Hello fellow Fire Fans!
Today I will be going through our FIRE target.
As mentioned in the previous post, at the moment it is going to be Slow
FI L.
But without further ado, are you ready to hear about our magic number?
Drum roll please….
It’s £1 Million!
Based on the 4% rule this would provide us with £40,000 a year, without ever running out of money.
If you’ve been reading about FIRE online, then I’m pretty sure you
would have come across the 4% rule. If not, in a nutshell, the 4% rule is what
‘financial experts and advisers’ (yep, those types of people) recommend is a
safe withdrawal rate (SWR).
It allows for a withdrawal of 4% of your investments without ever
running out of your funds/principle amount. They say this, as investments in
the long run tend to return between 7%-10%, I have even some places quote as
high as 12% - but I’m a very conservative person (you’ll see this when I talk
numbers throughout this blog) so I’m just going to assume that there’s no way
I’ll get even 10% let alone 12%, in fact majority of the time when doing my own
FIRE calculations, I only input returns at 5% on calculators, just to be extra
sure with my target and goals!
As you would be withdrawing less than the long term returns i.e. 4%
withdrawals being less than 5%, 7%, 10% returns etc. you would, as a result,
never run out of money and hence be able to retire, knowing money will be
coming in whether you choose to work or not! Yeah baby!
So £1 Million x 4% = £40,000. Once we reach our goal of £1m, we would
be able to withdraw £40K a year and never having to worry about running out of
money.
Let’s go through an example: Say for arguments sake that after
achieving the £1m target, the following year we returned 6% on our investments
then we would have earned £60K, however we would still have only withdrawn £40K
and so would have another £20K cushion added on for following years when the
markets might not be doing so well/went down.
So for us, £40K divided by 12 months would give us a monthly income of
£3,333.33, which I believe would be way more than enough for us to live on
(there’s me being conservative again!). In reality, I believe we wouldn’t need
this much to cover our expenses plus for the fun things we’d like to buy and
do, however I’d rather aim for a higher number for now and can then always
adjust if needed.
When I go through our lifestyle, spending and budget in later blog
posts, you’ll probably agree that we are being a little over cautious with this
amount and we would not need £40K in retirement but I’d like to aim for this
for now, because though we are being more cautious and frugal in our spending
at the moment, once we are able to retire… we will and will want to splurge! We
will probably go for new cars, have multiple holidays in a year and travel
abroad a lot more so better to be conservative right!?
Another way to calculate your FIRE target number is with the rule of
25, where you multiply your expenses/spending by 25. e.g. if your
expenses/spending would be £25K a year then £25K x 25 = £625,000, so this is
what you should aim for in your investments. £30K would be £750K, £35K a year
would be £875K and of course our number of £40K x 25 gives us the £1m.
So I’ve told you what me and my wife are aiming for. We believe this
will provide us with an excellent life where not only will our essential costs
such as household bills will be covered, but will also be able to treat
ourselves with latest gadgets, cars and holidays – things which we are limiting
on at the moment (though I will have to tell you something about my car in a
later post!).
Do let me know in the comments what you guys think about our FIRE
target and tell me about yours!
Thanks for the update - what is your main investment strategy? are you planning to split this between pensions/ISA? Good work on getting the blog off the ground!
ReplyDeleteHi Ad Otium,
ReplyDeleteThank you for your comment, you're the first!
Regarding main investment strategy, I'm actually in the middle of writing that post, so it will be up on the site soon.
But as you've asked I'll provide a few brief details: I do have a personal pension set up (due to being self employed). I did this before I became aware of FIRE and so ended up putting large lump sums in the beginning but now it is only a nominal monthly amount. If I knew about FIRE, I would have held off doing this. The rest goes to an ISA and a few other investment accounts as I can withdraw these before traditional retirement age.
Thanks again
Have you not thought of the impact of having money tied up in pensions that you won't be able to access for another 20-30 years?
ReplyDeleteJust having £1m isn't enough if you can only spend half of it.
Also, is that £40,000 before or after taxes?
And will you be raising your £1m target each year with inflation?
Hi Gentleman's Family Finances,
DeleteRegarding the pension, yes I have thought of the impact, like I mentioned in my response on the previous comment – I had set up the pension before I had even heard of FIRE. Now that I have already put large sums into it, I can’t really do anything about it and will just have to wait until I reach an age from when I can withdraw from it. I do put a small amount in still, this is purely because the Government puts in another 25% and those returns are quite good on its own! Plan is at 55 take 25% tax free – which could mean I may not need to do a 4% withdrawal that year.
The £1m that we are hoping to save wouldn’t include the pension – that will be separate. The majority of the £40K would be after tax as we save into ISAs.
Not sure we will raise the £1m with inflation YET. The reason is that we may not always end up spending £40K a year, we may have some leftover, and then we could just re-adjust lower withdrawals for the following year, if need be. As mentioned, in the Magic Number post, we may not even need £40K a year, but we are aiming for this right now, to be on the safe side and when the time comes we could lower this amount.