Estimate your financial independence number and how many years of work stand between you and freedom.
FIRE stands for Financial Independence, Retire Early. The core idea is simple: accumulate enough investments that your annual spending can be covered by portfolio withdrawals, making work optional. The most common benchmark is the 4% rule, which comes from the Trinity Study of historical US market returns. It found that a portfolio of stocks and bonds survived 30 years of withdrawals in the vast majority of historical periods when the initial withdrawal rate was 4% of the portfolio value.
At 4%, the rule of thumb is 25 times your annual spending. Spending $40,000 per year means a target of $1,000,000. Every $4,000 you cut from annual spending lowers the target by $100,000, which is why frugality is such a powerful lever in this community.
It is a starting point, drawn from US historical returns that may not repeat. Recent research suggests 3.3% to 3.7% may be safer for 40-plus year retirements, especially with high starting valuations. Test your plan at 3.5% to see the sensitivity.
Your annual spending figure should include expected taxes on withdrawals. Money in traditional retirement accounts is taxed on withdrawal; Roth and taxable accounts have different treatment.
Health insurance before Medicare age is one of the biggest line items for early retirees in the US, often $10,000 or more per year for a couple. Build it into your annual spending estimate.