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.

Assuming you have followed Step 1 and gathered all your financial information we will continue with Step 2 and Step 3.

(If you need to go back to Step 1 and get this information, you can click HERE)

Step 2 - What is my FIRE number?

The second step is to determine your FIRE number. What investment principal will you need in order to generate enough income to cover your living expenses?

There are two primary methods you will hear talked about in the FIRE world for determining the required principal, the 25 Times Rule or the 4% Rule. There's an example for each below.

Using the 25 Times Rule:

Take your annual expenses, and multiply by 25 to get your required principal balance.

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 you need to be to ensure your FIRE number is correct. 25 times allows you to safely withdraw your annual amounts (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) annually which will leave your principal investment untouched, and will also allow for growth that is at least inflation. This is based on historical statistics, and points to a 4% withdrawal being the sweet spot.

Example:

If you have a principal amount of $1,125,000 $1,125,000 x 4% = $45,000 available to be withdrawn annually.

If you have a principal amount of $1,875,000 $1,875,000 x 4% = $75,000 available to be withdrawn annually.

You may have noticed that the 25 Times Rule and the 4% Rule provided the same numbers.

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

His original 1994 paper

So...take your expense numbers from Step 1, and do the calculation. What principal will you need to reach, in order to cover your current annual expenses?

From the example numbers used in step 1, the annual expenses came to $55,434 (we'll round to $55,500).

This means that a principal balance of $1,387,500 would be needed to provide enough income to cover those annual expenses.

That seems like a HUGE number. In step 3, we'll figure out how to get to principal balance, this FIRE number.

Click HERE for Step 3