What is FIRE? (with calculator)

What is FIRE, and why do people want it?

What is FIRE? It is a goal, not a product: building enough invested wealth that the returns can cover your living costs for the rest of your life. Once you're there, you are financially independent. The "retire early" part is optional. Many people who reach it keep working, but part-time, in a different job, or on their own terms.

The idea has three moving parts:

1. Spend less than you earn, often by a wide margin. People chasing FIRE commonly save a large share of their take-home pay.
2. Invest the difference, usually in low-cost, diversified funds that grow over long periods.
3. Stop when the pot is big enough that you can draw a modest share each year without running out.

The magic is that spending works twice. Every euro you don't need each year lowers your target by 25 euros under the 4% rule, and also leaves you one more euro to invest.

The 25× rule and the 4% rule

The two rules are the same idea seen from opposite ends.

• The 4% rule: in your first year of retirement you withdraw 4% of your pot. After that you take the same amount each year, raised for inflation, whatever the markets do.
• The 25× rule: to make 4% cover your spending, your pot needs to be 25 times what you spend in a year, because 1 ÷ 0.04 = 25.

The 4% figure comes from two well-known US studies. In 1994, financial planner William Bengen tested withdrawals against US market history going back to 1926. He found that a first-year withdrawal of 4%, raised for inflation each year after, never exhausted a portfolio in under 33 years in any past period he studied, with 50% to 75% of the money in stocks.

In 1998, three professors at Trinity University published what became known as the Trinity study. Using US returns from 1926 to 1995, an inflation-adjusted 4% withdrawal lasted the full 30 years in 98% of past periods for a portfolio of 75% stocks and 25% bonds, and in 95% of periods for a 50/50 mix.

The limits of the research

These studies are useful, but they weren't written for a 35-year-old in Utrecht or Leeds:

• US data only. Both studies used US stocks and bonds. Other markets, and the future, can give different and possibly lower results.
• 30-year horizons. Someone retiring at 40 may need their money to last 50 years or longer. Bengen himself found a slightly higher 4.25% start could have run out in 28 years in the worst case.
• No fees and no taxes in the original numbers. Both reduce what you can safely draw.
• Rigid spending. The rule assumes you never cut back, which real people often do in bad years.

For these reasons, some people planning a very long retirement use a lower rate, such as 3% to 3.5%, or plan to spend flexibly. You can change the withdrawal rate in the calculator above to see how much it moves the target.

Worked example: the calculator's default settings

Take someone aged 30 who expects to spend €30,000 a year, has €25,000 invested and invests €1,000 a month. Assume a 5% yearly return after inflation, so all figures are in today's euros.

More than half of the final pot is growth, not deposits. That is compound growth doing the heavy lifting, which is why starting early matters so much. Our compound interest guide shows the effect in detail.

If this person instead aimed for Coast FIRE with a normal retirement age of 65, they would need €750,000 ÷ 1.05 to the power 35, or about €135,968 invested. They have €25,000 now; by keeping up the €1,000 a month, they would reach their Coast number in about 12 years 2 months, at age 42. After that, in this example, no further investing would be needed to reach €750,000 by 65.

Types of FIRE

Using the same 4% rule:

Lean FIRE suits people who genuinely enjoy a simple life, but leaves little room for surprises. Fat FIRE gives more cushion but takes much longer to reach. Barista FIRE and Coast FIRE suit people who want more freedom sooner without stopping work altogether.

Risks and things that are different in Europe

• Inflation. The calculator works in today's money, using a real return. If inflation runs above the ECB's 2% target for a while, your spending needs rise faster and real returns can be lower. See what inflation is.
• Healthcare. In much of Europe, healthcare is funded through taxes or compulsory insurance, so it is often a smaller retirement worry than in the US research. But compulsory premiums, excesses and care costs still need to go in your yearly spending figure.
• State and workplace pensions. Many European countries pay a state pension from a fixed age, and workplace pensions are common. These can reduce what your own pot has to cover later in life, but you usually can't access them early, and retiring early may reduce what you build up. Check your own national rules and pension statements.
• Taxes. Investment income and withdrawals are taxed differently in every country, and some countries tax the value of your wealth each year. Build tax into your spending number.
• Life changes. Children, housing, health and relationships change spending a lot over 20 years. Revisit your number every year or two.

Common mistakes

• Using today's spending without a buffer. Add costs you'll face later, such as home repairs, healthcare excesses and replacing a car.
• Assuming high returns. A 5% real return is an assumption, not a promise. Try 3% or 4% in the calculator to see how the timeline changes.
• Cutting so hard you burn out. A plan you can stick to for 20 years beats an extreme one you abandon after two.
• Skipping the basics. Before FIRE, most people need an emergency fund and no expensive debt.