The FIRE number is the net worth you need to have so that it (once invested) will support your expenses (until you die).
That means, once you reached that amount, you are financially free.
Here’s how you can calculate it
Yearly expenses * 25 = YOUR FIRE NUMBER
Example: Let’s assume your expenses are 50’000 per year = you will need 1’250’000 to be financially free. That means your FIRE number is 1’250’000.
Whats behind the multiplication with 25?
This simple function is based on the assumption, that you can safely take out 4% of your portfolio per year -> 100 / 25 = 4. And that again requires you to invest mostly in stocks, which did perform so good in the past 30+ years so that a take rate of 4% is considered “safe”.
Most people in the FIRE community follow this assumption since it has been widely stated and challenged with simulations. Even Vanguard wrote a paper on it I highly recommend you to read: Fuel for the F.I.R.E.: Updating the 4% rule for early retirees
Needles to say, this is just theoretical and includes some risks. Therefore most FIRE-people don’t retire the day they hit this number. Adding some buffer for unexpected expenses or a market crash in the early years of your retirement might let you sleep better at night.
What if you don’t have most of your net worth invested in stocks?
Then you simply have to define your own safe withdrawal rate which has to count in:
- Your expenses
- The expected yield of your portfolio
- The volatility of your portfolio
- Your life expectancy
Now you need to smash this into a spreadsheet and play around. Historic values might help you define what will work for you.
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