How to calculate a general amount to achieve FI/RE status?
This very number has been bouncing around my head for a long time now. I’ve been trying to see what it actually took for me to achieve FI/RE and was it ever possible to do so in San Diego? Now this number fluctuates for people and their living conditions, however, I find that my wife and I are pretty average people. Average looking, average family, average all the way across. I can give you guys an idea of how I got to my number and what lifestyle I would have. This way you guys can calculate what you would need to achieve your goal by following the same steps.
Note: Since I have kids, my goal is to hit the level of “BARISTA” FI/RE, until I got to “FAT” FI/RE which is why some of my comments lean more towards “BARISTA” than pure “LEAN”. Again, our needs probably aren’t as minimalistic as possible and I’m not in super “fight or flight” mode with money, so I would argue that having a little extra money to have fun with IS necessary and personally, 400 dollars with two kids and a date night a month is minimalistic to me. LOL
First step: You need to calculate your expenses to see what it would take for you to be happy
My wife and I are very much simple and square. Our idea of a good time is Netflix-ing, Crunchy-rolling, or Hulu-ing and Chill, hanging out with the kids while playing video games, or going to a friend’s / family member’s house for that social interaction. I LOVE to cook, so we save money from going out. However, that doesn’t mean we don't get some serious cravings once in a while for Chick-fil-A or In-n-Out. What I'm trying to say is that, I calculated what it took for me and her to cut all of our expenses and still be happy with our kids. Since, I never plan on going back into debt, I now use this as my newest month-to-month minimum amount of expenses to retire with “BARISTA” FI/RE status.
Now, if you are in charge of your household expenses you might look at the above and be like that’s insane or this guy doesn’t know what he’s talking about. He’s missing health and car insurance, property taxes, mortgage, so on so forth. The thing is, I pay those off on a yearly cycle so that they don’t enter my month-to-month expenses. Other things are taken from my paycheck like health and dental, so I don’t need to worry about it month-to-month (see the pattern here.). I do this because I personally like to keep my life as simple as possible. I also won’t have a mortgage once I sell one property and pay off there other. The old “KISS” principle or “Keep it Simple Stupid” works best for me regarding finances. This isn’t the most optimal thing to do mathematically, but it’s good for my sanity LOL. So let’s go ahead and do one more thing to account for these yearly expenses by doubling my minimum month-to-month expenses and ceiling to the nearest thousand and that’s how I calculated my spending needs for a month.
$1,882.98 x 2 = 3765.96
Ceiling to near thousand (3,765.96) = 4,000 a month
So personally, I think this is the amount I would need month-to-month to live comfortably in my home, work just for health insurance, and not giving anything up for my current lifestyle (which I am very happy with). This to me is an overestimation, but I like to think that whatever I save from the 4,000 from “BARISTA” FI/RE is something I would put in investments to make more MONEY!!!! So this is a great conservative estimate for myself. I honestly don’t think this would be to far off if I did the math down to the penny. My car insurance is about 120 dollars a month, health insurance on the private market is probably higher than what I pay now from my job which I pay 425 a month for my family (I just looked up a comparable cost for health insurance on private plan… it’s $1500 dollars a month WTH!!!! ehhh… yeah… heck no am I paying that full price…. “Librarian with health insurance” is the job I’m looking for after I hit my goal AKA “BARISTA” FI/RE). Property Taxes per month is about 350 a month. That’s already about an extra thousand. Throw in new tires once a few years or an oil change and boom, I’m getting close to double the usual monthly expenses. So keep it simple by doubling and ceiling.
Second Step: Apply the 4% rule
For those that don’t know the four percent rule, you’ll be able to find out more about it in my other blog post here <CLICK HERE>. For a quick explanation, it’s helps calculate how much you need for retirement based on a study from people smarter than me. It’s a pretty famous rule in the FI/RE movement. Math wise it’s a simple equation, again it’s explained in more detail in the blog post above.
100% / 4% = 25
(Monthly Expenses) x 12 = Yearly Expenses
(Yearly Expenses) x 25 = How much you much in the market to retire on your goal.
So, let’s use my numbers and fill in the equations above.
$4,000 Expenses per Month x 12 Months In a Year = $48,000 Expenses Per Year —> (Round for “KISS” principle) = $50,000 (is what I need per year)
$50,000 x 25 = $1,250,000 in the Market is what I need to retire.
That’s it. Looking at the numbers and applying a certain rule that seems to be widely considered as useful. This is the number that I need in the market to retire: $1,250,000.
Yay! We got to the number, however, we’re not done yet
Final Step: Understanding what your number means
So we finally got to the last number that we needed, but did you notice how I kept saying that you needed that money in the market? That’s because this number is not the same number as your Net Worth (What you own - What you owe). This is what you need on top of things that you already own. Some people that are just learning about finance sometimes get these two values mixed up, so I’ll explain by using myself as an example.
Currently, as of 9/29/20. I have a net worth of about $850,000. However, about 400,000 of that is in the condo I live in and the car I own. So I only have about 450k in the market. So I need another 800k in the market to be able to reach my “BARISTA” FI/RE goal. I’ll show the math below of what my net worth will need to be. (if I don’t buy a better car or house).
What I need in the Market : $1,250,000
Home + Car Value : $400,000
What I need my Net Worth to be to reach FI/RE : $1,250,000 + $400,000 = $1,650,000
How far am I from my Goal : $1,650,000 - $850,000 = $800,000
So, I’m only about half way to my goal currently if my wife and I don’t choose to upgrade our home or buy another car, which we feel we need to in about 5 years so that our little girl has her own room at 10 years old. But that’s a hurdle that we’ll visit when we get there.
If you have any comments / questions below please let me know. I love to talk about finances and I’m hoping that the information that I’m typing will help someone one day. Thanks for reading.
- M