A FIRE number is the number of assets you need where you can quit your job- never work again, and do whatever it is when you retire. What you want to do next will affect your F.I.R.E number- if you have very low cost hobbies/plans (eg. walking or local holidays within the same country) then you won’t need to budget massively for these. If, on the other hand, you want to travel the world every year, or week/month long cruises- then your costs are going to be much higher! So, there are actually a couple of things you need to know/work out before you can work out your F.I.R.E number
What are your expenses going to be?
Well, this isn’t that easy to work out- as its unlikely to be your current expenses right now (if they are as you have already retired- why are you reading this!), because you don’t have any of the work costs that you have now. Instead, you will have the costs of whatever you decide to do next instead- which might be higher or lower than your current spending. For most people- this is likely to be lower than their current spending. The figure you need is your yearly expenses- so whatever you budget to spend over the entire year. What do you want to do with your early retirement?- surely not just sit at home watching tv- there is a whole world out there. Not only that, but you have time to do things that you just didn’t have time for whilst working. Want to walk the entire UK from top to bottom?- it’s about 1000 miles, so going to take at least a month, you will have all the time to do that if there is no work to go back to!
Where is your income going to come from?
This might be from a pension (assuming you have reached pension age), property rental, stock market dividends, or any other type of assets. Whilst it doesn’t really matter where your income is coming from- you do need to plan to ensure you have enough income. For example, if you are going to use the stock market to provide for your F.I.R.E- what happens if it drops 10% in a year? Will this affect your plans? You also need to consider how tax will be due (but hopefully you saved in your ISA!). If you are doing proper F.I.R.E- you are going to want/need to stop all your side-hustles, unless they require no time (or maybe, you just want to keep them!). Either way, you are going to need to have income to support your early retirement.
The withdrawal rate is the percentage that you are going to take from your assets above in order to have an income. For example, if you have assets of £100,000- you would then take a percentage of this, on a yearly basis, to provide for your life. There has been many debates about what is a “safe” number- from 2% – 4% (and higher!). In truth, its somewhere between 2-4%, depending on your risk level, your age and if you can trim your spending if required. Even with a withdrawal rate of 4%- you would need 25 years to deplete the asset (assuming no growth or inflation), since 25×4 = 100- all your assets used up. This only becomes a bigger consideration if you are retiring pretty early (before 50), or if you aren’t expecting the state pension to bump up your income (and there is lots of discussion about if it will even exist when we reach state pension age).
Yearly Expenses x (100/Withdrawal rate) = F.I.R.E Number
Hopefully that makes sense as you have read how to get each of these numbers from above. Let’s run through some examples:
Frugal, non-risk taker- they have expenses of just £10,000 a year- they have paid off their house and have very cheap expenses. They don’t want to rely on the stock market at all, so instead have their money in fixed bonds (the type banks offer). They have chosen a withdrawal rate of 2.5%. Their F.I.R.E Number would be £400,000 (£10,000 x 100/2.5).
More of a fat F.I.R.E retirement, somebody that enjoys holidays worldwide, and eating out more, so their yearly expenses are £50,000. They are keeping most of their assets in the stock market- so have chosen a much more risky withdrawal rate of 4%. Their F.I.R.E Number would be £1,250,000.
It’s likely that you will want a number somewhere that sits in-between these two frugal/fat F.I.R.E’s. Just remember that if you don’t own your own home and rent instead- your yearly expenses are likely to be much higher than somebody that owns their own home. Of course- you could just move to a lower cost-of-living area, then you expenses would be much lower. Could you leave your friends/family though? It’s all a balance…
These seems like huge numbers- why?
Even if you are like the frugal person above, £400,000 sounds like a huge number to save for! Well, it’s mainly because you want to live for a long time without doing any further work- this isn’t “normal” retirement. As, for most people, they work their entire lives, get to 65 (or later if you are young)- retire, and die, approximately 20 years later. If this was true for you- you could have a withdrawal rate of above 5%!- Which, if you were looking at a 2.5% withdrawal rate, is half the number of assets. But, F.I.R.E is about retiring as early as you possibly can, so it’s all about getting those assets together & reducing your expenses.
You need to use compounding returns- from somewhere like the stock market, or even bonds, either way- saving this from your income will take years & years! So, use compounding returns to help you on your journey. I’ll write about this soon, but imagine this example:
35 years investing, at £500 per month, you will have put in £210,000- not nearly enough to retire, even very frugally. Now, if you compound this at 6% for the full 35 years (with the same amount input)- the total balance would be £690,000! (£480,000 of returns!!). And that, is the magic of compounding interest!