How could I have FIRE blog without a plan to retire early? Its time to change that!
What is a FIRE number?
Your FIRE number is the number you need to retire. Its the amount in investments you need to reach before you can officially say you have enough money to no longer work for the rest of your life.
While many European Countries give a pension this pension only comes at a late age. In Belgium its 67! It might be that by this age the age has moved back again. You shouldn’t take the risk to let the government decide on when you can retire. At the very least you need a backup plan.
How do you find your FIRE number?
So how do you calculate that number? The first thing you need to do is to track your expenses. If you don’t know what you are spending you will not know if you can retire or not.
Once you have written down your monthly expense every month for at least a year, then you can calculate your fire number. You just add all months up together then you divide it by 3.5 and you multiply it by 100.
3.5% is the number you could withdraw reasonable safe every year from your portfolio without needing to worry about money for the rest of your life. The stock market still goes up 6-7% by average so normally your portfolio should even grow with this number.
There is different numbers outthere. Most of the FIRE community choose 4%, and actually 4% is quite safe for the majority of the time. But I feel its always good to build in a little bit extra safety. But if the stock market goes up 6% per year why not choose 6% as withdrawal rate.
Well first there is inflation you need to keep into account, but secondly if you choose your number to high and you retire just before a big financial crisis hits then you could be in trouble. The worst year to retire was actually 1929. The second worst was March 2020, just before the dot com bubble busted.
On reddit I found a post of someone who tracks the portfolios of people who retired early in march 2000. This is how their portfolio survived based on their withdrawal rate. Check out what happened bellow:
It is not looking so good with their portfolios. However do not panic, we need to keep in mind this was the second worst period to retire. The odds that this happens to you are rather slim. And even in these times of big economic crashes, most portfolios are still surviving. We can see the 2% and lower are very safe choices.
So why did I chose 3.5%? Well firstly at 67 I expect a goverment pension. So I do not need my money to last a lifetime. If all else fails I can fall back on that. As you can see on the graph 3.5% can easily survive long enough to reach 67, even in the worst of times. Secondly I will also diversify with property so that if one investment is doing bad I can fall back temporarily on the other. 3.5% return net is realistic in Belgium on property. Should my retirement age get closer to my pension age (such as 55 for example), I will probably switch to the 4% rule.
So lets calculate my FIRE number
Now as I have been tracking my expenses rather well last year, and even better this year, I feel its really time to calculate how much I need to retire early.
According to my data in 2019 I had a total expense of 29501. Now there is some notes to make here. I drive a company car, have a company laptop and my company pays for my mobile phone subscription. These are all items I would need to take into account. So normally I should foresee some budget for that. However I am also currently paying off three loans (as you can see in my yearly expense). I do feel that I will make sure that I am loan free by the time I retire, so these will balance off.
So if I count make the calculation 29501 / 3.5 * 100 my FIRE number in 2019 was 983350 EUR! This is the amount I need to have in investments to be able to retire.
I guess this is why I never calculated it. I expected it to be HUGE. And it is. It shows that in 2019 my expenses were way to high. Most months I spend around 3000 EUR and now its clear that this was just way to high and I should live more frugal. Corona really helped me with that. Instead of going to restaurants or to bars I ended up having picnics outside. True…it did came on the right time, it was spring and we had some really nice months, but I still feel I can beat my last years expenses and do much better without going back on life quality!
So when can I retire?
Some people set their FIRE number and then do not change anymore. I noticed that my expenses change slightly every year. If I manage to lower my expenses then my FIRE number drops. If I spend more then my FIRE number goes up. I decided I will update my FIRE number every year based on the expenses of the last 12 months.
Now that I know how much I need to retire based on my expenses of 2019, I can also calculate when I can retire. However in this phase of my life there is just to much uncertainty. I am looking for a house, I might still have children, I don’t know how much my future partner would make, if she would be on board with FIRE or not,…
But I can calculate how far I am along. I know it will be depressingly low but seeing the number go up every year will be so motivating, that’s why its important to write it down, even if there is such a long way to go!
Now when looking at my monthly portfolio I only want to take into account my liquid investments. I do have a portfolio with retirement savings as well, but they will not come free until I’m 67. While I really do support to have them, as they will give an extra boost at retirement, I will not be able to use them right away if I retire early.
I have a total of 37256 EUR in my portfolio. First the good news, having this amount of money means that every year I would able to safely withdraw 1303 EUR. While this is a nice amount, nobody can really live from that. The bad news is that if I calculate that its only 3.7% along to retire early. But at the same time if I listed this in 2018 it would have been even a lot lower.
What I don’t want to do at this point is calculate how long it will take me to reach that. Even in the very short term I feel so much can change in my life, I rather just measure it every year and once I am closer to the end I will add a timeline.
I plan to work on both raising my investement portfolio and lowering my expense ratio. I feel if I manage to keep improving both sides then I will grow faster and reach that early retirement. Remember its a marathon not a sprint and creating your first fire number is the first step in reaching the finish line!
Progress to FIRE
Along with my FIRE number comes a brand new meter that will track my Roadtrip to financial independence!
Interested to follow my progress? Follow me and join me on my Roadtrip to Financial Independence!