If you’re hoping to retire early, you’re going to have to do quite a bit of math.
Those in the FIRE movement, which is all about attaining financial independence so that they can retire early, aim to save and invest large portions of their salary in early on in order to have enough money to leave the workforce decades before Americans typically can.
Under a common model, would-be early retirees calculate that they can safely withdraw 4% of the value of their portfolio per year in perpetuity. Growth in their investments would keep them from running out of money.
You can retire, the thinking goes, when you hit your so-called FIRE number. To find that figure, multiply the annual income you think you’ll need in retirement by 25. For example, someone who plans withdraw $40,000 a year to live on in retirement, can multiply by 25 to learn that they’ll need $1 million to retire.
Those who reach a level known as “Coast FIRE” take the projection a step further by assuming market returns will eventually propel their portfolio to their FIRE number in the future.
In doing so, these people are making the biggest mistake early retirees make, says Sam Dogen, founder of Financial Samurai and one of the prominent early voices of the FIRE movement. Chiefly, they’re not taking into account that life could look drastically different between now and the years they plan to live on withdrawals from their accounts.
Dogen learned from firsthand experience. He retired in 2012 at age 34 with about $80,000 in annual passive income. That was enough, he thought, to fund a modest life for he and his wife on a fruit farm in Hawai’i.
Those plans changed dramatically over the years. Dogen, who now lives with his wife and two children in San Francisco, estimates his expenses at about $264,000 a year. In 2023, his investments in stocks, bonds and real estate generated $380,000 in passive income. In another twist, after selling income-producing assets to buy a multimillion-dollar house in cash last year,
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