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How to estimate your FIRE number

Your FIRE number is annual spending divided by a withdrawal rate. The arithmetic takes one line. The interesting part is how much the assumption you pick moves the answer.

2 min readFIRE Planning

Key takeaways

  • Your number is annual spending divided by a withdrawal rate. Everything else is detail.
  • At 4 percent that division gives 25 times spending, which is where the 25x shorthand comes from.
  • The rate you assume moves the target enormously. Going from 4 percent to 3 percent adds more than eight years of spending to the goal.
  • Spending drives the answer twice over, because it sets both the numerator and the lifestyle you are funding.

The whole calculation

Take what you expect to spend in a year once you stop working. Divide it by the withdrawal rate you are willing to assume. That is your number.

Spend $60,000 and assume 4 percent, and you need $1,500,000. There is no second step.

Why people say 25 times

Dividing by 4 percent is the same as multiplying by 25, because 1 divided by 0.04 is 25. The shorthand is just the arithmetic wearing a friendlier face.

The multiple is one divided by the rateTHE MULTIPLE YOU NEED IS ONE DIVIDED BY THE RATE25xwhat you need at a 4 percent withdrawal rate0x22x2.5%3.5%4.5%5.5%4 percent needs 25 times spending
The multiple is one divided by the rate. A small change in the assumed withdrawal rate moves the target by years of work. Computed arithmetic.

Look at what the assumption costs you. Drop from 4 percent to 3 percent and the target jumps from 25 times spending to more than 33. On $60,000 of spending that is the difference between $1.5 million and $2 million, which for most savers is several additional years of work.

That sensitivity is why the withdrawal rate is worth understanding properly rather than accepting from a headline.

Spending is the lever, not income

Notice which variable the formula actually contains. Not your salary. Not your savings rate. Spending.

Cutting annual spending by $6,000 lowers a 25x target by $150,000. The same $6,000 saved once lowers it by $6,000. Recurring changes to spending are worth twenty five times a one off change, which is a strange fact until you look at the formula and see why.

What the number does not include

A single figure hides several things. Health coverage before you qualify for a public program. Taxes on withdrawals, which depend on which accounts the money sits in. A mortgage that ends partway through, or one that does not. Spending that is rarely flat across a thirty year retirement.

Treat the number as a target to aim at and revise, not a finish line someone will confirm you crossed.

Sources

  • The 4 percent figure originates with William P. Bengen, Journal of Financial Planning, October 1994, where the computed worst case was 4.15 percent.
  • Multiples above are arithmetic. The multiple always equals 1 divided by the withdrawal rate.
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