What Is A FIRE Number?

Your FIRE number is your expected annual expenses x 25.

If you expect to spend $3,000/month in retirement, your annual expenses would be $36,000.

Your FIRE number would therefore be:

$36,000 x 25 = $900,000.

This means once you reach a net worth of $900,000, you should be able to retire.

This is based on the 4% rule.

How the 4% rule works

The 4% rule is a popular guideline you will read in many personal finance books.

It states if you limit spending to 4% of your portfolio each year, it will last for your entire retirement.

Dividing by 25 gives you 4%, which is why your FIRE number gets calculated that way.

The rule was invented by a financial planner who claimed between 1926 and 1976, even during the worst periods, there was never a market where you could withdraw 4% a year and deplete your portfolio in less than 33 years.

In other words, if you withdrew 4% per year from your portfolio, even in the worst case scenario, your portfolio would last at least 33 years.

Since you retire at 65, and practically nobody lives to 98, it became a "golden rule".

Nuances With The 4% Rule

Here's a couple of interesting factoids for you:

• The S&P 500 has returned 10.02% annually since 1926.
• The NZX 50 has returned 10.26% annually since 2001 (excluding dividends!)

On the surface, this looks like you should be able to withdraw much more than 4% per year, and your portfolio would still grow!

However, what this misses is the fact that markets do not move in a straight line:

Therefore, spending $40,000 of your portfolio each year is not equal.

It will deplete your portfolio much more value in a bear year (since you need to sell more stock to get the same amount of money).

Of course, a savvy investor will know how to mitigate this.

For example, you can spend freely in the years the market is up, and be more frugal when the market is down.

This is simply the old adage of "buy low sell high".

Spending in a bull market is akin to "selling high" which is not a problem.

Spending in a bear market is akin to "selling low" which is destructive to wealth.

You could also tell yourself, in a bear market you're going to limit yourself to spending dividends and interest only, so you don't need to sell any of your assets at low prices.

You could also aim to be more frugal, such as moving to a cheaper city or country for that year to reduce your spending. 

Many FIRE retirees can be found living in places like Thailand, Vietnam or Mexico in order to keep their wealth growing, even after reaching their FIRE number.

Finally, the last thing people miss is in retirement, you're not just sitting around doing nothing.

Many people in FIRE are naturally ambitious and driven people, so they will continue to have side hustles and small businesses that feed their passions.

It is very unlikely you will stop earning completely during your FIRE retirement.

Therefore, in bear markets you can focus on increasing your cashflow so you don't need to deplete your assets at bear market prices.

How To Reach Your FIRE Number

Luckily for many of you, NZ and Australia are two of the best countries in the world for living a FIRE lifestyle.

• High minimum wage ($20+ per hour).
• Free healthcare and ACC.
• Interest free student loans.
• Generous Kiwisaver/Super
• No NZ capital gains taxes
• Tax free dividends (franking and imputation)
• Free schooling and many parenting subsidies (for those with kids).
  
  

In countries where the minimum wage is $5 or $10, it is impractical for many people to do FIRE. 

However, in New Zealand, even if you sweep floors for a living your income will be high enough for it to work mathematically.

Let's look at a worked example of how you might plan your lifestyle around FIRE:

Minimum wage in New Zealand is $21.20 per hour.

Assuming you work 40 hours per work and take no holidays (work 52 weeks per year), you will earn $44,096 per year. 

Since this is a minimum wage job - something like packing supermarket shelves - we'll asssume you will start as soon as you leave high school (age 18). 

Using our income tax calculator, you will see you will pay tax of $6,737, leaving you with take-home income of $37,359:

You can work out your own personal after-tax income using the income tax calculator below:

Let's aim for a savings rate of 50%.

This would equal $18,680 saved per year.

Using our compound interest calculator, we can then work out how long it will take you to reach your FIRE number.

Using a FIRE number of $900,000, at a return of 10% per year, reaching your FIRE number would take you 18 years:

This means if you start at 18, you will be a retired (almost) millionaire by the age of 36, even if you work at McDonald's the whole time and never get a payrise.

This obviously leaves a lot of room to wiggle, because most people will not just work at McDonald's until they're 36 and never receive a payrise.

Meaning in reality, you can reach your FIRE number much sooner than that!

Let's do another scenario:

You leave school at 18, do a four year degree, become an accountant at 22.

Your starting salary is $50,000, you get a pay rise of 10% per year.

After 13 years, your salary will be $157,000, your average salary over those years will be $94,318.

Using our income tax calculator, $94,318 after tax works out to be $72,273 per year.

Savings rate of 50% = $36,137 per year

This will get you to your FIRE number after 13 years, or at age 35.

(of course I took some liberties here to simplify things, but the end result is mostly the same).

Click the yellow bar below to open the calculator and work out your own FIRE number timeline:

One thing you will notice after playing around with the calculators is even small numbers can make a big difference.

Most people might spend $5k on a new iPhone and a holiday, but saving an extra $5k per year turns into differences of hundreds of thousands of dollars in wealth over a span of 15 or 20 years.

Below you can see increasing your savings amount from $25k per year to $30k per year is a $300k difference in wealth after 20 years. 

At a 4% dividend rate, that would be an additional $12,000 in income to spend each year.

Alternatively, you could take that $300k and put down a house deposit, or even buy a condo in cash in some countries.

In reality, this means even things like driving Uber a few nights a week, starting a side hustle like matched betting or flipping or even just trying to increase your savings rate from 50% to 55% can make a huge difference.