the portfolio was 25% or more invested in stocks (instead of corporate bonds). At a 3% withdrawal rate, there was a 21% chance of running out of money when the portfolio was 100% bonds, adjusted for inflation.
At a 4% withdrawal rate, the odds were still mostly good - but not 100% (though nothing in life is ever truly 100% certain). With a 100% stock portfolio, there was a 2% chance of running out of money by the end of the 30 years and with 50% invested in stocks there was a 5% chance of running out of money in 30 years. Any portfolio that had less than 50% in stocks began to significantly raise their chances of running out money - in fact, a 100% bond portfolio had an 81% chance of running out of money by the end of the 30 years at a 4% withdrawal rate.
You can download the study and see the charts for yourself at different withdrawal rates, time periods, and and balances here.
A more recent version of the Trinity Study analyzed stock market returns through 2020. While the new study confirms that 4% is still somewhat risky, the results for 3 and 3.5% are very promising.
Key Takeaways
Even though the 4% rule is more popular, the 3% withdrawal rate is much less risky
A 3% annual withdrawal rate, or 0.25% monthly, is much safer than a 4% withdrawal rate
The study was NOT meant for early retirement and only covered a 30 year period - it is not clear if the value of the portfolios would reach $0 if extended for an early retirement of a much longer time period (50+ years)
The study ended in 1997 - the digital transformation of the world, including robo-advisors for stock portfolios, current events in the market, and/or the effects of the pandemic could impact the results of the study if it was repeated in modern times
The study assumes you are willing to spend the principal and that you are not attempting to leave any money behind for your family
The portfolios with the highest success rates were heavily invested in stocks (at least 50%) instead of bonds, which is contrary to the popular belief that those who are retired should choose “safer” investments and avoid the stock market
It is assumed that you would withdraw your money at the end of the month, giving your portfolio as long as possible to grow throughout the month
Before you calculate your FIRE number…
You may think you should just take your current salary and plug it into the equation - but that’s not quite accurate.
Take some time to really think about where you will be when you begin early retirement and what your actual expenses will be, not what they are right at this moment. You may not need your entire salary if you get (and keep) your expenses low before beginning early retirement, while on the flipside you may need more than your current salary if you plan on having a very active retirement lifestyle.
Some questions to ask yourself:
Will you pay off your student loans, car, and house before beginning early retirement?
If so, great! That will lower your monthly expenses during retirement significantly.
Are you planning on traveling more, picking up any expensive hobbies in retirement, starting a business, going out to eat frequently, and/or having (more) kids?
Don’t forget to factor those new expected costs into your monthly retirement expenses!
Are you aware of any medical problems in your family that you yourself could run into in the future?
We may not want to think about aging and all that comes with it now, but better safe than sorry. Plan for needing medical care, especially as you age. You may even want to look into the costs of nursing homes in the future in the event you cannot care for yourself and your family is not able to provide the constant care that elder people often need.
And the list of questions could go on. Really take the time to picture what your life looks like in retirement to anticipate your real future monthly expenses.
And another word of caution… always overestimate your expenses by at least 10% to give yourself a buffer!
If you plan on renting for life, the monthly amount you pay is almost guaranteed to go up with every lease renewal (and could even skyrocket if the city you live in becomes popular). If you own a home, even if you paid it off in full, property taxes can - and will - go up. The HOA could also attempt and succeed at increasing their rates at any time. Want to help your kids with college? Tuition has increased 25.3% for private colleges and 29.8% for public colleges over the last 10 years. Today’s rent, tax, and tuition prices will not be the same 10, 20, 30 years from now.
Now that we’re done with the doomsday budget scenarios…
Calculating your FIRE number
Once you’ve gone through the last section and decided on what your annual expenses are, simply multiply your desired annual income by 25 to get your FIRE number.
So if you decided that you needed $40,000 per year to live comfortably, ignoring the 10% buffer for simplicity, you would multiply $40,000 by 25, giving you a FIRE number of $1,000,000.
$1,000,000 * .04 = $40,000 annual withdrawal$1,000,000 *.003333 = $3,333 per month$1,000,000 is the amount you would need to have invested in order to retire early. And, as we saw with the Trinity Study, you should be able to live off this amount by withdrawing 4% total per year, or $40,000 for at least 30 years with a very high success rate, assuming you have put at least 50% into stocks.
Personally, given the result of the Trinity Study and the updated study, I would opt for the 3% rule to eliminate as much risk as possible.
So, taking the same example as above, you would multiply $40,000 by 33.33 instead of by 25.
This would give you a target portfolio value of $1,333,200.
$1,330,000 * .03 = $39,900 annual withdrawal$1,333,000 *.0025 = $3,332.50 per monthHow to reach FIRE
Armed with your FIRE number, you now have a concrete goal to save towards. $1,000,000 can seem like a scary goal, but with dedication towards cutting your spending, raising your income, and making smart investments - it is completely possible.
Read my articles on saving hacks and 10 tips to spend less to get started! You might even be surprised to find out that making coffee at home can save you a mortgage payment…
More into real estate investing? I broke down the exact cost of my latest home purchase and wrote about the (nightmare) appraisal process!
Let me know what your FIRE number is in the comments below & what you’re doing to achieve it!