Know where you are…and where you’re going.
If you want to know if you’re on the right track, you need to put some numbers to your financial life.
Start with this: How much do you spend monthly? What about annually? You’ll need to have a firm grasp on your expenses now, so that you can project out how much you will be spending in the future during retirement.
Next, you’ll need to set a target date or age when you want to hit financial independence. Are you targeting age 40? Age 50? Then, use your target retirement date and your estimated expenses in retirement to pinpoint your financial independence number. In other words, how big of a nest egg do you need to support your lifestyle for the rest of your life? To get a feel for what this exercise might look like, check out this video:
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What’s Your Safe Withdrawal Rate?
Your nest egg is going to have to do the heavy lifting of supporting your lifestyle now, but how much can you sustainably withdraw from your portfolio without jeopardizing your financial goals?
The guideline for your safe withdrawal rate is going to depend on your retirement age:
- Age 35 = 2.5%
- Age 45 = 3%
- Age 55 = 3.5%
- Age 65 = 4%
Make sure you don’t fall prey to using overly optimistic assumptions for living expenses or portfolio growth. Remember, you can always adjust your withdrawal rate upward, and it’s going to be a lot less painful than adjusting your number down.
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Does Your Account Structure Support FIRE?
Government incentivized retirement accounts are geared toward a more traditional retirement age. That means that if you intend to retire early, you may need to get creative with an account structure that will support your FIRE goals by allowing you to withdraw from those accounts at early retirement ages. It’s no help if all of your money is locked away in a 401(k) that you can’t access, so make sure that you have enough accessible funds in a “bridge account” such a taxable brokerage account.
Video: How to Structure Your Accounts for FIRE (Financial Independence, Retire Early)