How do I calculate the FIRE Number? Let me start with a story. A few months ago, I stood motionless inside my Sydney apartment. The place smelled faintly of cardboard and dust – the kind that clings to old bookshelves and forgotten corners. Around me, piles of neatly packed boxes were stacked like uneven skyscrapers against the wall. Each box was labelled in thick black texta, though half the time I had already forgotten what was inside.
A year earlier, I had quit my job, surprising everyone – including myself. And now here I was: jobless, staring at a wall of boxes, clutter threatening to topple over, and wondering if I had enough money to attempt what I was about to embark on.
My chest felt tight: equal parts fear, equal parts excitement. It was like standing on the edge of a cliff, knowing the view was incredible but also aware of how far the drop could be.
I had confidence though, because of two widely used rules for money management in FIRE. They are actually closely related. They are the 4% Rule and the 25x Rule.
The 4% Rule and the “Trinity Study”
The 4% Rule comes from the Trinity Study, a 1998 paper by three professors at Trinity University that looked at historical stock and bond returns to figure out a “safe withdrawal rate” (SWR): the percentage of your investment portfolio you can withdraw annually without running out of money over a typical retirement (30 years).
The rule states that if you withdraw 4% of your portfolio per year, adjusting for inflation, you have a very high chance of your money lasting for 30 years or more.
Example: (enclose in a box)
If you had $1,000,000 total invested, you could withdraw $40,000 in the first year. The next year, you’d increase that amount to keep up with inflation – say, $40,800 if inflation was 2% – regardless of what the market did.
25✕ rule
Similarly, the 25✕ Rule is just the inverse of the 4% Rule. The rule states that if your total amount invested is 25 times your annual expenses, you can afford to retire. Hence the 25✕. 1 divided by 4% = 25. Hence, to calculate the FIRE Number, you just need to multiply your annual expenses by 25.
This is called your FIRE Number.
If you spend $25,000 a year → FIRE number = $625,000
If you spend $40,000 a year → FIRE number = $1,000,000
If you spend $70,000 a year → FIRE number = $1,750,000
The FIRE number and Retiring Early
When I first started working, I’ll admit, my graduate friends and I compared salaries over drinks, and there was always this unspoken competition: who got the biggest pay, who worked for the best company, who got the newest mobile phone. I did what a lot of people did: as my salary increased, so did my expenses.
One trap that people who want to retire early fall into is thinking they can live like they do after they stop working. The problem is that a lot of us (that included me at one point) live quite extravagantly.
However, once you stop working, you have less control over money coming in. You can’t simply say to yourself “I’ll just get a higher paid job.” Remember, you’re no longer working like you used to, right?
In order to work out if you can retire early, you need to calculate the FIRE Number.
One thing you do have more control over is your expenses and this greatly affects your ability to retire.
If your expenses are $30,000/year, it doesn’t matter if you earn $50,000 or $150,000 – the FIRE number is solely based on that $30,000.
Remember the equation:
FIRE Number = 25 × annual expenses
You can retire if
Total investments > 25 × annual expenses
You can retire earlier if
- Total investments is increased
- Annual expenses is reduced
In all likelihood, only one of these is able to be manipulated by you easily.
My Personal Example – My FIRE Number
I worked as a software developer earning $220,000 as an annual salary, which is roughly $2,500–$2,600 per week take-home. Accordingly, my lifestyle matched this: I had a penthouse on the top floor of a Sydney city apartment block which I was renting for $1350 a week.
My partner and I would eat out two or three times a week, usually in the city centre. If your city is anything like Sydney, we truly were experiencing a “cost of living crisis” and everything now is noticeably more expensive. For two people, eating out would be anywhere between $50 and $90. We would go out drinking once or twice, which would be around $70 for the two of us. Groceries would be around $150 a week. My subscriptions would be $50 a month including Netflix, Disney+ and Prime. Home internet would be $90 a month. Mobile phone subscriptions would be $40 a month.
If you say my total liquid investments were worth $2 million, could I afford to retire?
To answer this question, I need to calculate the FIRE number, again.
Adding up my expenses, it would be (very roughly):
My annual expenses would be roughly
My FIRE number would be $2.022m.
What this means is with the current expenses and lifestyle, I would not be able to afford to retire.
That realisation stung. I thought back to the late nights where I sat in front of glowing screens, eyes gritty, waiting for endless builds and deployments to finish. Sometimes an error would pop up just as I was about to leave, forcing me to start over and kiss another hour of sleep goodbye. Or worse, the dreaded crisis meetings when a live bug brought everything crashing down. I never wanted to go back to that.
It became crystal clear: if I wanted out, I had to cut my expenses. No excuses, no “maybe next year.” It was the only lever I could pull to bring my FIRE number down to something achievable.
And that is exactly what I did (I will explain more in a further blog post how I went about it)
The Finer Detail
The 4% Rule and the 25x rules both assume a few things which are based on the Trinity Study.
These assumptions include that you have a diversified portfolio. The study assumed a mix of stocks and bonds with bonds providing stability and stocks providing the potential of better upside and smoothing over any downturns.
It also assumed less than 40 years (in total) retirement. Anything greater would require perhaps a lower payout per year.
Adopting the rules does require some discipline, because the withdrawal rate is set in stone, meaning it cannot accommodate a lot of “expenditure creep.”
Further Commentary
With portfolios that consist mainly of stocks, it may be perceived that a 4% rate of withdrawal is too conservative. The withdrawal rate may be increased to add a bit of luxury to your life. Otherwise, you may end up with a large surplus for your estate but that may well be another, legitimate goal. This is described more in “The Different Flavours of FIRE.”
If you want to increase your withdrawal rate by CPI each year and you do have an extended retirement, it may be worth reducing your initial withdrawal rate, since even small annual CPI increases may result in quite a large withdrawal in the later years due to compounding.
Conclusion
To calculate the FIRE number is a clear cut way to work out how large an investment portfolio you require as well as seeing the impact of your expenses on your ability to retire.
Reducing your expenses in the easiest way to get the FIRE number down.
Actions:
Sum your expenses and calculate the FIRE number and have a think about how to get yourself closer to retiring.
