Calculating some FIRE numbers

I want to achieve financial independence and be able to retire early, just like many of you. There are many reasons for it. To slow travel more, spend quality time with family and friends, expand my mind and pursue my dreams and hobbies. To be able to manage my own time and quite the commute. More freedom.

But I realize that I don’t really have a plan. And you need a plan if you want to achieve something great.

What I have at this stage is a lofty goal. At the moment it is to generate a sustainable passive income of $50,000 per year. To do this, using the magic 4% safe withdrawal rate, I would need a total of $1,250,000 invested. And I have a lofty goal of achieving this by the time I hit forty.

So I am going to lay out my thought and try to make a plan. Hopefully, this may help you in formulating a plan for yourself to achieve FIRE.

Goals are achieved with solid plans and consistent action

Can I achieve my lofty goal? Am I on the right track? And where do these numbers come from? It’s time to sit down and work it all out. And if you have the same ambition to become financially independent and be able to retire early I invite you to work out your numbers too.

Working out the numbers will show you if you are on the right track to be able to achieve your goals, or reveal that you need to work harder.

Right of the bat, I can see that my lofty goal will be hard to achieve. I have 10 years to save and invest 1.25 million. Ignoring returns, that is going to be $100K a year. More than we earn! So let’s examine the numbers and work out if they are correct.

Passive Income

I estimated that I would need a passive income of $50k per year to retire early.

Where did I get this number from?

I pulled it from thin air and thought it sounded like a good number. But is it realistic? After All, that is one of the key steps to set an achievable goal.

To find out, I examined our expenses for the last 5 years. I have a spreadsheet of all my expenses from 2012 until 2017. After 2017 I switched to an online platform. The data on my online platform is much more stratified than my spreadsheet so I will only use the data from 2012 to 2017 for my calculations.

So how does my $50k per year stack up to my actual expense? Over the 5 year period, we have spent an average of $60,196 per year.

Ok, that isn’t good. I am already 10k short on what I need. Or am I….

10k short?

In my spreadsheet I have classified my expenses into six categories, each category has subcategories but that isn’t important right now. The categories are;

  1. Utilities and Home Expenses
  2. Mortgage
  3. Daily living
  4. Transport
  5. Entertainment
  6. Investments

I won’t go into too much detail about what is under each category, but from the list, two categories shouldn’t exist once I retire. And one has the potential of being significantly reduced.

That is, I plan to be mortgage-free once I retire. We are already on track to be mortgage-free in 8 years at our current repayment rate. I could push to become mortgage-free earlier, but I think there is some lost investment opportunity in doing so.

I hopefully won’t need to continue to invest once I retire either. By the time I actually pull the trigger I should have enough invested that I don’t need to invest more. After all, isn’t that the goal.

My transport expenses could potentially drop once I retire, but then again, they could go up if I choose to travel more. So I will just keep it there for now.

So now, what does yearly expense look like if I remove the cost of the mortgage and investments?

It brings our total living expenses to $27,047.

That means we have had a savings rate of 55% (if you count mortgage payment as saving). I’m quite proud of that number.

Far-less than expected

Our total expense average over 5 year is only a little over $27k per year. This surprises me somewhat. I would have assumed it to be much higher than that. There is much to learn when you record every financial transaction you make.

So in theory, we could retire when we hit a passive income of around $30k. That would mean I would need to have a total of $750k invested

Investment Timeline

So, a decade to invest 750k (minus the amount already invested at a modest 50k). What does that look like?

10 years to invest 700k works out to be 70k per year, ignoring investment returns. Few, I hope that maths wasn’t too hard for everyone.

Now, 70k per year is $1346 per week. That’s somewhat larger than the current 400 per week I am investing now. At my current rate, it will take me 33.5 years to be able to retire. And by that stage, I will nearly be at the socially designated retirement age anyway.  

Adding Returns

What happens when I add in returns? How much will I need to invest then? Let’s get out the spreadsheets.

If I consider my original 50k investments and assume a 5% average growth over this 10 year period. I will need to be investing $1110 per week to hit $750k.

At this stage, I have come to a realization that I haven’t been working hard enough to achieve my goal of FIRE by 40. There is no way I can sustain investing $1110 per week. Not while I am still paying down the mortgage.

Re-evaluation your goals

After doing some number I have come to the conclusion that I will either need to start earning more or extend my goal date, in order to make it realistic. This is why you should do some calculations for your own situation.

There is no point in having a goal if it is not achievable. When this happens, it’s not a goal but a dream. I’m going to re-evaluate my situation to account for possible salary increases and areas in my budget where I can cut down spending. But at this stage, I will need to push my end date out to 15 years, at an investment rate of $1200 per week.

So have you worked out your numbers? Are they reasonable and achievable?

0 Shares

9 thoughts on “Calculating some FIRE numbers”

  1. HI Rohan,

    Nice work on the blog, keep it up mate! Good reading so far.

    Hey just wanted to ask. When you say you consider you mortgage payments as savings, surely you are only talking about the principal portion and not the P&I together right?

    Cheers
    L

    Reply
    • Yes, should only include principal portion. I will go through and see what the percentage was and if I included it correctly here. Currently, around 30% of what we pay on the mortgage goes to interest, the rest on principal. And the percentage number will keep coming down as we continue to pay it down.

      Reply
  2. Hi Rohan, I’m a little closer to the end goal than you, through good luck mostly. I’m 53 and am FI now but waiting a few years before jumping. Had I been smarter on getting onto this FIRE mindset I could have freed myself from the consumer BS allot earlier. 40 would’ve been an excellent age. The passive income thing is so very important and to achieve this I stumbled across a commercial building which is now giving me a good income. Luck was on my side. I love how you think and how you are being smart about achieving your goal. I’ll keep following your thread to see how things evolve. All credit to you for doing it right.

    Reply
    • Good work Bret! Can I ask how you stumbled across a commercial building? I have always been interested in commercial buildings as investments, just don’t really have the funds at the moment.

      Reply
      • Sure Rohan, I took a big risk about 12 years ago and purchased a warehouse and turned it into a photographic studio for shooting cars. Size is 500m2. I had a side hustle bringing in a good income with the commercial photography business. This was when I was a super consumer with way too much debt. I sold a private residence to fund the warehouse. Over time the figures didn’t stack up and my business wasn’t sustainable as overheads were too high. My partner and I ended up leasing the building out and this created an immediate positive cash flow environment and from that point I haven’t looked back. As I’m sure you’re aware, commercial buildings are mainly about cash flow and not so much about capital gains. Just be careful going down this road as many fish hooks exist if you aren’t aware of the commercial environment. If I was do it all again, I would be reducing debt first and then make the leap. The bonus about commercial property is that you can set up a contract where the tenant pays all the overheads. The returns are way better than residential rental property, especially now in this over inflated housing market. I hope for the sake of all New Zealanders the housing market flat lines for 10 years to get back to reasonable figures. Private debt will cripple us all.

      • Wow that story sounds super familiar. I think one of the happy savers podcast has a story like yours. I see many more benefits in commercial property than in residential property, especially all the overheads ect. And your right, private debt will cripple us all. I think we are on the path you mentioned, reducing debt first before we jump into a commerical property or even a managed horticultural block.

      • I’m going to follow your blog as you definitely have a way with numbers. I like how you think. And yes that was me on the happy saver. Ruth is fantastic and was instrumental in really putting a fire under my arse. She’s got a really good heart and used to drive those 50 tonne quarry trucks. Big rig for a small woman. Anyway I’ll stay in touch.

Leave a Reply to Rohan Cancel reply