FIRE

FIRE stands for Financial Independence, Retire Early. The idea is simple: build up enough wealth and the returns on it will cover your living costs, at which point work becomes optional.

It is not about getting rich. It is about reaching the point where your money earns as much as you spend.

How the target is calculated

It starts from an estimate of annual spending and a safe withdrawal rate:

$$C = \frac{V}{w}$$

• $C$: the target portfolio value
• $V$: annual spending
• $w$: the withdrawal rate as a decimal

At the commonly quoted 4%, the formula simplifies to twenty-five times annual spending. Someone spending €20,000 a year needs roughly €500,000.

A worked example

A household spends €1,800 a month, that is €21,600 a year. At a 4% withdrawal rate the target is:

$$C = \frac{21{,}600}{0.04} = 540{,}000\ \euro$$

Putting aside €1,000 a month at an average real return of 5% a year, it reaches the target in about 23 years.

Raise the amount saved to €1,500 and the time falls to roughly 18 years. Cut spending to €1,500 a month at the same time and the target drops to €450,000 and the time to just under 15: cutting spending works on both sides of the equation at once.

The savings rate matters more than the return

The most powerful variable is not the portfolio's return but the share of income you set aside. Someone saving 10% of their income needs several decades to reach independence. At 50% the time falls to roughly seventeen years, at 65% below ten and almost regardless of the salary.

The reason is mathematical: a higher savings rate raises the numerator and shrinks the denominator at the same time, because lower spending means a lower target.

Variants

Lean FIRE

Independence on very modest spending. The target is low, but there is practically no cushion for unexpected costs.

Fat FIRE

Independence while keeping a high standard of living. It requires substantially more wealth.

Coast FIRE

You save enough early on for compounding alone to reach the target. From then on you save nothing further and cover ordinary spending with ordinary work.

What to watch out for

Three more things the model usually underrates: inflation over long decades, the order of returns in the first years of withdrawal, and the fact that spending in life is not constant: children, health and caring for parents arrive unannounced.

Work out your own scenario, including the effect of the savings rate and the return, in the FIRE calculator.