FIRE number

What is the FIRE number

FIRE (Financial Independence, Retire Early) is the capital that, invested, generates enough to cover your expenses. With the «4% rule» it's about 25 times your annual spending.

Note

It's a theoretical estimate based on historical market returns: not a guarantee. A lower withdrawal rate (3-3.5%) is more prudent.

Where the 4% comes from

The number was not invented: it comes from a 1990s study that tested every thirty-year window in the history of the American markets and asked what annual withdrawal, adjusted for inflation, a portfolio could sustain without running out. The answer was around 4%, and from there comes the multiplier of twenty-five, which is simply one divided by 0.04.

Which also explains its limits: it talks about thirty years, not fifty; it is measured on a single market, the one that did best of all in the twentieth century; and it assumes a portfolio largely invested in shares, not a savings account. Someone stopping work at forty faces a far longer horizon than the one studied, which is why many use a withdrawal of 3.5% a year, corresponding to a multiplier of about twenty-nine.

The number depends on spending, not on salary

This is the part that turns the reasoning upside down. Earning more helps, but spending less acts twice over: it lowers the target and raises how much you can set aside each year. A thousand a year less in spending takes twenty-five thousand off the goal, permanently.

It follows that the sum must be done on real spending over a full year, including the items that come round once: insurance, the dentist, holidays, the car that eventually needs replacing, the boiler that dies every fifteen years. Taking a quiet month's spending and multiplying by twelve is the error that makes every FIRE number too optimistic.

The risk the number does not show

The average return is not enough: the order in which returns arrive matters too. Two sequences with the same average lead to opposite outcomes if one starts with three bad years, because in those years you sell a larger share of a smaller portfolio, and what has been sold does not take part in the recovery. It is why the first five years weigh more than all the others.

The known defences are two, and neither is complicated: keep two or three years of spending in instruments that do not swing, so that in bad years you draw from there; and accept tightening the belt when markets fall, instead of withdrawing the same amount with your head down.

What the calculation does not contain

Tax, which applies to withdrawals and differs from country to country. Healthcare, which in some countries is public today but need not cover everything for fifty years. The state pension, which does not appear in the sum but which past a certain age cuts the required capital considerably: someone leaving work early only has to cover the window up to the pension with capital, not eternity.

And above all it does not contain the non-financial part. People who have hit the number almost always report the same two things: that the money was enough and the days were not. When to stop is a life decision for which capital is only the precondition.

Nearby tools

The growth of capital over time is handled by Compound interest, and the time needed to reach a figure by Savings goal. For the day-to-day part there are 50/30/20 budget and Inflation calculator, which says what today's figure will be worth in twenty years.