The Basics of FIRE

March 10, 2023 – After seven years of blogging in the personal finance and FIRE community, I realize that there’s one type of post I’ve always avoided: How to explain FIRE to a complete newbie. Until now, I’ve outsourced that task and simply referred to the Links Page. But where’s a good overview, all in a simple and comprehensive post to give a one-stop overview of what FIRE is and how one can pull it off? I’ve come across a lot of good information, but it’s all in bits and pieces and here and there. I’m not going to dump a reading/listening list of 20 different posts/shows on 18 different blogs/podcasts on someone new to the community. And my Safe Withdrawal Rate Series? Great stuff. But it’s also the deep end of the pool, and I would likely scare away any new recruits. That series is targeted at folks already retired or nearing early retirement.

So how would I explain or even pitch FIRE to someone new to the community? Let’s take a look…

Traditional vs. Early Retirement

Traditional retirement planning usually involves a 40 to 45-year accumulation phase. While not useful and applicable to all, the generic boilerplate retirement planning advice would normally involve saving around 10-15% of your net income. So, for every $100 you earn, you spend about $85-$90 and save and invest the remainder. Because the planning horizon is long enough to smooth out all the ups and downs of the economy and asset markets, those small regular contributions should be more than enough to build a sizable nest egg. The miracle of compounding! You will very likely close the gap between your expected Social Security benefits and your retirement spending needs.

So, together with Social Security and any other supplemental income from corporate pensions, you should be able to achieve a retirement income of $70 or more per $100 of pre-retirement income. Financial planners call that a 70% replacement ratio. Why only 70%? Well, first of all, in retirement, you need to no longer save for retirement, so you really only need to replace $85 of pre-retirement consumption. And the step down from $85 to $70 usually comes from lower expenditures: you no longer commute to work, no need for work lunches, etc.

Traditional Retirement (top) vs. FIRE (bottom)

FIRE requires you to step up your game and save a minimum of 30% or more of your net income. 50% would be even better. You can likely cut the accumulation phase in half and retire well before the typical retiree. You use your nest egg to bridge the time until Social Security starts and maybe even have a side gig, like a blog, or adjunct teaching job, etc., to supplement your budget for a few years.

How much do you have to sacrifice for that early retirement? It’s hard to put precise numbers into this chart because everybody’s experience is different, depending on how early you start, whether you first have to eliminate large debts, how aggressive your savings rate is, etc. But most FIRE fans should be able to retire well before the average American.

Absent a large inheritance, what all FIRE fans have in common is that we’d need to curb our consumption, which brings me to the next section…

The Power of Frugality

How can a shift in your savings rate have such a radical impact on your retirement timing? Very simple, every dollar of spending you redirect into investing helps you in two ways. First, you grow your nest egg faster, and second, every dollar you can permanently eliminate from your budget also reduces the nest egg target.

To observe these mechanics at work, let’s look at the following example. Imagine you currently save $15 out of your $100 income. For simplicity, I assume you want to “replace” the entire $85 of pre-retirement consumption rather than a reduced ~$70 retirement. If you use a rule-of-thumb of 25x annual expenses – the famous “4% Rule,” more on that later – you’d need a nest egg of $2,125 (=25x$85) upon retiring. Assuming a 5% real annualized return that task will take about 42 years, so just about in line with the boilerplate retirement advice. Cutting your expenses to $50 will not just accelerate your accumulation but also lower the nest egg target to “only” $1250 (=25x$50). In other words, by “attacking” your savings target from two sides – faster accumulation and lowering your retirement budget – you can reach your retirement target after only 16 years; see the chart below. Sweet! Reducing your spending by 42% ($50 vs. $85) will chop 62% off your accumulation time (16 vs. 42 years)!

Traditional vs. FIRE accumulation. Cutting your spending from $85 to $50 (-42%) will cut your time to retirement from 42 to 16 years (-62%). Assuming a 5% real return, investment at the beginning of each year.

What if you can’t manage a savings rate that high? Notice that FIRE is never an all-or-nothing proposition. If you can’t manage the customary 50% savings rate, start with a lower rate. And see how much earlier than planned you can retire, as in the table below. For example, simply going from 15% savings to 25% savings, you reduce the accumulation time by more than a decade. By the way, why would I include different savings multiples, 20x, 25x, and 30x? Very simple, there isn’t a one-size-fits-all solution in retirement planning. Some folks should probably target closer to a 30x, others a 20x savings target. But 25x is certainly a good start for most people. More on that below!

Time to reach different savings targets as a function of the savings rate. Assuming a 5% real annual return, pay raises grow with inflation, and the investment occurs at the beginning of the year. Notice the numbers for the 25x column are slightly lower from the classic Mr. Money Mustache post because he assumed the investment takes place a the end of the year, not the beginning.

Of course, actual results may vary; asset returns can be better or worse and thus shorten or extend the accumulation phase, see my old post on the accumulation simulations with historical data. You might be able to accelerate your FIRE date if your net income grows faster than inflation. Or you could reduce your retirement budget by moving to a more affordable area, in what we call “Geographic Arbitrage.” And even without moving, people in the FIRE community are good at finding ways to save; my buddy Justin who writes at the Root of Good blog had a neat article on how a $40,000 annual retirement target really feels like a $100,000 budget for a working couple.

By the way, the table above also explains how some folks in the community took the express lane to FIRE; with a pretty hard-core frugal savings rate of 70%+, you can get there in under ten years, even with a modest 5% real return, and probably faster with the actual returns in the 2010s.

Of course, it’s one thing knowing that frugality can supercharge your path to retirement. But how does frugality look in practice? How can folks in the FIRE community save so much? That brings me to the next section…

Frugality in practice

For the majority of us, the most impactful savings effort will come from the three major categories:

  1. Housing: America’s favorite pastime is buying ever-larger houses. If you are the typical home buyer, you get an approval letter from the bank and go shopping to max out that budget. You are not looking for a house that you need or want but a house that the bank wants you to buy. A good way to start FIRE is to break this cycle and stop targeting or even exceeding the 28% payment-to-income ratio. My wife and I live in a comfortable 1,800-square-foot house in a nice neighborhood. Paid in cash with no mortgage. We could have spent a lot more on a McMansion, but our current house is really all we need.
  2. Vehicles: Another major money pit is buying and financing, or – even worse – leasing brand-new vehicles every two to three years. I know it looks great in your driveway, but if a mere 5 percentage point change in your savings rate knocks off years from your time to retirement, is that really worth it? Most people in the FIRE community recommend buying slightly used cars and driving them into the ground. There’s nothing wrong with buying a brand-new car either, as I did in 2019. As long as it’s a modest car and we plan to use it for an extended time. And later in retirement, when we have more certainty about our retirement withdrawal rate success, we may even splurge again and go for a nice brand-new ride made in Stuttgart or Munich.
  3. Food: While we still go out to restaurants occasionally, we prefer to cook at home most of the time. We don’t do takeout or delivery because we can fix something much healthier and tastier in less time for less money. Try to break the never-ending cycle of an empty fridge and overspending on takeout and delivery. The expense of any single takeout meal may seem small, but overspending small amounts daily will add up over the years. And might hold back your retirement by several years.

Beyond the three major categories, there will be additional savings potential with a smaller impact. Again, every single small spending “win” might not seem to have a large enough impact. But finding ten or twenty small savings hacks can.

But don’t go too far, either! This brings me to the next point…

But make sure you enjoy the ride!

I always thought that there was no point in going overboard with my frugality. We certainly still splurged on certain categories, like travel. It’s always best not to deprive yourself because the path to FIRE is not a sprint but rather a marathon. Or even more like an ultra-marathon lasting decades. Remember, everything you cut out from your budget to achieve that higher savings rate has to also stay out of your budget during retirement if you use that simple math displayed in the table above. Reward yourself and spend more on a few select categories that truly enhance your life. There is no need to forego the Avocado Toast or the Starbucks Coffee if that’s truly meaningful to you.

For example, while working in Atlanta and later in San Francisco, I splurged on eating out for lunch every day and getting my caffeine fix at Starbucks or Peet’s Coffee Shop with my office buddies. Maybe I could have cut my accumulation time by a few months if I had brought my lunch from home, but the social interaction with my colleagues over lunch and coffee was worth the price tag. Free education from some really smart people.

I also splurged on cars. I drove – gasp!!! – gas-guzzling, luxury 8-cylinder sedans back then. But I did so in the most cost-effective way, i.e., buy slightly used ones and drive them as long as I could. If you can be frugal without anyone else noticing it, you’re doing it right. See my post on Stealth Frugality from two years ago! For most people, it should be feasible to be frugal without looking cheap or stingy!

From my 2021 post Stealth Frugality

Investing Basics

One of the greatest FIRE myths is that you have to be a finance wizard, stock picker, and expert market timer to reach early retirement. Not true. At least in the FIRE blogging community, finance professionals are only a small minority.

Most folks in the community reached their goal by simplifying their investing style. Passive investing with lost-cost equity index funds, like those offered by Fidelity, Schwab, and Vanguard, are all the rage. A broadly diversified large-cap index fund, replicating the S&P 500 (and its predecessor and historically reconstructed indexes), would have gained about 7.2% above the CPI index annually over the last one hundred years (12/1922 to 12/2022). Please see the chart below. That includes the Great Saddenion, WW2, crazy inflation during the 1970s and 80s, the dot-com crash of 2000-2003, the housing crash and global financial crisis in 2007-2009, and the pandemic bear market in 2020. And all the smaller ups and downs in between. So, that 5% real return assumption I used in the chart and table above was indeed quite conservative.

S&P 500 total return, adjusted for inflation. 1922-2022. The average compound return was 7.2%. Notice the vertical log scale to highlight the exponential trend!

So, resist the temptation of stock picking. Also, resist the temptation of market timing. I know people who got out of the market in March 2020 when the S&P dropped below 2,500 points. And they are still waiting to see those lows again to get in again. It’s always best to automate your savings and investing and take the emotions out of it.

How about your asset allocation? Is it crazy to use 100% equities on the path to retirement? If you have the stomach for a lot of volatility, you can certainly use an all-equity portfolio. Risk-averse investors should probably consider moving to a more cautious allocation during the last 2-5 years. If you’re very risk-tolerant and/or very flexible in your retirement timing, you may even keep 100% equities all the way to retirement. See my post, “Pre-Retirement Glidepaths: How crazy is it to hold 100% equities until retirement?

Tax planning

Another related issue: when investing, make sure you utilize all the tax advantages the government offers to you. That will vary from country to country, but if you’re in the U.S., check out the following:

  • Contribute to your 401(k) plan to capture all the free money your employer gives you as a match. Sometimes a 1-for-1 matching of your contributions. You don’t get an instant 100% return anywhere else!
  • In taxable accounts, buy-and-hold works best. Try to defer capital gains for as long as possible to avoid compounding a tax drag.
  • Consider a Health Savings Account (HSA) as a quasi-retirement account with tax benefits even better than a 401k or Roth IRA, see a 2016 Wall Street Journal article. Instead of withdrawing money from the HSA for health care costs, keep the money in the HSA for extended tax-free growth, as outlined in this Investopedia article.
  • Roth IRAs are neat, but not every investor is eligible due to income limits. But there are ways around the income constraint. One can always convert a regular IRA into a Roth IRA, regardless of income. This step also helps with another headache: how to access retirement plans penalty-free before age 59.5. Because Roth contributions and conversions can be accessed tax and penalty-free after five years, one could build a “ladder” of Roth conversions over five years before the planned retirement date and then access the conversion amounts from five years prior. The folks at SelectFI have a nice summary of this technique.
  • And many more. Check out a post of mine with more ideas: Principles of Retirement Tax-Planning – SWR Series Part 44.

Withdrawal Rate Basics

Where does this magical nest egg target of 25x your annual retirement budget come from? We base it on personal finance research dating back to the 1990s. Bill Bengen wrote a seminal paper in 1994, and three researchers at Trinity College in 1998 wrote a paper, often called the Trinity Study, pointing out that a diversified portfolio of stocks and bonds would have survived a 30-year retirement in most historical cohorts when withdrawing 4% of the portfolio in the initial year and then adjusting subsequent annual withdrawals for inflation.

If you’re still starting out on your FIRE path, years or even decades away from your FIRE date, you can probably safely target that 25x spending rule. My personal research has shown that certain idiosyncratic factors can significantly alter that target, though. If you plan for an extremely early exit from the labor market, say, in your 30s, it might be prudent to target a slightly higher savings target of about 30x to hedge against the risk of running out of money during your 50-year or longer retirement. In contrast, if you plan to retire in your 50s, you can likely get away with a smaller nest egg of maybe 20x if you expect substantial supplemental cash flows from Social Security and pensions after only a few years in retirement.

Once you get closer to retirement, though, it’s worthwhile devising a more detailed plan. What’s your retirement horizon? What kind of supplemental cash flows will you receive later in retirement? When and for how long? How much money do you like to leave to your heirs? And many more. Relying on your answers, you might get an initial safe withdrawal rate far above or far below the naive 4%.

Moreover, asset valuations will become more relevant when approaching your retirement date. Historically, the failures of the 4% Rule are always clustered around the cohorts that retire at the end of a long bull market that sent equity valuations (e.g., PE ratios, Shiller CAPE Ratio, etc.) sky-high. On the other hand, if you retire when equities are underpriced or only moderately priced, you can likely withdraw a bit more.

Some folks in the FIRE community, who probably don’t think too highly of my work, recommend just winging the safe withdrawal rate part. But most people reading my blog realize that performing a more customized analysis gives you the peace of mind needed before you leave the workforce. Think of early retirement as the largest “purchase” you will ever make, worth 10 or even 20 years’ worth of income lost (=opportunity cost). Several times larger than the typical home. Shouldn’t you put some thought into a “purchase” that large? Especially considering how much time people dedicate to much smaller purchases like a home or a car!

So, for now, don’t stress out over the exact withdrawal rate planning. But once you’re closer to your FIRE date, check out my SWR Series and my free simulation tool.


Of course, you will always encounter naysayers. Here are some of the objections I have often heard over the years, as well as my replies:

“Only very few people can do this in practice.”

The first objection is that to achieve FIRE you need to be a member of an elite club of Americans satisfying all of the following conditions: 1) college or graduate-school educated, 2) either single or a dual-income couple, 3) without children, 4) in a high-paying profession, and 5) living in a low-cost-of-living area. Maybe some folks in the FIRE community check all those boxes. I also grant you that if you’re a married couple with one income, no college degree, five children, and living in San Francisco or New York City, you might have a hard time saving 50% of your net income. But most of us in the FIRE community will check only some of the boxes. For example, I have Ph.D. in economics and worked in finance, a highly-compensated profession. But we have a daughter, my wife has been a stay-at-home mom, and we’ve always lived in expensive metro areas. We have a score of 2 out of 5 and still managed to save aggressively.

“You were just lucky.”

The second objection is that I just had fortunate timing. Specifically, people often lament that because today’s savers have a much leaner outlook on asset returns, they cannot possibly achieve FIRE anymore. But that’s not really true. The average annualized compound return in the S&P 500 total return index (including dividends) during my 18 years of accumulation from 8/31/2000 to 5/31/2018 was only 3.2% after inflation; please see the chart below. (Note: this is the point-to-point return, often called the “Time-Weighted Return,” independent of cash flows along the way. Essentially a buy-and-hold return)

Real, CPI-adjusted S&P 500 TR Index: 8/31/2000-8/31/2018.

In fact, for the first 12+ years, the S&P 500 was flat when adjusting for inflation. That said, there were also some great opportunities for picking up equity index funds along the way through the two bear markets. The money I invested at the market bottoms of 2003 and 2009 gave me an average annualized return of 7.9% and 16.1%, respectively. While saving for FIRE, you win some and you lose some. If you had invested $1,000 every month at the beginning of each month, adjusted for inflation, during the 213 months it took me to reach FIRE, you would have a total of just under $440,000. It’s an internal rate of return (a.k.a. the Money-Weighted Rate of Return) of about 7.6%. Slightly higher than the long-term historical average of real equity returns but by no means exceptional.

“FIRE bloggers aren’t really retired.”

The third objection is that all those FIRE bloggers are now busier than ever before. I’m certainly not, as blogging is mostly a hobby for me, and the little bit of advertising revenue accounts for only about 10% of my retirement budget. If you want to make serious money from blogging, you also have to make a serious time commitment, and the handful of folks who fall into that category probably do so. But keep in mind that the loudest voices in the FIRE community are also the profitable ones. There’s a selection bias in that you hear and read the most from busy and professional bloggers. But for every FIRE member with a financially successful blog, there ought to be thousands or more of just regular FIRE folks who simply retire and live off their savings. No blog and no other hustles are required if you plan right.

And just for the record, all of us bloggers and podcasters deserve every penny we may make for educating the community. If anything, we’re not making enough money.

“FIRE must be boring.”

And finally, the Hail Mary pass: FIRE will be boring for some people. There are indeed folks in the community that went back into the workforce a few years after retiring. But I’ve never felt a day of boredom in my almost 5 years of early retirement. We did an extended trip around the world in 2018 (7 months) and 2019 (4 months). We have a young daughter who keeps us busy, and we volunteer a lot of our time at various places – school, church, neighbors, etc. So, boredom and lack of purpose have never been a concern for us. But if you are worried, check out Fritz Gilbert’s blog, The Retirement Manifesto, and his book “Keys to a Successful Retirement” on how to plan for a purposeful and fulfilled retirement.


So much for today! It’s impossible to compress years of FIRE blogging into one single post. But I tried. If you’ve come to my blog for the first time and I piqued your interest, please subscribe to get an email notification if I publish a new post, maybe once or twice a month. I suggest you also check my fellow FIRE bloggers and podcasters listed on the Links page.

And if you’re getting closer to your FIRE date or just out of curiosity, make sure you check out my Safe Withdrawal Rate Series.

Thanks for stopping by today. I’m looking forward to your comments and suggestions below!

Title Picture Source:

61 thoughts on “The Basics of FIRE

  1. Great article! Your SWR series literally changed my life… I’m now early retired and living in Europe thanks to your SWR spreadsheet. I added a tab where I convert the monthly safe consumption amount into euros at the current exchange rate and at the average five-year historical exchange rate, to get a SWR range that helps me budget for currency exchange fluctuations.

    1. Hallo Ellie,
      w?re es m?glich diese Registrierkarte der Community zur Verfügung zu stellen?

    2. Hallo ELLIE,
      w?re es m?glich die Registerkarte der Community zur Verfügung zu stellen?


  2. Thanks for the great write up! Those visual of lower retirement target and accelerated journey really drives the point home.

    I think there’s a typo in the sentence: “the failures of the 4% Rule are always clustered around the cohorts that retire at the end of a long bear market that sent equity valuations (e.g., PE ratios, Shiller CAPE Ratio, etc.) sky-high”.

    Failures were after long *bull* markets that lead to sky-high valuations, yes?

    1. “Failures were after long *bull* markets that lead to sky-high valuations, yes?” –

      This is what I was thinking too unless I misunderstood all the prior blogs ?

  3. Fantastic intro/summary to FIRE, I think this post will be really useful to a lot of FIRE newcomers.

    For keeping food costs down, I think what made the biggest impact for us was doing weekly meal planning and making big batches each time we cooked. It still amazes me how effective that is at reducing costs and saving time. I also strongly recommend a good pressure cooker to avoid heating up your home in the summer.

    It’s funny, I used to agree 100% on buying inexpensive used vehicles and then running them into the ground, but now that we’ve gotten an EV and a plug-in hybrid, I’m increasingly inclined to recommend folks electrify their vehicles as soon as they can – even if you have to buy new. They are so much better for the planet and your health, I think it’s worth delaying FIRE a bit if needed.

    One last thing I’d like to mention is how a reasonably frugal retirement budget also means you can pay little to no federal income taxes during your retirement. That was something I had to convince myself of, because I was worried about how it would screw up our withdrawal rate (“oh crap, should we have saved more to account for taxes?!?” went through my head many times). Very fortunately with the standard deduction, Roth conversion ladder, and 0% long term cap gains bracket, it’s very doable to keep your federal income taxes at $0 (or pretty dang close to it). And no FICA taxes either, if you have no earned income like a job anymore.

    1. All really great points! I like the meal plan idea and they’ve discussed this a lot on SelectFI.
      I’m not yet in the market for an E-vehicle, though. We’d sometimes go on long roadtrips and we still need a gasoline-powered car for that. If we ever get a 2nd car, that would be electric, though.
      Very correct: married couples can get away with 0 federal taxes despite a 6-figure income if structured right.

      1. Great post.
        Your buddy Justin made the following interesting point (in the link given above) about his taxes: “We are in the strange situation of paying higher taxes during early retirement than we were when working full time …”. Whilst I am sure Justin is far from the general case (note how low his pre-retirement taxes were) it might be worth doing some sums in advance.

        1. I didn’t realize that their tax burden is higher now. I would have thought with a $30-40k annual budget they pay $0.00. But maybe their capital income is high enough to push them over what they paid before. For the vast majority of FIREd folks I’d expect a low tax burden

          1. Yup, their tax situation really surprised me too – hence my comment.
            Justin gives a fairly detailed explanation in his “Living a $100k …” post.

  4. Great post. I’ve been FIREd for a little over a year now. (54) It’s interesting to read this as I came to learn about FIRE in my late 40s. Fortunately my wife and I were good savers even before learning about FIRE so we only needed to adjust spending for about 7 years to achieve our goal. Even though I knew most of this it’s nice to reread the fundamentals and I’ll be saving this post to share when I get the “how did you retire in your early 50s” question that invariably comes up.

    1. Nice! We’re very much alike. I only found out about FIRE in 2016 when I was already FI myself and 2 years before my own FIRE date. Some lucky people find FIRE on their own. But it also helps to have a support network! ?

  5. Hey Karsten, excellent post on the Basics of Fire. I want to thank you for all of your work in supporting the FIRE community. The SWR series, podcast interviews, and the SWR spreadsheet provided me with confidence to step away from a corporate career early with a much higher level of confidence. I had a rewarding career as a mechanical engineer in R&D, but the new freedom and flexibility to ski, hike, and be ‘out and about’ during the week is incredible. Your work, along with Two Sides of FI, Select FI, and others is very impactful.

    1. Thanks! Those two podcasts (Two Sides of FI and SelectFI) are my favorites, too.
      You make a very important point about confidence. It’s much easier to pull the plug when you’ve convinced yourself that this will work. Wouldn’t want to rely on just a generic rule of thumb like the 4% Rule!
      Good luck, Joe!

  6. Hi Ern,

    Thank you for your post. It might be one of the most accessible for a Fire newbie.

    We discovered FIRE in our mid-career, but as very low spenders, my wife and I were able to save more than 80% of our income. Combined with a bull market which turbo charged our investments, we reached the FI milestone within a few years. I agree that there is no boredom in RE, especially with 3 young children.

    Finally, looking back, I might have been too aggressive in our savings and frugality. And we experienced some frugal fatigue which was not necessary. Fire is a journey, not only a destination ?

    Thanks again ERN for all your inspiring posts!

      1. Thanks. At that time, we had no kids, no car, no expensive habits. We were very frugal, maybe too much. In hindsight, we should have stretched it more to make the journey more enjoyable. We are not complaining, just a takeaway for people on their journey. It is a (ultra) marathon, not a sprint.

  7. There are some unstated fundamental assumptions associated with FIRE. e.g. Good health and independence. These assumptions can be left un-stated for the young with no family or with responsibility only for a “nuclear family.” By the time one reaches mid-life, there are often chronic issues to fund. Someday, I’d like to see a story like, “How to Achieve FIRE While Supporting a Destitute Parent and a Child with Long-term Health Issues.”

    1. There are no guarantees in life. The best that can be said of living below your means when possible and investing wisely is that it maximizes your chances of being able to assist someone else in the sort of situations you referenced and your chance of being able to retire early or to retire at all.

    2. Good point. I don’t have that exact issue but the FIRE community is a big tent. There are people in the FIRE community who are widows/widowers, people with special-needs children, etc.
      They are out there. It’s an additional challenge to reach FIRE in that case but people achieved that, too.

  8. “FIRE requires you to step up your game and save a minimum of 30% or more of your net income. 50% would be even better.”

    I hate to ask because I know this is a can of worms and mostly addressed in a different post, but: net of what, exactly?

  9. Lieber Herr ERN,

    Ihr Blog war bis jetzt nichts für Einsteiger ins Thema “FIRE”. Vor 2 Jahren habe ich Ihren Blog einfach “weggeklickt”, da ich 99 % nicht verstanden habe. Mittlerweile ist Ihr Blog mein absoluter Lieblings-Blog. Das bedeutet aber nicht, dass ich nun alles verstehe ?
    Albert Einstein soll gesagt haben, “so einfach wie m?glich, aber nicht einfacher”. Manche Blogger machen das Thema zu einfach und ich habe dann Sorge, dass ich etwas übersehe …
    Ihr Blog gibt mehr Sicherheit.

    Vielen Dank und Grü?e aus ?sterreich

    1. Danke, liebe Hanna!
      Ict mit auch schon oft so gegangen, dass man etwas andfangs nicht mag/versteht, aber dann klickt’s irgendwann! Vielen Dank fuer Ihre ermutigenden Worte!
      Viele Groesse zureuck nach Oesterreich!

  10. Hey Karsten, thank you for another great article and also for sharing your personal experience, it really helps!

    When reading about timing luck, I found there phrase “The average annualized compound return in the S&P 500 total return index (including dividends) during my 18 years of accumulation from 8/31/2000 to 5/31/2018 was only 3.2%” and also the chart below misleading.

    It would be correct for a lump sum investing but most of people would be making periodical contributions. I think you benefited a lot from the two bear markets actually! And you did indeed mention “an internal rate of return of about 7.6%” later in the middle of the next paragraph

    Also, how was 7.6% calculated? I just ran the numbers via portfoliovisualizer and I got the same 440K total final value but it says TWRR was 5.33% and MWRR was 9.53%.

    1. It’s not misleading at all. Just like your source PortfolioVisualizer, I compute the return 2 ways. Once time-weighted and once money-weighted.
      I clearly stated that 3.2% is a point-to-point return and then also calculated the IRR taking into account the cash flows along the way, which, due to Sequence Risk would be much higher.

      I don’t vouch for other people’s calculations, so I have no idea what they calculated at PortfolioVizualizer. I’d suspect that the PV returns are nominal, so about 2% higher due to inflation.

      Their TWR corresponds is equal to my point-to-point return. After inflation probably in line with my 3.2%.
      Their MWR after inflation is also close to my 7.6% IRR.

      If you wonder how I calculated this:
      In Excel with the RATE function:

      Another way: just XIRR function with dates and cash flows and calculate the internal rate of return

  11. ERN, you may have covered this but I don’t seem to be able to find it….. Is there a meaningful impact on SWR if I withdraw $$ monthly vs. annually?

  12. Just found about this site. I’m new to FIRE so I’ll have to read everything you posted here ?

  13. Hi karston,
    I have a quick Q about whether your calculations for % SWR are based on total net worth, or only liquid net worth. I had been aiming for 30x my net worth as the goal for FI—($3.75M, late 40s target retirement) but read on Reddit that if a house (no -liquid asset) is a substantial part of that equity, it should be ignored in the net worth target and SWR should only be applied as a percent of liquid assets. This dramatically changes my retirement picture and pushes things out by nearly a decade! Tell me it ain’t so!

    1. The home should be excluded if it’s owner-occupied. So, your safe withdrawal dollar amount should be the safe withdrawal rate times the financial portfolio only.
      That said, if you plan to leave a bequest to your loved ones and you own a home and assume that the home appreciates about in line with inflation, you can certainly factor that into the withdrawal math.
      For example: $2m portfolio, $500k home, $800k bequest target. You can run the SWR calculations assuming only a $300k final value target, because you leave the house and $300k in financial assets to your heirs.
      So, the house has a small impact. But you can’t assume that you have a $2.5m portfolio unless you sell the house and put the money into your portfolio.

  14. The recommended withdrawal rate is something that seems to be in motion these days. I’m still using 4% as a rule of thumb, but I can easily be swayed if there is evidence that I should be changing my outlook.

    1. Yeah, that’s because economic conditions change and different retirees need different custom solutions due to idiosyncratic differences. So, if anybody declares the safe withdrawal rate is x% I normally roll my eyes and stop reading.

  15. Great post. I’m about 10 years into my FI “journey” with maybe 5-7 years to go (we’ll see what the future holds…). It’s nice to get a refresher on the basics and remind myself to stay the course, and just keep doing what I’ve been doing.

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