The Magic Number

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the following year we returned 6% on our investments then we would have earned £60K, however we would still have only withdrawn £40K and so would have another £20K cushion added on for following years when the markets might not be doing so well/went down.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!?

Would love to go to Bora Bora!

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!