How to figure out how much money you need to retire early

If you retire in your 40s, how much money will you need to live comfortably for the rest of your life? That is one of the central questions of the FIRE (financial independence, early retirement) movement.

Financial independence, at least for many online communities, is defined as having enough savings and investments to cover reasonable living expenses for the rest of your life. You can volunteer, continue to work, or pursue a hobby or passion, but you no longer rely on income from work to cover day-to-day expenses and save for retirement.

The goal of the financial independence movement can be summed up as, “What would I do with my life if I didn’t have to work for money?” follow the popular subreddit on the subject.

For many mission adherents, there is a savings goal they want to achieve, at which point they will achieve financial independence, as they have determined. It’s called their FIRE number, and typically it’s 25 times a household’s annual spending, invested in passive, low-cost stock funds. Many early retirees want to save $1 million to $2 million.

You can calculate your own numbers by meeting with a financial advisor or using an online calculator that can give you an idea of ​​the ballpark.

For early retirement, the standard thinking is that your 4% annual savings withdrawal rate is “safe” and you can increase this rate with inflation each year. So, for example, if you saved $1 million, you could take out $40,000 in the first year. If inflation is 3%, the next year you can withdraw $40,000 plus 3%, or $41,200.

Of course, there are countless factors that go into determining how much you need to retire: Your current salary and savings rate, how much your employer contributes, how the market works. , how much you need to live per year, your withdrawal level. rate, your family size, your goals, your diverse sources of income, health care, unexpected expenses – the list goes on.

Julien Saunders, who blogs about her FIRE journey with his wife, Kiersten, tells CNBC Make It: “Like many others in the FIRE space, we use a general rule of thumb that is 25 times the cost of ours. We make the base. “However, since we have a number of variables, such as potential for another child and a financially insecure parent, we don’t build a plan based solely on those numbers.”

They have different savings and investment goals, he said, adding that prioritizing retirement savings and passive income streams allows them to “opt out of working in the traditional sense and focus into other things.”

Tanja Hester, author of “Work Options: Retiring Early The Penny Way” and the blog Our Next Life, tells CNBC Make It that she recommends that people save in excess. “25 times”.

“Your spending will likely go up as you have more free time for travel and money-intensive activities,” she says. “I recommend saving at least 30 times your projected annual expenditure in early retirement, along with having at least one or two large provisions, such as a home you own completely. completely and can be scaled down.”

Overall, though, FIREs try to keep costs down so that they can save at least 50% of their wages each year, although some save significantly more than others.

Going through FIRE’s subreddit will help you realize that: Some followers are picky about every penny they spend, while others prefer to indulge in some luxuries right now. Some say they want to retire in their 40s, some in their 50s, and others are just in it to hone their general financial know-how. Many people make six figures, but there are others who make $50,000 per year and still save a lot of their money.

FIRE is not for everyone. The most common criticism of this movement is that only the privileged classes with high salaries, such as software engineers and lawyers, can really get there, and that the participants, at least the vocal ones, mostly male and white.

Douglas Boneparth, president and founder of Bone Fide Wealth, tells CNBC Make It that while the FIRE movement is great for those who want to pursue it, it’s impractical for many. FIRE is extreme, and extreme methods have extreme results – not always better.

“Balancing a comfortable and frugal lifestyle for your goals is, in my opinion, a great way to do it,” says Boneparth. “FIRE isn’t really a scale, it’s an extreme tilt of the scale.”

While it’s easy to look at your current expenses to calculate your FIRE figure, Boneparth says it can be difficult to predict those amounts in the future without complex software. A 4% annual withdrawal rate is suitable for a purely quantitative approach to your finances, but does not necessarily take into account the qualitative aspects of life.

“These analyzes don’t take into account life, they’re in a vacuum,” he said. For example, what happens if you experience a serious illness, a recession hits you shortly after you “retire,” or your house burns down – all of these are unpredictable. before can.

That said, Boneparth says anything that gets people to save more and think about their financial well-being is a positive thing. Applying the parts of the FIRE movement that fit your goals can be part of a comprehensive financial plan, even if you don’t necessarily have a specific figure you’re aiming for.

“My dad always said if you’re drifting down a river where there are rocks lining the bank, the last thing you want to do is crash into the bank,” he said. “Floating to the middle is the safest way.”

Do not miss: More workers want early retirement: A look back at the FIRE . movement

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