FIRE Calculator: Calculate Your Time to Financial Independence

Wed Nov 09 2022

Do you want to retire early but don't know where to start? The Financial Independence Retire Early (FIRE) movement might be the community for you!

But how do you know if you're on track to achieve financial independence and retire early? That's where a FIRE calculator comes in. With just a few inputs, a FIRE calculator can estimate how long it will take you to reach financial independence based on your current net worth, expenses, savings rate, and investment returns.

In this post, we'll explore what a FIRE calculator is, how it works, and why it's an essential tool for anyone who wants to achieve financial independence and retire early. So, let's dive into the world of FIRE!

Calculate how much you need to reach Financial Independence

What is Financial Independence Retire Early (FIRE) and why is it important?

Financial Independence Retire Early (FIRE) is a movement that advocates achieving financial freedom and retiring early by aggressively saving and investing money. The ultimate goal of FIRE is to achieve a level of passive income that can cover your annual spending, allowing you to retire early and live life on your own terms.

Simply put, financial independence is having the ability to choose to work or not work because you have enough in savings or income to cover all of your expenses.

While the concept of early retirement may seem daunting or even impossible to some, many people are embracing the FIRE movement as a way to achieve financial independence and free themselves from the constraints of traditional retirement and to exit the rat race decades early than the norm. By focusing on increasing their savings rate, reducing expenses, and investing simply, the FIRE community aims to achieve financial freedom as soon as possible. This can mean retiring in their 30s, 40s, or 50s instead of waiting until their 60s or 70s like most people.

The significance of the FIRE movement lies in the fact that it challenges conventional financial wisdom and empowers people to make the most of their time and resources, unlike the traditional approach to saving a modest amount of money for 40+ years and then retire.

How do I calculate my FIRE number?

Calculating your FIRE number is the first step in reaching financial independence. To calculate your FIRE number, you'll need to provide a few inputs, including your current net worth, monthly expenses, current savings contributions, and estimated investment returns.

The FIRE Formula:

The basic formula for calculating your FIRE number is to multiply your annual expenses by a 25. That's it. Easy, peasy.

For example, if your annual expenses are $50,000, your FIRE number would be $1.25 million (50,000 x 25). This formula assumes a safe withdrawal rate of 4% per year, which is the amount you can withdraw from your savings each year without running out of money.

However, this number should be used as a ballpark and not an exact figure as it's based on an assumed growth rate over time.

How to use the calculator:

You'll need a few inputs to calculate your FIRE number and time it'll take to you to reach it.

Net worth:

The first metric we need is Net worth. This metric will be used as your starting point for your FIRE number and the number you'll track to see how close you are to achieving your FIRE number.

Your net worth is the difference between your total assets and your total liabilities. Assets include everything from retirement, stocks, savings, and home equity. Liabilities are all of your debts: Car loans, student loans, credit card debt and mortgage. The difference between the two is your net worth.

Monthly Expenses:

This includes all fixed expenses (rent, cable, etc), variable (groceries, eating out, entertainment), non-monthly/sinking fund contributions (travel fund, holiday gifts etc)

Monthly Savings Contributions:

The Monthly Total Savings Contribution is the amount of money you save every month towards your financial independence goals. It includes the money you save from your pay check after taxes (take home pay - expenses) and any contributions made to your retirement accounts, health savings accounts (HSAs), or other savings vehicles from your paycheck.

This number is crucial to reaching your FIRE number as the more you can save, the sooner you'll be to achieving financial independence. If you're not sure how much you're saving each month, you can use the Money Optimist savings rate calculator to help you calculate your monthly savings. Don't worry as much about the savings rate. You just need the monthly amount for your FIRE number.

Annual Interest Rate (%):

The Annual Interest Rate is the expected growth rate of your investments or networth every year. While the historical average growth rate of the stock market after inflation is around 8%, returns can vary depending on your investment choices and asset allocation.

DISCLAIMER ALERT! The 8% rate of return is just an average, and returns can be higher or lower depending on stock market performance and annual inflation rates. Also if a large portion of your net worth is tied up in your home equity this could also impact your growth rate as real estate growth is different than stock market returns.

When can I retire and how long do I need to save before I can retire?

The Years to FIRE metric calculates the estimated time it will take for you to achieve your FIRE number, based on your current net worth, monthly expenses, and monthly savings rate.

This metric serves as a countdown to your financial independence and retirement, but it's important to compare this timeline with the traditional retirement age and adjust your inputs in the calculator as necessary.

Next Steps

Schedule a free financial independence retire early session with me to get a step by step playbook to fast tracking your path to retiring early!

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