Getting Started with FIRE! - Part 2
Sorry for the tardiness of this post, life got away on me, and this project was put on the backburner. I am going to make it my goal for the remainder of the year to do a post at least every two weeks as I have lots of material I have collected over the past few years that I want to share.
Assuming you have followed Step 1 and gathered all your financial information we will continue with creating and guiding your FIRE future.
(If you have not please go back to Step 1 and get this information, you can click HERE)
Now that we have identified our income/expenses from the past year (Average this over 3 years if possible.) we can now begin to calculate what YOUR FIRE number!
There are two methods primary methods you will hear talked about in the FIRE world for doing this the 25 Times rule or the 4% rule, below are examples of both.
On a high level your fire number is:
(Annual Expenses) X 25 = Principal Fire Number
Example:
If your Annual expenses are $45,000
$45,000 x 25 = $1,125,000
If your annual expenses are $75,000
$75,000 x 25 = $1,875,000
You might be thinking.. Why 25?
25 is the generally accepted
multiplier which determines how aggressive or conservative do you want to be to ensure your FIRE number is correct, in allowing you to safely withdrawal your annual earnings (Excluding taxes!) while maintaining your principal investment.
The 4% rule also known as the "Bengen rule" simply means that you can take 4% out of your portfolio (Excluding taxes and safely based on historical withdrawal rates) annually which will leave your principal investment untouched, along with room for growth with or better than inflation.
Example:
If you have a principal amount of $1,125,000
$1,125,000 x 4% = $45,000
If you have a principal amount of $1,875,000
$1,875,000 x 4% = $75,000
You may have noticed that they are the same? Why is that?
We get the 25x Rule from the 4% Rule because if you multiply 4% of something by 25, you will get 100% of the original value.
To find out more about William P. Bengen check out these links;
https://en.wikipedia.org/wiki/William_Bengen
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