If you’re interested in FI/RE, check out this handy FI/RE calculator below!
Use the first part to calculate your FI/RE number, and then use the second part to calculate how long you have until financial independence.
There is a certain number, called your FI/RE Number, that determines when you can retire. Once you reach this amount of money, you can essentially live off of the interest that your money makes you.
How do you find this magic number? It’s simple, you take your annual expenses and multiply that by 25.
FI/RE Number = Annual Expenses * 25
How do you find your annual expenses? You add up spending from the last 12 months, and that is how much you spend in a year. You could also make a monthly budget and multiply that amount by 12 to estimate your annual expenses.
Why does this number work? Because when this number is multiplied by 4%, you get your annual living expenses. The FI/RE community suggests that you only take out 4% of your investment each year.
Some years your investment might gain value, while other years it might lose value. On average, the stock market increases by 10% every year. If you factor in inflation of 2%, your investment should grow by 8% every year.
That means that if everything goes well, your investment should continue to grow even when you are pulling out 4% to live off of.
Now take your FI/RE number and enter it into the “Amount At Retirement?” field below.
Great! Now you know how long you have until you can retire, but what exactly does this mean?
What is FI/RE?
FI/RE is an acronym that stands for Financial Independence / Retire Early. It is used in the financial world to describe a lifestyle.
The goal of FI/RE is to save the majority of your income for the first few years of your adult life, invest that money, and then live off of the interest that money generates.
FI/RE requires extreme sacrifices. You have to live off of the bare minimum in order to achieve it as fast as possible. The idea behind this is that you can make sacrifices now in order to be able to retire much earlier than everyone else.
Some say that this is no way to live. It can be torture to put yourself through this for years. They say that there is no guarantee that you live until you can retire so you should just enjoy yourself now while you can.
In a way, these people are right. But honestly, you can do this however you’d like. If you still want to have some fun, you can. It will just take you a few more years. Or, you can live at the bare minimum and achieve this in as less than 10 years.
How does FI/RE Work
FI/RE might seem complicated, but it really isn’t. It involves saving most of your money every month and investing it into some sort of high-interest investment. It could be the stock market, a retirement account, etc.
First, you are asked about your current age.
Then you should enter your current retirement savings if you have any.
Then you enter the amount you will save each month (if you have an annual savings amount, just divide it by 12).
Next enter the annual interest rate of your investment (I’d suggest 10%).
Finally, you should enter the FI/RE number you got from the first part where it says “Amount At Retirement?”.
Then hit calculate and you will see the exact age of when you can retire along with how your investment has performed.
In case you’re confused, here are some examples to help you. All of these estimates are made on the assumption that the investment grows an average of 10% per year and there is $0 currently saved.
John is 23 and makes $50,000 a year. He only needs $20,000 to cover his annual expenses. He saves $30,000 a year. He can retire at age 32.
$20,000 * 25 = $500,000
$30,000 saved a year = Retire by age 32
Jack and Jill are each are each 25 years old and their household income is $100,000. Their annual expenses are $50,000. They save $50,000 a year. They can retire at age 37.
$50,000 * 25 = $1,250,000
$50,000 saved a year = Retire by age 37
Jane is 22 and makes $100,000 a year. She only needs $30,000 to cover her annual expenses. She saves $30,000 a year. She can retire at age 29.
$30,000 * 25 = $750,000
$70,000 saved a year = Retire by age 29
Those are some extreme examples but I just wanted to show you how this could be used in incredible ways.
In reality, you might be in your 30’s or 40’s, but you could still retire 10-20 years before your peers.
It might sound crazy, but it really isn’t. Thousands of people are choosing this lifestyle and having great success with it.
If you are considering living this lifestyle, I have a few tips for you.
Start as early as possible. The earlier you start, the earlier you will be able to retire. Even if you don’t go all-in right away, there are major benefits for starting early because of all the compound interest you’ll earn.
Here are the Best Ways To Start Investing With Little Money!
Don’t Retire As Soon As You Hit Your FI/RE Number
Keep in mind that when people talk about FI/RE, they consider their retirement spending to be the exact same as their current spending.
Basically, if you are making a lot of sacrifices now and living on $20,000 a year, you will only have $20,000 a year to live on in retirement and you’ll have to make the same sacrifices.
However, that is going off of the assumption that you are retiring as soon as you hit your FI/RE number. I would highly advise against this. I would suggest working an extra year or two after you hit your FI/RE number. This will allow you to save and invest even more money in order to live a more luxurious life in retirement.
Here’s a good way to think about it: Don’t think about your current living expenses, but think about your future ones. You’ll need a house if you don’t have one. You’ll need extra money for a spouse and kids. You’ll want money to save for your kids’ college education. No matter what you decide, you will want a significant amount of money available for emergencies. And I’m guessing you’re going to want to travel quite a bit now that you are retired.
So maybe right now you are living off of $20,000 a year, but in the future, you want to live off of $50,000 a year. When you are calculating your FI/RE number, you should use the $50,000 instead of the $20,000.
Just to be safe, whenever you hit your FI/RE number, don’t retire right away. Either work an extra year or two, slowly decrease your hours, or get a part-time job. Doing a little extra saving now will go a long way in the future.
Consider Your Life After Retirement
When people think about retirement, they immediately think that they want to retire as soon as they can. They think that work sucks and that they would do anything to not have to work.
To an extent, sure, retirement is awesome. But it also comes with some unintended downsides. People don’t realize how much time they spend at work. A huge chunk of our life is spent at work.
So when one retires, they are left with so much time on their hands and very few obligations. This can lead to feelings of not having a purpose, being bored, depression, etc.
So when you retire, you should have a plan for life after retirement. It should be something that you are passionate about and find purpose in.
Maybe you volunteer and help others, maybe you spend time with family, maybe you travel the world, maybe you get a part-time job you enjoy, or maybe you start a business.
Whatever you do, enjoy yourself, you’ve earned it.
How To Cut Spending
If you want to retire early, you’re going to have to cut as much spending as you possibly can. Here are a few things you can cut in order to save and invest more money:
- New Cars: The average car payment is $530. You could save $105,000 over the course of 10 years if you invested that money instead.
- Subscriptions: If you canceled just one $10/month subscription, you could save and invest that money instead an have it be worth $2000 over the course of 10 years. Now imagine if you canceled 5 subscriptions. All of the sudden you have saved $10,000.
- Food: The average American household spends $3,000 a year on eating out. If you invested that money instead for 10 years, it would be worth $50,000
- Technology: The average American spends $166/month on things like cable TV, phone payments, etc. If you invested that money for 10 years it would be worth $30,000.
- Traveling: Americans spend an average of $2,000 on traveling each year. If you invested that money instead for 10 years, you would have $30,000.
If you did all that, you could save $225,000 over 10 years. If that’s not some serious saving then I don’t know what is!
If you’re a teenager reading this, here are 10 Budgeting Tips For Teens!
How To Make More Money
If you’re saving as much as you can and you still aren’t making enough money to retire when you want to, you might need to consider some options for making more money:
- Part-time job: The average part-time income is $32,000. If you invested that for 10 years it would be worth $500,000.
- Business: The average business owner income is $59,000. If you invested that for 10 years it would be worth $940,000
If you need some more business ideas, here are 8 Businesses That Make Money While You Sleep In 2020!
FI/RE is not for everyone. It’s a lifestyle that some people choose to live because it works for them. They are okay with making sacrifices now to enjoy the freedom later. If you choose to retire early, you should find something that you are passionate about to fill your time. I highly recommend reading: Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence. Best of luck!
If you enjoyed this post, please make sure to comment your thoughts below and share it on social media!
Check out more content for:
Use this link to sign up for a brokerage account on WeBull and get TWO FREE STOCKS valued up to $1400 when you fund your account!
Join The Group Of Teens Dedicated To Achieving Financial Freedom
Disclaimer: Some of the links used on this site are affiliate links. At no additional cost to you, we receive a commission each time you purchase something through our link. It helps us cover the costs of running this blog. We only recommend the best products available.
Disclaimer: We are not experts or certified financial advisers. Our advice for you based on what has worked and continues to work for us. If financial problems occur we are not responsible for them and advise that you speak to a professional. That being said, we believe wholeheartedly that the advice we give to you will help your financial situation greatly.