In our last post we focused on our current monthly expenses and a path leading up to our projected monthly expenses once we FIRE.

Naturally, this follow up post will delve into what our FIRE number actually is and how we are calculating it.  Lucky for you, we are all about transparency here and we want to spend some time right here, right now, digging into our FIRE number and show you how we came up with it.

What do we mean by our FIRE number?

This is the amount of money you must squirrel away before you can give your boss the bird and ride off into the sunset of early retirement (or you know, be a decent human and politely say good bye on good terms).

Most people in the FIRE community live off the 4% rule which equates to 25 times your annual expenses.

For example, if you spend $40,000 per year, you’d need to hoard $1,000,000 in passive investments before you can cut ties with your employer. Essentially it’s when your cash flow from your investments can replace your annual expenses. We’ll dig further into how the math works below.

You’ll have then reached that magical point where your job needs you more than you need your job.  It is at this point in which you are financially independent.  Weeeeooo! You may have a Retire Early (RE) date that is different from your Financial Independent (FI) date.

Any way you look at it, the point is, you are now free to choose a life you enjoy and one that focuses on your personal values and goals.  If you enjoy what you do and want to keep working to build a larger nest egg or just to enjoy the satisfaction you get from your job, by all means go for it!  Or if you want to pursue your passions and hobbies, regardless if they make money or not, go for it!  Or if you want to chill 24/7 on a beach sipping pina coladas, by all means! Or if you want to travel the world, go for it! The point is, you’ve now reached freedom in which you can dertermine how exactly you want to spend each remaining day on earth.

Our FI Date

For us, we reached our FI date for our family of 3 back in 2018 and my wife stopped working then as it aligned with our little lady’s birth and my wife’s ability to go on paid parental leave for 18 months (and not return back to work afterwards). I am still working as we hope to become a family of 4 in the future and will retire early in 1-2 years once we reach our revised FI number based off a larger family size.

Of course, there is no guarantee for a lesbian couple (or any couple) to have another child, so if we are unable to do so we are perfectly content with our current set up and will be living like queens financially as we will be in a buffered financial situation.

A key point I’d like to ensure gets across in case you breezed past last weeks post is what defines your annual expenses is NOT your current annual expenses, it’s your projected annual expenses once you retire early.  These are likely different numbers!

Current vs. Projected Expenses

A couple of examples of how your current expenses may differ from your FIRE expenses:

  • You may have day care costs now that may dissipate once you retire early.
  • Or you may be contributing towards a mortgage that may be paid off once you retire early.
  • You may have two cars but plan to drop to one car once you retire early.

All of these will reduce your FIRE number.

  • Conversely, your work may be paying for your phone and you may need to add in a monthly phone bill you currently aren’t paying for.
  • Or you may want to have a supplemental health insurance plan in your FIRE expenses if these are currently being provided by your employer.
  • Or you may estimate that you want to spend more in certain discretionary spending areas like travel or food once you reach FIRE.

These will all increase your FIRE number which is why it’s very important to figure out the kind of lifestyle you want to live post-FIRE to figure out your FIRE number.

Hopefully, you are not depriving yourself along the way to reaching FIRE (that’s not the point/goal to all of this!) and your number will likely look the same with a few minor tweaks.

Your FIRE Number And Your Net Worth Are NOT The Same Thing

Why’s that?

Can you buy a new couch with the equity of your home?  No!  Some of your assets do not generate income and thus you cannot plan to live off some of your assets.  Your net worth and FIRE number are RELATED but they are not the same thing. 

Your net worth includes illiquid assets such as your home equity and car value which we do not include in our FIRE number as we cannot easily access these funds.

For example, you’re paid off house may help you need a smaller FIRE number because you don’t need to account for monthly rent or mortgage payments when calculating your annual expenses (assuming you’re content where you are and aren’t planning to move to a McMansion once you FIRE). But your house isn’t making you any easily accessible income (assuming it’s not being rented out, if so that’s a different story).

While we do not intend to move once we reach our FIRE number in the near term, the idea is that if/when we decide to move in the future, we plan to rent out our current townhouse and then use that rental income to fuel our rent elsewhere.  Or if we decide to sell our townhouse, then the proceeds of the sale will fuel the purchase price or rental costs of our next destination.

We view it as a wash and we do not plan to let lifestyle creep impact us and move into a costlier home down the road.  If anything, we’d want to move to a smaller place in a smaller town which is likely more affordable than our current setup.

Then of course there’s also the geographic arbitrage option of traveling to Southeast Asia, Mexico, Eastern Europe, Central America, or South America for example where we could easily spend a few years for a fraction of the cost compared to our current setup in Canada (not that that’s the plan, but it’s a contingency if all hell breaks loose with our investments).

Other Illiquid Assets

Same idea applies to other assets such as your car, cherished keepsakes, furniture, jewelery, etc.

Both of our cars were bought used in cash upfront but can you buy a dozen eggs with your car? No!

We currently own two cars and we plan to drop to a one car household once we retire early and we will likely sell my beloved Carol the Corolla for about $6,000.  The proceeds from Carol will go into our investment accounts to grow with the market which will allow us buy a low mileage used car down the road once Bucky bucks out on us (he only has 90k km/55k miles so he should last us awhile post FIRE).  In fact, the $6,000 from Carol will be able to fund all our future cars down the road.

Don’t believe us?  Here’s the math:

Sell Carol for $6,000 and assume a 7% return for 10 years until Bucky bucks out.  Carol’s investment account is now worth $12,057.  We will likely be able to sell Bucky for at least $3,000 (likely more).  So we now have $15,057 in our car fund.  We can likely purchase another used car for $7,000. That then leaves $8,057 in our accounts to keep growing for the next car 10 years later which will be valued at $16,191.

We can likely get $3,000 for our next used car purchase again when it’s time to sell, so we now have $19,191 for the subsequent car.

Continue to purchase the next used car for roughly half of our car investments account value and let the rest grow and we will never run out of car funds for the future.

This is essentially the rule of 72 for anyone who’s familiar with that. For those unfamiliar, the rule says that to find the number of years required to double your money at a given interest rate, you divide the interest rate into 72. For example, if you want to know how long it will take to double your money at seven percent interest, divide 7 into 72 and get 10.2 years.

So as long as our cars last 10 years and we only take out half of our car fund to pay for the next used car, this car fund will last us for all future cars as well.

And yes, there are MANY low mileage reliable used cars in the $7,000 range that will last 10 years without having to put in much maintenance costs and will resell for $3,000.  We’ve done it a few times and know its possible.

Since we do not include housing and car payments in our post-FIRE annual expenses, it would not be fair to include the value of these illiquid assets in our FIRE number as that would be double dipping.

The 4% Rule

Many people in the FIRE community have written about the Trinity Study and the 4% Rule so I will point you their way to further dig into it and how the math works:

The cliff notes explanation is that, in theory your portfolio should grow at 7% annually and that inflation will grow at 3% annually. That then leaves 4% of growth that you can withdraw out of your accounts without having to dip into the investments themselves and so it will theoretically last you the rest of your life. Note that over the last 100 years, the S&P 500 has grown at 10% per year on average and inflation has grown at 3% so some can argue that the 4% rule is too conservative assuming you are investing in low fee index funds tracking the overall market. However, it’s important to remember that past returns do not guarantee future returns.

While we understand why the 4% Rule works for so many members of the FIRE community, we are a bit more cautious especially in regards to sequence of returns risk and follow the research conducted by Early Retirement Now who advocates for a SWR in the 3.0-3.5% range in his Ultimate Guide to Safe Withdrawal Rates. While this series is very technical, I found it to be a fantastic read and would highly recommend it.

The 4% Rule equates to 25 times your annual expenses, a 3.5% SWR would equate to 28.57 times your annual expenses, and a 3.0% SWR would equate to 33.33 times your annual expenses. So depending on your comfort level, you can plug in the numbers to understand what your FIRE number is.

How do we calculate our Safe Withdrawal Rate?

First off, as noted above, you need to figure out what your projected annual expenses are. Actually, let’s back it up even further. You need to be tracking your spending everyday to know your current annual expenses to be able to project your future annual expenses!

We use a modified 4% Rule, in that we plan to actually withdraw less than 3% of our passive income each year but base our calculations on the 4% Rule.

How can we use the 4% Rule (aka 25x our projected annual expenses) to calculate our FIRE number BUT we do not plan to actually withdraw 4% from our investments? Is this where we get the skeptics and naysayers screaming from the top of their lungs that this whole FIRE concept is a hoax, scam, and cult!?

Read on my friends.

We have two items in our FIRE ammo to allow us to withdraw less than 4% of our portfolio.

  • Geo Arbitrage
    • Currently, about 70% of our investments are in USD (401ks, IRA, Brokerage Accounts) and the USD/CAD exchange rate has been sitting around 1.30-1.35 for quite some time now.  What does this mean?
      • If we converted the funds currently in USD into CAD today (where we live, the currency we use, and the country we plan on living in long term) without ever working another day in my life, we’d be way past our FIRE number and down to a 3.29% SWR.
      • If our funds in USD grew at 3% over the next 2 years until we FIRE (yes this is how conservative I am) and we again didn’t work another day and kept our Canadian portfolio as is, we’d be sitting at a 3.14% SWR.
      • If we assumed our entire portfolio (both USD and CAD) grew at 3% over the next 2 years until we FIRE and we again didn’t work another day we would be sitting at a 3.09% SWR.
      • If I switched to a part time role for the next 2 years, which would knock us down to a 50% savings rate vs our current 75% savings rate, and we again assumed our entire portfolio (both USD and CAD) grew at 3% over the next 2 years until we FIRE we would be sitting a 2.96% SWR. This is our current base case scenario. Boom boom boom!
  • The Canadian Child Tax Benefit
    • As if the geo-arbitrage piece wasn’t enough, we also have the Canadian Child Tax Benefit in our ammo.  What is the Canadian Child Tax Benefit you ask? It’s a tax free monthly payment made to eligible families to help with the cost of raising children under 18 years of age.  Based off our family’s current income, we earn about $1,000/year from this benefit.  However, if I shift to part time, this benefit will jump to ~$5,500/year. Woo! Once we FIRE and our income is reduced further, we would be eligible for the max benefit which is $6,639 per child under the age of six and $5,602 per child aged 6 through 17 (as of July 2019). Again, this is tax free money in our pockets! Have I mentioned how much I love Canada? Now of course, this is subject to change based off the political party in play so we realize these exact figures are not guaranteed forever and just icing on the cake and will only help us reduce our SWR lower if it remains as is.  Some sort of federal family allowance has been in place in Canada since 1944 so we don’t see it disappearing completely anytime soon.
    • If we assume the weighted average 2019 figures, that’s an extra $5,907 in our pockets each year until each child is 17 which is pretty much our assumed child costs each year.  Mind blown. That in and of itself brings us from a 4% SWR to 2.64% SWR.

If we tag team the lowered projected annual expenses thanks to the Canadian Child Tax Benefit with our higher portfolio from our base case geo-arbitrage scenario above, we are sitting at 1.96% SWR. Holy moly!

So there you have it, we are confident we can reduce our SWR closer to the 2% range vs the standard 4% value all while still basing our FIRE number on the 4% rule.

Side Hustlin’

And of course, this does not account for any future side hustles or going back to work part time for the social side of things once the kid(s) are in school.  If we also managed to bring in $7,000/year in a side hustle, that would bring us down from 1.96% to a 1.37% SWR.

Most stock index funds yield dividends higher than this so it would be amazing to somehow be able to live off only our yield from VTSAX (1.8%) or VUN.TO (1.46%) and never have to withdraw any of the funds ever and let them grow baby grow.  Or worst case, it looks like we can withdraw the dividends and then withdraw 1% of the portfolio versus the typical 4%. Not bad at all!

How do we calculate what our FIRE number is?

Since we are comfortable using the math behind the 4% rule of 25 times our projected annual expenses even though we will be withdrawing less than 4%, we simply multiple our projected annual expenses by 25. For those following along, you know we covered our projected annual expenses in our previous post and we are sitting at a post-FIRE annual expense figure of ~$35,000.

$35,000 x 25 = $875,000

What investments do we use to calculate out FIRE number?

So you reviewed above that your FIRE number is the amount you must save in passive investments in order to pull the plug from your current job and that we do not include our home and car values in our FIRE number.

So what do we use to calculate our FIRE numbers?

  • Tax Advantaged Accounts
    • Accounts such as 401ks, Roth 401ks, IRAs, Roth IRAs, RRSPs, TFSAs, etc.
    • For those in the States worried about tapping into your 401k early and getting hit with a penalty, check out the Roth Conversion Ladder.
  • Taxable Accounts
    • Brokerage accounts which for us include Vanguard and Questrade
  • Cash
    • Cash in our checking or savings accounts
    • Cash in our high interest savings account
  • CDs/GICs (Certificates of Deposits (US) or Guaranteed Investment Certificate (Canada))
    • Typically, higher interest than a savings account but has a penalty for making a withdrawal before maturity (typically 1-3 years)

There are some other accounts that we have in our back pocket that we do not include in our FIRE calculations (again, I’m very cautious and conservative with our FIRE plans):

  • Health Savings Account (HSA)
    • I currently have about $5,000 invested in my HSA from when I was living in the States.  If this grows at 7% over the next 35 years, it will then be valued at $57,530. HSAs probably deserve a whole entire post on their own so stay tuned for that in the future.
  • All of Nic’s accounts
    • Nic has about $25,000 in her various accounts that we do not include in our FIRE calculations.  We view this as our true emergency fund.  If this grows at 7% over the next 35 years, this will be an additional $287,653 for us to use as we get older if unexpected medical bills arise (unlikely in Canada but you never know) or if we need home health care, home aids, long term care, etc.
  • Federal public funds such as Social Security, CPP (Canadian Pension Plan), or OAS (Old Age Security, another thing I love about Canada)
    • With the way things are going, who know if any of these will still be in place in 30+ years when it’s our turn to tap into the system. I’m more confident in the Canadian accounts but still not banking on anything here. Granted the number we would receive here is low since we haven’t worked the typical 30+ years to reach the maximum SS/CPP benefit.
  • Pension
    • I have a pension from when I was working in the States that is currently valued at $32,254.  It has a neat feature in that you can estimate your monthly benefits based on different dates.  For example, if I start withdrawing at age 60, it’s either a lump sum value of $88,239 or $451/month for a 50% Joint and Survivor Annuity. Or at age 65, it becomes a lump sum value of $106,837 or $600/month for a 50% Joint and Survivor Annuity.  Or at 70, it then becomes a lump sum value of $129,381 or $819/month for a 50% Joint and Survivor Annuity. We would wait to access this until the very end so the monthly benefit is at it’s highest during our later years (same for the federal funds above). $819/month or $9,828/year starting at age 70 may not sound like a lot to most people but for us that’s wonderful news to help bridge any extra medical costs as we get older!
  • RESP (Registered Education Savings Plan)
    • We view this as money for our child’s education, once money enters this account, in our eyes it belongs to the child (even though we are fully aware that it doesn’t actually and we can access these funds if need be – however that is not our intention/plan with these funds).

So even if our sub-4% withdrawal rate fails on us somehow, we have some contingencies in place once we reach “typical” retirement age.

There you have it!  You have now been enlightened as to how conservative we are with our finances.  We know that retiring early does not mean we can never go back to work if we need to but we want to be as cautious as possible with the goal to enjoy our post-FIRE life to the max.

What is your FIRE number and how do you calculate it? Do you see any flaws in our system?  Thanks for tuning in and please leave a comment below!

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20 thoughts on “What Is Our FIRE Number And Why?”

    1. It definitely helps us out big time! I’m sure you guys are thinking something similar with all your travels too! 🙂

    1. We are VERY conservative when it comes to pulling the plug! I’m sure I could have retired a year or two ago but I love having all these back ups in place. Like you say, it definitely helps us sleep better at night!

    1. Thank you! We definitely don’t have all eggs in a single basket! And as for the child tax credit, right!? I’ve learned about to amazing things Canada offers since I’ve moved up here – definitely happy with our choice! Could you imagine if a US political party voted in favour of that – that would be something!

      1. Don’t forget that the Canada Govt also provides 52 weeks of paid maternity leave on top of giving the child care payment down the road along with the free healthcare. I can not fathom living within the US health system knowing what I know from all the FIRE blogs and how it alone is one of the biggest things holding people back from leaving work, the loss of health protection.

        1. Yep! The government of Canada actually just bumped it up this year to 18 months of paid parental leave! The net overall pay ends up being the same as the 12 month option but you can now choose to be off for up to 18 months now if you’d like. That’s what Nic ended up doing. And I plan to do that with hopeful babes 2 to extend our employer paid benefits for our first 18 months once we FIRE. The health alone is why we are planning to stay in Canada long term vs heading back down to the states.

  1. Hi Ladies, I noticed that you didn’t include any future expenses related to pets ! Being an animal lover and having dogs/cats and other small furry pets through out my life, I was just wondering if you ever thought about adding a fur baby to your family. If so, I would include at least 1K a year for pet expenses (more if we are talking about cats and dogs). Although they could be a costly addition to your family (if you include unexpected vet bills) the benefit you gain from having them in your life are in my opinion PRICELESS. Now I will admit, this is a very biased (towards pet ownership) post comment, but hey if you’re going to think of EVERYTHING, you have to include the possibility of owning a pet one day 🙂

    Beata

    1. Haha you are funny! While this is definitely a valid point/topic to bring up, we are sorry to disappoint you, but we are not a pet family. I had fish years ago and that was too much responsibility every time I went out of town so I learned my lesson then! I also don’t think I’d do well with outliving a pet we’d come to love over the years. Lastly, I am too OCD with my tidiness that I would be cleaning 24/7 with a dog (and we are not cat people). My brother has a dog, Nic’s sister has a dog, my dad has a few dogs and a cat, and our neighbours has a dog so luckily we have a few furry friends near by to hang out with and pet sit from time to time.

  2. Great article, thank you. Can I ask about how you physically withdraw money from an index fund, is it totally made up of dividend payments or the only other way i can think of is to sell some of the shares in the index fund. Thank you

    1. You are correct! Index funds, like individual stocks, provide a dividend as well as the share value. Index funds typically have lower dividends (sub 2%). So in our ideal world we will withdraw the dividend with out having to sell the shares and let the value of all of those in our accounts continue to rise over the years. This would only work if our withdrawal rate matched the dividend. If we are in need of more money than what the dividend is providing, then we would sell some of the shares (how much depends on what the shares as valued at). The thought is that the shares should grow about 7%/year so you can withdraw 4% of the shares, account for 3% for inflation, and then you’re back at your starting point to allow the 7% growth to happen again. Of course there is no guarantee to 7% annual growth which is why sequence of returns risk is very scary. Our back up plan is if the market is in a downturn when we FIRE we will find some part time job bringing in ~$25k/year so we don’t need to withdraw then. Then once the market rebounds back to our FIRE number we should be entering a bull market and we’d be more comfortable to sell shares.

  3. Canada has got to be the best place in the world to FIRE with kids. We are a family of 5 in Ontario and about to FIRE ourselves soon. Great blog, keep up the good work. =)

    1. Totally agree! The Canadian Child Tax Benefit is AMAZING!!! Wow a family of 5 about to retire early, very impressive!!!

  4. Reviewing all of this finally and with that crazy SWR I’m shocked you are jumping to part time when you could go completely FIRE 🙂 Then dropping the bomb on all those extra contingencies and cash savings hiding here and there plus all the pensions and the future potential incomes you are doing great. Also, don’t forget you will also start to get GST rebate cheques when you FIRE. I get a tiny quarterly cheque now since I left work 2 years ago.

    1. Haha yes we are VERY fiscally conservative, even more conservative than ERN who seems to be the most conservative FIRE blogger out there that we know of 😂 Ah I hadn’t thought of the GST debate cheque’s, that’s true too! More fuel for our FIRE bucket. The goal is to live off the sub 2% dividends from VTSAX 😁

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