The FIRE Everyone is Talking About

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When it comes to FIRE, the 25x rule is specifically tied to the cost of living and is the number one reason why experts will continue to drive the point that living below your means is critical to building wealth. I grew up pretty frugal but now that I’m older, being the “Commander in Cheap” can actually go a long way when you do the math. 

The 25X rule is one of the original Financially Independent Retire Early (FIRE) figures. For example if your living costs are $75k a year, multiply that by 25 and you have your retirement number (otherwise known as the number where you fire your boss). That would bring the grand total to $1,875,000 in liquid investments, savings, brokerage accounts, retirement accounts, pensions, defined benefit plan, annuity benefits etc. If you hit that goal in time, withdrawing 4% of that balance each year (in theory) can enable the money to last for another 30 years even with inflation. 

For any of this to work you need to know your living costs. Whatever it takes for you to get by on a month to month basis. Consider your costs for rent/mortgage, utilities, food, entertainment , travel and--even if you travel for vacation once or twice a year-- turn that into an annual cost to give yourself as close of an idea as possible. Your FIRE number is dependent upon you and how you live now.

Advantage: It provides a clear goal that helps people focus. One of the major reasons people stumble along the savings and investment path is because they don't have their sights set on anything worth mobilizing. But if they knew they were only 6 years of aggressive saving behavior away from retiring early it could change their outlook on life. For many people, it simply isn't realistic because they either don't have the means to save and invest enough or they didn't start early so they need to do more heavy lifting now than planned. 

Limitation: Assuming your living costs don't increase significantly, and the assets continue to bear interest or increase in market value, it would be enough to sustain someone and allow their lifestyle to remain unchanged. The trick is to make sure your kids aren’t as cheap as you otherwise you're stuck with them. This figure does not include Social Security or medicare benefits so those are simply additional icing on the cake. By only withdrawing 4% to live off of each year, this allows the remaining balance to continue to appreciate during the withdrawal years. 

This doesn't factor in increased medical costs, unforeseen circumstances, extravagant vacations, supporting adult children, or enable risky investing unless you are already doing those activities (one of which you can’t plan for). The earlier you start the better. The leaner you live, the quicker you can hit that number.