If you’ve spent any time at all reading about F.I.R.E. (Financial Independence, Retire Early), you will be familiar with this question:
“What is your number?”
What is the amount of money you need to retire now and never work again? How much do you need to put in the magical money pot which will never run out?
£300,000? £750,000? £1,000,000?
It’s a question which is asked over and over again among FIRE communities online. It’s discussed endlessly. Everyone knows their number. Newbies are encouraged to work it out as soon as possible.
It’s a huge, fascinating, exciting, one-day pot of gold. If you’re anything like me, when you’re first starting out, it’s also more than a little scary.
How to find your FIRE number
The standard FI numbers are based around a 4% withdrawal rate. This is commonly accepted to be a ‘safe’ number, allowing for inflation (though some savers are more conservative with their figures). For the sake of this post, let’s accept it. You can withdraw 4% of your total stash per year and it should (in theory) last as long as you need it to.
This means your FIRE retirement pot needs to be 25x your required annual income.
Can you live off £25,000 a year? Save £625,000 and you’re done.
Want £50,000 a year? You’ll need £1,250,000.
When I started to look at FIRE I figured out my number. And I stalled, right there. I know I’m not the only one.
Because when your total savings so far amount to less than £5,000*, those numbers look really, really big. How do you even start to think about amassing that amount of money?
Logically, I knew it was possible. I just didn’t quite believe it was possible for me.
This is why, early on, I decided to start small. Forget £625,000. I needed another number.
The usual FIRE number is based on a yearly salary. Instead of this, I decided to work towards a daily number. This means that I am no longer saving for my whole retirement; I am now saving to buy a day, every year for the rest of my life.
How to find your daily number
Let’s look at an example.
You have decided that you can live of £27000 a year. For FI you need to save 25x£27,000. It’s a big number (£675,000). Too big. Forget it.
Let’s look at these figures another way.
£27,000 a year is £73.97 a day (£27,000/365). For FI you need to save 25x£73.97 for every day of freedom. That’s £1849.
Just £1849 buys you a day of freedom every year for the rest of your life.
With a bit of hustling you could probably stash that in a month or two. Do it.
Then repeat 365 times. And you’re done!
Of course, it’s not quite this simple. Long term, a large pot of money, invested wisely, should begin to increase on its own and the end goal will begin to look a lot closer and more realistic. But I found it a great way to start; that huge retirement number was broken down into manageable lumps.
It’s also allowed me to break down my aims and allow room for other investments to also ‘buy’ days. For example, in the past I have looked at BTL investments (more on that in another post – let’s just say my feelings on property have changed in recent months).
If I did buy a BTL property which reliably returned more than £1480 (£74×20) a year after costs, with less than £36980 (1849×20) of my own money in, I have 20 days a year covered. More work, undoubtedly (property is not entirely passive, even if fully managed) but a better return. This goes for any other investments, businesses, or other forms of passive income.
There is no difference in the income I need to create. The final savings figure hasn’t changed at all. But the smaller goals make the whole thing seem closer and more achievable from the start.
*£4,212.40 is the average balance of UK savers, according to a recent article (March 2018) in The Independent.