(CNBC) How much money would you need to retire today and never have to work again?
If you’re planning to retire at 65, that figure may seem distant and amorphous. You’re saving as much as you can today so that you can enjoy life as much as possible when you eventually leave your job.
For adherents to the financial independence, retire early, or FIRE, movement, that figure is much more concrete. “Your FIRE number is the amount of money you need to live on for the rest of your life,” says Grant Sabatier, creator of financial site Millennial Money and the author of “Financial Freedom.”
For many aspiring early retirees, calculating that number comes with an easy shorthand: “The way you calculate your FIRE number is multiplying your expected annual expenses by 25x,” says Sabatier, who reached financial independence at 30. “Meaning if you spend $40,000 a year, multiplying that $40,000 by 25 would get you to a million dollars.”
“This million dollars essentially is how much money you need to reach financial independence and live off that amount of money for the rest of your life.”
As with any other one-step financial calculation, the FIRE number math is based on several assumptions and will vary based on your financial situation. Here’s what retirement experts say you need to know to figure out how much money you’ll need to retire.
The FIRE number calculation is rooted in the so-called “4% rule,” which was popularized in an influential 1998 research report known as the “Trinity study.” Included in the research was an examination of past market performance to determine a safe withdrawal rate in retirement.