What is Your FI Number?

The Finish Line

For most of modern history, "retirement" was defined by an age: 65. You worked until you hit that birthday, at which point the government and your employer (hopefully) provided a pension to sustain you.

The Financial Independence, Retire Early (FIRE) movement changes the paradigm. In FIRE, retirement is not an age. Retirement is a number.

Your FI Number (Financial Independence Number) is the total amount of invested assets you need to accumulate so that the passive income generated from those assets covers all of your living expenses indefinitely, without you ever having to work again.

The 25x Rule (The Math Behind FI)

So, how do you calculate this magical number? It relies on the Safe Withdrawal Rate, specifically the 4% rule derived from the Trinity Study.

If you can safely withdraw 4% of your portfolio every year (adjusted for inflation) without running out of money, the math to find your starting portfolio size is simple algebra. You divide your annual expenses by 4% (0.04).

Mathematically, dividing by 0.04 is exactly the same as multiplying by 25.

Step 1: Estimate Your Future Expenses

This is the hardest part. You cannot multiply your current salary by 25; you must multiply your expenses. Furthermore, you must estimate your expenses in retirement, which will look different than your expenses today.

• Expenses that go away: Commuting costs, professional wardrobes, saving for retirement (you're already there!), and potentially your mortgage if you plan to pay it off.
• Expenses that appear: Private health insurance premiums (if retiring before Medicare age in the US), increased travel budgets, and expensive hobbies.

Example: You currently spend $60,000 a year, but realize you won't be saving $10,000 for retirement or spending $5,000 commuting. Your new estimated baseline is $45,000.

Step 2: Do the Math

Once you have your estimated annual expenses, apply the 25x rule.

• $40,000 / year: $1,000,000 FI Number (Lean FIRE)
• $60,000 / year: $1,500,000 FI Number
• $80,000 / year: $2,000,000 FI Number (Chubby FIRE)
• $120,000 / year: $3,000,000 FI Number (Fat FIRE)

Adjusting Your FI Number

The 25x rule assumes your investment portfolio is doing 100% of the heavy lifting. But what if you have other sources of income?

Example: Let's say your retirement budget is $60,000 a year. You have a rental property that generates $15,000 a year in net cash flow.

1. Total Expenses: $60,000
2. Minus Rental Income: $15,000
3. Remaining Gap to be funded by portfolio: $45,000

Your adjusted FI number is $45,000 × 25 = $1,125,000.

(Without the rental property, your FI number would have been $1,500,000. That $15k in cash flow lowered your target by $375,000!)

The Danger of the 25x Rule

The 25x rule is an excellent starting point, but it has flaws, primarily because it is built on the 4% rule, which assumes a 30-year retirement. If you are retiring at age 35, you may need your money to last 50 or 60 years.

To be safer against Sequence of Returns Risk over a 50-year period, many early retirees choose a more conservative 3.5% or 3.25% withdrawal rate.

How does that change the math?

• 4.00% SWR: Multiply expenses by 25
• 3.50% SWR: Multiply expenses by 28.5
• 3.25% SWR: Multiply expenses by 30.7
• 3.00% SWR: Multiply expenses by 33.3

If your expenses are $60,000, choosing a highly conservative 3% SWR pushes your FI number from $1.5 million to almost $2 million.

What If My Number is Too Big?

Calculating your FI number for the first time can be demoralizing. If you realize you need $2 million and you currently have $50,000, it feels impossible.

Don't panic. You have several levers you can pull to drastically reduce the time it takes to reach your goal:

• Increase your Savings Rate: This is the most powerful tool you have.
• Geo-Arbitrage: Move to a lower cost of living area to instantly reduce your annual expenses (and thus, multiply that reduction by 25 to slash your FI number).
• Consider Coast FIRE: You may have already reached your Coast FI number, meaning you can downshift your career today.
• Consider Barista FIRE: Plan to work part-time in retirement (Barista FIRE) to lower your immediate portfolio requirements.