FIRE Number
The pot that lets investment income cover your spending for good.
Recent
Formula
How the calculation works
The number is annual expenses divided by the withdrawal rate. At 4% it is twenty-five times spending, so 40,000 a year of expenses needs a 1,000,000 pot. That is the whole arithmetic, and it is why spending is the input that matters most.
The monthly figure is reported alongside so the target can be read against a budget rather than a yearly total. Because the number moves in step with spending, cutting costs lowers the target directly -- which is often a faster route than raising income.
Common mistakes
- Treating the number as a finish line. It is a planning target built on a withdrawal rate, and the rate can prove too high in a bad market.
- Ignoring the monthly figure. A target read only as a yearly total is hard to compare with a budget, which is where the plan has to fit.
When to use it
- Use it to turn your spending into the pot that would fund it for good, which is the first number a financial-independence plan needs.
- It is also the tool for the cost-cutting question: lower the spending and watch the target fall, which shows how much a cheaper life is worth.
Worked example
Spending 40,000 a year at a 4% withdrawal needs a pot of 1,000,000; the monthly spend is 3,333.33.
Common questions
Why 4%?
It is a popular planning rate drawn from historical returns. Four percent means twenty-five times the spending, which is the arithmetic behind the number.
What if my spending changes?
The number moves in step with spending. Halve the spending and the pot roughly halves, which is why cutting costs is the fastest route.