How much money do you truly need to achieve FIRE (Financial Independence / Retiring Early)? This is probably the most common question and biggest concern of those pursuing early retirement.
Most people use the popular Multiply by 25 Rule and its companion, the 4% Rule, to help them determine their “magic” number.
The Multiply By 25 Rule states that you should have at least 25 times (a.k.a., 25X) your yearly expenses in your investment portfolio. In this case, 25 is your “FI Number.”
The 4% Rule claims that if you withdraw 4% (or less) of your invested assets to pay your annual expenses, you are statistically likely to not run out of money.
If you’re on the path to FIRE, then you have most likely pored over these numbers countless times. Even after you achieve FIRE, it’s very common to continue to analyze your numbers.
Is 4% really a safe enough withdrawal rate so that you don’t run out of money during your (hopefully) long retirement, or would it be smarter to play it safe with 3.5% or even 3%? Is a FI Number of 25 sufficient, or should you aim for 30, 40, or even more? You can check the likelihood of success by using a calculator like firecalc.com or with a Monte Carlo simulation.
So, what would be the ultimate FI number? Well, how about Infinity?
Our Path to Infinity FI
Allison and I were laid off from our jobs in 2015, and that was the start of our FIRE journey. At the time, we knew nothing about the 4% Rule or the Multiply By 25 Rule.
What we did know was that we had built up a sizable investment portfolio (mostly equities), and we no longer had a mortgage. It just felt like we were in good enough shape to not have to go back to the workforce.
Looking back at our financials, I estimate that our FI number at the time was about 45. Thanks to the continued bull market (COVID-19 notwithstanding), that number has continued to grow.
This is a very comfortable FI number, but what if we want to punch it up to infinity? What would that look like for us? Is it even possible to have a FI of infinity?
With the 4% Rule, you are withdrawing 4% of your nest egg each year to cover your annual expenses. But what if you could reduce that to 0% or less than 0%?
This all sounds fantastical, right? How could this even be achieved? Well, all you have to do is generate more passive income than you spend. If you can do that, then (theoretically) you would never run out of money! This is like creating a “perpetual money machine.”
Adjusted FI Number (AFI)
While the concept may be simple, making it a reality is a bit more challenging. However, it is possible to achieve. We thought it was time to pull out the old pencil and paper (OK, it’s a spreadsheet, who in the FIRE community doesn’t love a spreadsheet??) and crunch some numbers!
We started by looking at a slightly different number, our “adjusted FI” or AFI.
Let’s look at an example:
Investments = $1,250,000
Yearly Expenses = $50,000
Yearly Income = $25,000
FI Number: Your FI number here is 25 or (1,250,000 / 50,000 = 25).
AFI Number: Your AFI number is 50. You subtract your annual income from your yearly expenses (1,250,000 / (50,000 - 25,000) = 50).
Three Possible Scenarios
We’re currently evaluating three possible living scenarios: 1) Stay where we are, 2) Sell and rent, or 3) Sell and buy something cheaper.
Let’s look at the key metrics, assumptions, pros and cons, and the approximate FI and AFI numbers for each option.
1. Current situation
We currently own a condo in Oakland valued at ~$1 million. We’ve been living along the waterfront in Oakland for almost 8 years. Overall, we enjoy it, but we may be ready for a change of scenery at some point.
Key Metrics: Yearly expenses = $42K, Annual passive income = $20K
Pros: No mortgage, Nice amenities (pool, gym, 24-hour staff), Great weather, Friendly neighbors & local merchants.
Cons: High HOA fees, Expensive property taxes, Possibility of major earthquake, Recent uptick in crime.
FI number = 70
AFI number = 130
2. Sell & Rent
Sell our condo and live in a rental. The location is flexible, and we could even see becoming nomadic and living in a variety of different places.
Key Metrics: Yearly expenses = $66K, Annual passive income = $50K
Assumptions: We sell our condo for $1 million, invest that money (estimating 3% ROI after accounting for inflation at 2%), and rent a place for up to $4000 per month.
Pros: Reduced financial risk from major earthquake or other disaster, No HOA fees or property taxes, Flexible living situation.
Cons: No ownership or home equity, Risk of increasing rents over time, Less stability.
FI number = 60
AFI number = 245
{Note: this FI number is lower than our current FI number, because the $4K per month rent is higher than our current housing expense. However, this AFI is greater than our current AFI, because we would be generating much more income with the 3% ROI from the proceeds of the sale of our condo.}
3. Sell & Buy Cheaper
Sell our condo and buy another less expensive home. One option we’re considering is splitting a duplex with Allison’s mother in Jersey City, NJ for $1 million ($500K each). We would be very close to NYC, which Allison and I love (that’s where we met), as well as plenty of friends and family.
Key Metrics: Yearly expenses = $35K, Annual passive income = $35K
Assumptions: We sell our condo for $1 million, buy something cheaper (budgeting $500K), and invest the $500K difference (estimating 3% ROI after accounting for inflation at 2%).
Pros: Reduced financial risk from major earthquake, Close to additional friends & family, Proximity to NYC arts & culture, Infinity FI.
Cons: Would be leaving many friends (and some family), Not as good of weather (cold winters & humid summers) and geography (no mountains or redwoods nearby).
FI number = 90
AFI number = Infinity
If you were us, which of those three scenarios would you choose?
Getting Your FI Number to Infinity
The two main levers to improve your AFI are 1) increasing your passive income, and 2) reducing your yearly expenses. If you can optimize both of those simultaneously, you just might be able to get to infinity FI.
Let's examine some ways you can pull those levers to your advantage...
Increasing Your Passive Income
There are a variety of types of passive income streams you can create. Some are truly passive, while others require some work to maintain.
Many in the FIRE community have a side business they use for extra income, or just to keep themselves productive and engaged. It’s really up to you how much time and effort you want to put into generating extra income.
For us, we are fortunate that we don’t have to do any work for additional revenue. However, we do generate some income from our books, our blog, speaking engagements, etc. We look at these side gigs as fun projects that we would do even if we didn’t make any money from them.
Types of Passive Income
So what can you do to increase your passive income? Here are some ideas…
Dividends, Capital gains, and Interest. This is our favorite type of passive income. About half of all our expenses are paid for by the dividends from our taxable account.
Blog, Podcast, YouTube Income. If you have a blog, podcast, YouTube channel, or other platform, you can earn income from ads, affiliate offers, sponsored posts, etc. The amount of work varies, but those who do best treat it more like a job than a hobby.
Product sales. You can earn money by creating and selling books, courses, or other physical or digital products. The nice thing is that these can be evergreen products, meaning you create them once and continue to market and sell them over time.
Rental income. This includes long-term rental properties, Airbnb rentals, or house hacking (e.g., renting out a room). We have some friends who own three properties in California (Tahoe, San Francisco, and Palm Springs). They bounce between the three and Airbnb the others throughout the year.
Silent Partnerships. Some people invest in others’ business or rental properties as silent partners, so they’re not doing any actual work. Allison’s uncle was a minority partner in a commercial real estate investment for decades.
Pensions and Social Security. Not everyone is lucky enough to get a pension, but those who do can count this as valuable passive income. And while collecting Social Security isn’t an option until you turn 62, it is a form of income that you can include at that age.
Annuities. For some people, getting a regular check each month reduces anxiety about market fluctuations. Before signing on to an annuity, make sure you do a full analysis of the terms and conditions, especially the fees!
Reducing Your Expenses
The other big lever for increasing your FI number is to reduce your expenses. The lower your annual costs, the longer your nest egg will last. If you can reduce your expenses below your annual income, then you can reach that coveted infinity FI number.
The largest household expenses tend to be housing, food, and transportation. Other big expenses include insurance (health, car, home, etc), education, entertainment, and travel.
We’ve typically been pretty good about keeping most of our household expenses low, especially for things like food, transportation, clothing, and entertainment.
Our housing costs have always been high due to living in one of the most expensive regions of the country. We also love traveling, so we’re happy to spend freely to experience the world.
Ways to Cut Costs
Let’s look at some strategies to cut those big household expenses.
Housing. One of the best strategies for achieving FIRE is to drastically reduce your housing expense by moving to a lower cost area while maintaining your current income. This is known as geographic arbitrage and was popularized by people moving overseas while still being paid their normal paycheck.
We managed to work out a local geo arb when we moved from San Francisco to Oakland. We were able to buy a condo for half the price while receiving our regular salary. This allowed us to FIRE nine years ahead of schedule.
Transportation. We’re big believers in buying inexpensive cars that are a couple years old and keeping them for a long time. We kept our last car, Greta the Jetta, for 17 years until we traded her in for Lola the Corolla. Lola is a 2017 model, and we bought her in cash in 2019. So far, she’s seen 43 of the 50 states and hopefully has a long life left!
Food. Eating out can be very enjoyable, but it can also be pricey. You can save quite a bit on your monthly food bill if you buy your own ingredients and make your own meals.
We’re fortunate that Allison enjoys cooking, because she prepares almost all of our meals. We eat out maybe once or twice per week, but the rest of the time, Allison does her magic in the kitchen.
Other cost cutting strategies. Allison is a master of reducing expenses. Over the years, we’ve saved money by getting stuff for free, buying in bulk, getting things secondhand, and doing things ourselves.
Final Thoughts
As you can see, if you’ve built up a big enough nest egg , it’s certainly possible to tweak your expenses and income to get to a large FI Number (maybe even infinity).
Just make sure you don’t pursue this goal at the expense of your own happiness. Whichever scenario we choose in the examples above, we want to make sure we continue to have an enjoyable lifestyle. We don’t want to settle for living somewhere we don’t like just to get to an infinity FI.
If we can pull it off, even for a short time, we’ll be happy to let our investments pay for all our bills. As one of Hollywood’s most famous characters bellowed, “To infinity and beyond!”
Dividend Power
Interesting concept I have never heard of before. I like it. However, I think some people are starting to say the 4% rule may not be right. There was an interesting article in M* about it.
dylinr
Yes, I have seen several articles suggesting the 4% Rule has its limitations. Most suggest it should be lower, like 3.5%, but some say higher. I think a lot of it depends on your risk tolerance and how early you retire.