Early Retirement Number: Basics and How to Calculate

Retiring early is a dream of many, with visions of freedom, vacations, and more time spent with family. But have you considered what it would take to get there? While lots of people want it, it can seem like a lofty feat that would take immense sacrifices in both lifestyle and spending habits. However, one way to gain clarity on how you can exit your career ahead of schedule is by calculating your early retirement number, which tells you how much money you’ll need to retire before your expected retirement age.

In this article, we’ll cover the basics of an early retirement number, including how to calculate it and how you can implement budgeting strategies to achieve it. We’ll also outline some of the potential lifestyle changes you may need to make to retire early, as well as explain how a financial advisor can work with you to create a viable roadmap.

What Is an Early Retirement Number?

An early retirement number is a calculation that conveys the amount of money you’ll need to have saved up to retire before your traditional retirement age, which is around the time you become eligible to collect Social Security payments (ranging from 65 to 67 depending on your birth year). The estimate is also often known as your FIRE (financial independence, retire early) number, referring to a recent movement that encourages individuals to adopt disciplined saving strategies and lifestyle habits to retire early.

Your FIRE number encompasses the “value of an investment portfolio” you must hit before you can stop working, explains Jordan Taylor, an independent financial advisor at Core Planning in Birmingham, Alabama. This means that to reach the number, it isn’t just about building a sizable sum of money in one or more savings accounts. Instead, you can work to create a diverse portfolio that allows you to reach your goal.

It’s important to note that the early retirement target that works for you may be different than someone else. Multiple factors may influence the amount of money you would need to retire, including your preferred lifestyle and time horizon after leaving your job. For example, someone who plans to live in a small house and take few vacations will be able to live on a smaller amount than someone else who wants to maintain more luxurious living standards with a bigger house and trips abroad.

How to Calculate Your FIRE Number

Calculating your early retirement number can depend on several factors, such as your needs and age. Ultimately, it takes an understanding of how much you see yourself spending each month or year in retirement and how long you think you could keep that up. At the traditional retirement age, a time horizon might be 25 to 30 years, but it could be much longer for early retirees.

A common strategy is to align your FIRE estimation with the 4% rule, a retirement withdrawal strategy that helps people figure out how much to pull from their retirement savings annually for about 30 years. Therefore, an effective way to find out your early retirement number is to multiply your average monthly expenses by 25.

According to Taylor, “$40,000 x 25 is an easy way to calculate the investment value needed to pull off the ‘4% Rule.’” However, he adds that “if you’re retiring early, you’ll typically [multiply] by 30 or more.”

The 4% rule isn’t the only way to calculate the amount of money you would need to retire, however. Per Dr. Annie Cole, Ed.D., a financial coach and advocate of the FIRE approach, another potential method is to collect “enough in your investment accounts to cover your expenses until you pass away,” which “focuses on investing just enough to cover your living expenses for life, and you’ll end up with nothing leftover.”

A final option Cole proposes involves generating “enough passive income to cover your living expenses for life” through various means, such as real estate investing, investing in a taxable brokerage account, or starting a business, to create enough cash flow to live on or supplement your savings for the duration of your retirement. “This FIRE number is simply your annual living expenses, plus an additional 3% living expense increase each year to account for inflation,” she says.

What to Do Once You Know Your Number

At this point, you may wonder what’s next after you’ve figured out your FIRE number. After all, it’s one thing to know the amount of money you’ll need, but how do you get there? The answer is that you’ll likely need to be willing to take a disciplined and intentional approach to your finances, ideally with the help of a professional.

“The first step to early retirement is being on-track for regular retirement. Don’t put the cart before the horse,” Taylor advises. “Every financial advisor who helps someone reach early retirement will start by making sure there’s enough money being saved & invested to keep that person retired after 65,” he says.

Budgeting for Early Retirement

As mentioned, retiring early will require you to keep a keen eye on your budget from month to month. At the simplest level, you’ll need to monitor your cash flow and ensure you’re putting away a specific amount per month, being careful not to spend more than your means. Sometimes, this may mean spending and living with less than you want to, understanding that your long-term goal is becoming more possible each day.

There are several concrete strategies you could adopt to keep a tight budget. For help putting one together, it’s wise to connect with a financial advisor, who can work closely with you to develop one tailored to your situation and needs.

“A common budgeting strategy I see is a spin on the 50-30-20 rule. Folks looking to retire early will do 30-20-50. Shifting the largest part of their budget from fixed expenses to saving & investing,” says Taylor. “Another common spin is changing the 60/40 rule to the 40/60 rules (30-10-60), so that the majority of your annual income is being saved & invested.”

Combine Saving and Investing When Possible

While budgeting and saving a certain amount each month can put you ahead and on track for an early career exit, you can propel yourself to your goal by adding a healthy amount of investing to your plan. Doing so smartly and after consulting an advisor can help you take advantage of compound interest and build your portfolio for life after work.

“Smart saving is going to keep you out of debt, keep you healthy, & allow you to prioritize your investment goals even when ‘life happens,’” observes Taylor. “Investing stacks on top of saving by allowing excess money to grow exponentially over however much time you have,” he continues.

You could, for instance, invest in mutual funds and exchange-traded funds (ETFs) in a brokerage account. As you hold them over time, you’ll be able to ride the wave of the market and, hopefully, have decent returns that outpace inflation. However, keep in mind that unlike holding funds in a standard bank or high-yield savings account, there’s always a risk of losses due to various factors.

Understand the Sacrifices and Risks

Attaining FIRE status, as noted, will require you to make a certain amount of personal sacrifice in your lifestyle. In many ways, it means accepting the idea of delayed gratification and implementing consistent strategies over time that will put you in a better position later in life.

“Keep in mind that planning for early retirement means investing heavily in your younger years, which might mean giving up spending on non-essential items like shopping, entertainment, and travel,” says Cole. “If you want to retire early, think about your WHY first – if you don’t have a strong why, you’ll likely have a hard time setting aside the large sum every month to invest,” she points out.

Though most people can theoretically retire early once figuring out their number, it’s not always the best for everyone. Because of the immense sacrifices in the present, such as not going on a trip you want to go on or buying a car you want, it can be more rewarding to live now and aim for a regular retirement.

“The biggest risk you face when trying to retire early is that you’ll sacrifice a beautiful life today & end up in poor health due to large amounts of stress & overworking yourself. Tomorrow is not guaranteed,” Taylor emphasizes.

Consider a Financial Advisor

As you work toward early retirement, it’s beneficial to do so with the help of an experienced and trusted financial advisor. They can work with you to build a budget, calculate your number, and help you assemble a portfolio that suits your risk tolerance and time horizon.

Consider working with an advisor who has one of the following credentials, as these will have experience with retirement planning and must put your interests first:

• Certified Financial Planner (CFP)
• Chartered Financial Consultant (ChFC)
• Chartered Financial Analyst (CFA)
• Chartered Retirement Planning Counselor (CRPC)
• Retirement Income Certified Professional (RICP)

To find a financial expert who fits your needs, we recommend using this free matching tool. After answering a few questions, it will connect you with a vetted professional who offers the services you need.