Millionaire who retired at 30: Here's how to calculate how much money you need 'for the rest of your life'

How much money would you need to retire today and never have to work again?

If you're planning to retire at 65, that figure may seem distant and amorphous. You're saving as much as you can today so that you can enjoy life as much as possible when you eventually leave your job.

For adherents to the financial independence, retire early, or FIRE, movement, that figure is much more concrete. "Your FIRE number is the amount of money you need to live on for the rest of your life," says Grant Sabatier, creator of financial site Millennial Money and the author of "Financial Freedom."

For many aspiring early retirees, calculating that number comes with an easy shorthand: "The way you calculate your FIRE number is multiplying your expected annual expenses by 25x," says Sabatier, who reached financial independence at 30. "Meaning if you spend $40,000 a year, multiplying that $40,000 by 25 would get you to a million dollars."

"This million dollars essentially is how much money you need to reach financial independence and live off that amount of money for the rest of your life."

As with any other one-step financial calculation, the FIRE number math is based on several assumptions and will vary based on your financial situation. Here's what retirement experts say you need to know to figure out how much money you'll need to retire.

The math behind the FIRE number calculation

The FIRE number calculation is rooted in the so-called "4% rule," which was popularized in an influential 1998 research report known as the "Trinity study." Included in the research was an examination of past market performance to determine a safe withdrawal rate in retirement.

The conclusion: In 99% of cases, retirees could withdraw 4% per year, adjusted for inflation, from a portfolio of stocks and bonds without running out of money.

"Unfortunately, that was a 30-year timeframe, and most early retirees today need their money to last 30 to 50 years," says Sabatier. "But thankfully, the updated calculations now show that you can live off between 3.5% and 4% of your money" and your portfolio will likely continue to grow over the decades.

When calculating your FIRE number, remember that the multiple of 25 is really just an easier way of dividing by a 4% withdrawal rate. Returning to to Sabatier's earlier example, if you intend to spend $40,000 a year in retirement, divide by 0.04 to get to your million dollars.

As Sabatier points out, some more recent studies suggest it may be wiser to aim for a lower withdrawal rate if you're hoping for an extended retirement. Researchers at Morningstar peg the safe withdrawal rate at somewhere between 3.3% and 4%, accounting for factors such as relatively low yields in the bond market and relatively high valuations on stocks (which tend to dampen future returns).

"In general, if you have a portfolio balance and you're planning to stretch your withdrawals out over 40 or 50 years, starting with a lower withdrawal rate gives you a higher probability of success," says Christine Benz, director of personal finance and retirement planning at Morningstar.

If you're looking for that same $40,000 annual income and plan to withdraw 3.3% from your portfolio a year instead of 4%, your FIRE number rises to more than $1.2 million.

Although your FIRE number can help serve as a guide to when you can retire, preparing for life beyond work requires much more planning than one simple calculation. What you're planning to spend in retirement now could be vastly different than the reality once you get there. And twists and turns in your portfolio could require you to be flexible about how much you can withdraw in one year versus the next.

If you do calculate your FIRE number and find yourself getting overwhelmed by a huge number, remember that you don't have to get there all at once, says Sabatier.

"I might need $2 million to be financially independent, but instead of focusing on that, let me focus on saving six months of expenses. Then one year. Then two years," he says. "Take it one year of expenses at a time. People get distracted by that huge number at the end."

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