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Here's how to figure out how much money you need to retire early


If you retired in your 40s, how much money would you need to live comfortably for the rest of your life? That's one of the questions at the heart of the FIRE (financial independence, retire early) movement.

Financial independence, at least for many online communities, is defined as having enough savings and investments to fund reasonable living expenses for the rest of your life. You can volunteer, continue to work or pursue hobbies or passions, but you are no longer relying on income from a job to cover day-to-day expenses and save for retirement.

The goal of the financial independence movement can be boiled down to, "What would I do with my life if I didn't have to work for money?" per the popular subreddit on the topic.

For many people who adhere to the mission, there's a savings target they want to hit, at which point they will have reached financial independence, as they define it. It's called their FIRE number, and typically, it's equal to 25 times a household's annual spending, invested in low-cost, passive stock funds. Many wannabe-early retirees aim to save between $1 million and $2 million.

You can calculate your own number by meeting with a financial advisor or using an online calculator that can give you a ballpark idea.

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For early retirement, the standard thinking is that a 4% annual withdrawal rate of your savings is "safe," and you can increase it by inflation each year. So, for example, if you've saved $1 million, you can take out $40,000 in the first year. If inflation is 3%, the next year you can withdraw $40,000 plus 3%, or $41,200.

Of course, there are countless factors that come into play to determine how much you need to retire: Your current salary and savings rate, how much your employer contributes, how the market performs, how much you need to live on each year, your withdrawal rate, the size of your family, your goals, your varied income streams, health care, unexpected expenses — the list goes on.

"Like many others in the FIRE space, we used the general rule of thumb of 25 times our expenses as a baseline," Julien Saunders, who blogs about his FIRE journey with his wife, Kiersten, tells CNBC Make It. "However, given we have a number of variables, such as the potential for another child and a financially insecure parent, we aren't building a plan solely based on those numbers."

They have different savings and investment goals, he says, adding that prioritizing retirement savings and passive income streams allows them to "opt out of work in the traditional sense and focus on other things."

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Tanja Hester, author of "Work Optional: Retire Early the Non-Penny-Pinching Way" and the Our Next Life blog, tells CNBC Make It that she recommends people pad their savings well beyond the "25 times" benchmark.

"Your spending will likely go up now that you have much more free time to fill with travel and activities that cost money," she says. "I recommend saving at least 30 times your anticipated annual spending in early retirement, along with having at least one or two major contingencies, like a house you own outright and could downsize."

Overall, though, adherents of the FIRE movement try to reduce expenses so that they can save at least 50% of their salary each year, though some are significantly more frugal than others.

A perusal of the FIRE subreddit will drive home the point: Some followers are fastidious about every penny they spend, while others like to enjoy some luxuries now. Some say they want to retire in their 40s, some in their 50s and others are just in it to hone their general financial know-how. Many earn six figures, but there are others who earn, say, $50,000 per year and still manage to save much of their money.

The drawbacks of early retirement

FIRE isn't for everyone. The most common criticisms of the movement are that only the privileged elite with high salaries, such as software engineers and lawyers, can really achieve it, and that participants, at least vocal ones, are predominantly male and white.

Douglas Boneparth, president and founder of Bone Fide Wealth, tells CNBC Make It that while the FIRE movement is great for those who want to pursue it, it's not realistic for many. FIRE is extreme, and extreme methods have extreme results — not always for the better.

"Striking the balance between a comfortable lifestyle and saving for your goals is, I think, a superior way to go about it," says Boneparth. "FIRE isn't really a balance, it's an extreme tilt of the scale."

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While it's easy to look at your current expenses to calculate your FIRE number, Boneparth says it can be tricky to project those into the future without sophisticated software. A 4% annual withdrawal rate is fine for a purely quantitative approach to your finances, but doesn't necessarily take the qualitative aspects of life into account.

"These analyses don't take life into account, they're in a vacuum," he says. For example, what if you experience a serious illness, a recession hits right after you "retire," or your house burns down — all of these things are impossible to foresee.

That said, Boneparth says anything that gets people to save more and think about their holistic financial plan is a net positive. Adopting parts of the FIRE movement that align with your goals can be part of a comprehensive financial plan, even if you don't necessarily have a specific number you're aiming for.

"My dad always said if you're floating down a river where there's rocks lined up on the shore, the last thing you want to do is crash into the shore," he says. "Floating down the middle is the safest way."

Don't miss: More workers are looking to retire early: A look inside the FIRE movement

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