FIRE Number: How Much You Need to Retire Early

Your FIRE number is the amount you spend in a year divided by the share of your portfolio you plan to withdraw each year. At a 4% withdrawal rate that is 25 times spending, so $60,000 a year needs $1.5 million. At 3.5% the same budget needs about $1.71 million. For someone retiring at 40 instead of 65, the choice of rate matters more than anything else in the formula, because the research behind 4% tested retirements of about 30 years.

Where the 4% Figure Comes From

The rule traces to a 1994 paper by financial planner William Bengen in the Journal of Financial Planning. He took U.S. stock and intermediate-term Treasury note returns from 1926 onward and asked how long a portfolio would last if a retiree withdrew a fixed percentage of the starting balance in year one, then raised that dollar amount with inflation every year after.

His findings, in his own terms:

• 4% first-year withdrawal: in no historical case did the portfolio run out in under 33 years, and in most cases it lasted 50 years or more.
• 4.25%: could empty a portfolio in as little as 28 years if past conditions repeated.
• 3% (and rates up to about 3.5%): never lasted less than 50 years.

Those results come from one country's history and a mix of stocks and bonds, not a guarantee. They do show why an early retiree planning for 45 or 50 years has reason to pick a rate below 4%.

What Each Withdrawal Rate Means in Dollars

The formula is simply spending ÷ rate. $60,000 ÷ 0.035 = $1,714,286.

Why the Order of Returns Matters

A FIRE number assumes an average return, but withdrawals make the order of returns matter. When the market falls early, you sell more shares at low prices to fund the same spending, and those shares are not there for the recovery.

A small illustration: start with $1,000,000 and withdraw $40,000 at the start of each year.

• Loss first (−20%, +10%, +10%): $960,000 × 0.8 = $768,000; $728,000 × 1.1 = $800,800; $760,800 × 1.1 = $836,880.
• Loss last (+10%, +10%, −20%): $960,000 × 1.1 = $1,056,000; $1,016,000 × 1.1 = $1,117,600; $1,077,600 × 0.8 = $862,080.

Same three returns, same withdrawals, and the loss-first path ends $25,200 lower after only three years. Over decades the gap compounds. That is the case for a lower starting rate, or for a plan to spend less in a bad early stretch.

Getting at Your Money Before 59½

Early retirement has a practical problem the formula skips: most retirement money sits in accounts with an age gate. The IRS charges a 10% additional tax on most distributions before age 59½, on top of regular income tax. Two exceptions come up often for early retirees:

• The age-55 rule: if you leave your job in or after the year you turn 55, withdrawals from that employer's plan avoid the 10% tax (age 50 for certain public safety workers). It does not apply to IRAs.
• Substantially equal periodic payments: a fixed schedule of withdrawals from an IRA or plan avoids the 10% tax, but you cannot change it until the later of five years after the first payment or age 59½.

Health coverage is the other gap. Medicare generally starts at 65, so someone retiring at 45 needs 20 years of coverage from another source, and that cost belongs in the spending figure you divide by the withdrawal rate.

Lean, Fat, Coast and Barista FIRE

These labels use the same arithmetic with different inputs. Lean and Fat FIRE simply plug in a low or a high spending figure. Coast FIRE means your current balance, left alone, would grow to a full target by a normal retirement age. Barista FIRE means part-time income covers some spending, so the portfolio only has to cover the rest. Halving the spending the portfolio must cover halves the target.

What This Doesn't Cover

This guide does not model taxes on withdrawals, Social Security, variable spending rules, or returns outside the U.S. history Bengen used. The 6% real return is an assumption, not a forecast. A fee-only financial planner can test your plan against different return orders and your actual account mix.

Sources

• William P. Bengen, "Determining Withdrawal Rates Using Historical Data," Journal of Financial Planning (1994, reprinted 2004)
• IRS: Exceptions to tax on early distributions
• IRS: Substantially equal periodic payments FAQ
• Medicare.gov: Get started with Medicare