Financial Independence, Retire Early, AKA the FIRE movement, has become a major theme among millennials this past decade, including myself. Shortly after you start reading about it, you’ll learn that FIRE means different things to different people. In this post, I’ll give my take on what FIRE means to me, why I think it’s important, and how I determined my FIRE number. That is, how much money one needs to reach financial independence and retire early.

What Does FIRE Mean To Me?

I focus on the Financial Independence (FI) part of FIRE, not the Retire Early (RE) aspect.
Financial independence is my milestone for when I accumulate enough passive income to cover my family’s expenses for the rest of our lives.
It is peace of mind. Knowing that my family will be taken care of for the rest of our lives is invaluable.
Attaining financial independence will allow me to reevaluate my life and pursue my dreams, whatever they may be. It doesn’t mean quitting my current career, but I’d certainly have the option!
I don’t subscribe to the FIRE lifestyle of penny pinching just to reach my FIRE number. I’d rather delay my FIRE ambitions than put my family through that stress over the years. Instead, I plan to stick within a reasonable budget and enjoy the journey along the way.

Why is FIRE Important?

The FIRE movement is creating a generation of budgeters, savers, and investors.
It’s challenging social norms of sticking to the typical 9-to-5 grind, fostering creative financing and entrepreneurship amongst those seeking financial independence.
It’s changing the way millennials invest, especially those aspiring to retire early, since they have to find ways to create income before they reach normal retirement age (typically between 65 and 67).

My FIRE Number

My FIRE number is $10,000,000, and I plan to reach that milestone by 40.

Most members of the FIRE community use net worth as their metric to track their progress towards their FIRE number. If I were to follow that approach, reaching a $10M net worth would mean reaching my FIRE number. However, I’m using a slight variant to determine when I reach that amount.

My $10,000,000 FIRE number is the sum of my entire investment portfolio, excluding the entire value of my primary home. While equity in my primary home is certainly a big percentage of my overall net worth, it yields absolutely zero income to me. My FIRE number also excludes all money across my retirement accounts. Because I want the option to retire early, I won’t be able to rely on income or withdrawals from my retirement accounts without penalties. Granted, I could include all my Roth IRA contributions since withdrawals are penalty-free (unlike 401(k)s), but I’d rather see my contributions grow until I reach retirement age so I can capitalize on the Roth IRA’s tax-free growth (see my Roth IRA or 401(k) post for details).

Factors Affecting My FIRE Number

I live in Silicon Valley, one of the most expensive areas in the world, so my cost of living is relatively high. I don’t know if I’ll live here in retirement, but I want to keep that option open.
I want to have the option to retire early. So If I do, I’ll need more money than, say, someone retiring at 59 ½ who has penalty-free access to their 401(k)s or someone retiring at 65 who can rely on both Social Security and Medicare. That wouldn’t be the case for me, so I’d have additional expenses like private health and dental insurance.
I’m 30-something, so should I retire early in my early 40s, my money will need to last much longer than someone retiring early in, say, their 50s.
I have a young toddler whose expenses will only rise over the next decade, likely past the point at which I will reach financial independence.
I’m typically risk-averse when it comes to finances, so I want to have a large buffer in my nest egg for additional peace of mind.
I expect my appetite for luxuries will continue to increase and, therefore, so will my annual expenses.
Inflation. As inflation rises over time, today’s dollars won’t be worth as much in the future.
I don’t plan on being debt-free. In fact, I currently have several outstanding loans, including both my primary residence and all rental properties. However, I don’t have any other types of debt, nor do I plan on accumulating any in the future.
My nest egg will pay for my annual expenses without withdrawals, relying solely on the passive income it yields (i.e. dividends, rental income). Because I won’t withdraw from my nest egg, it will continue to grow higher over the years, increasing my passive income.

FIRE Portfolio Allocation

The FIRE community’s rule of thumb for determining your FIRE number is to multiply your annual expenses by 25.

FIRE number = Annual expenses x 25

My annual expenses average around $180K per year. My mortgage and property taxes for my primary residence alone account for nearly 50% of those expenses, which is another reason why I don’t include the equity in my home toward my overall FIRE number. In fact, owning my primary home is one of the main factors holding me back from reaching financial independence sooner; it nearly doubles my FIRE number and has a high opportunity cost since I’m unable to invest that equity into cash-flowing investments like stocks or rental property.

Nevertheless, if I were to use the above FIRE number formula, my FIRE number would come out to $4,500,000. That’s less than half of the $10,000,000 nest egg I intend to acquire. To understand how I calculated my FIRE number, let’s look at how I plan to structure my nest egg:

Asset Class	Rate of Return	Cash Flow
Rental Property	8%	$240K
Stocks	2%	$100K
Bonds	2%	$20K
Savings	0.5%	$5K
Total	3.65%	$365K

*Rate of return & cash flow are annualized; rate of return excludes appreciation.

As mentioned in my About page, as part of reaching financial independence, I intend to own $10M worth of rental property, $3M in equity and $7M in loans. This is factored into the 30% real estate allocation since 30% of $10M is $3M.

Taxes

Now come taxes on the annual cash flow (should I retire early). Let’s first take a peek at tax treatment per asset class at both the federal and CA state levels:

Rental property: Treated as ordinary income. However, this will vary widely depending on the state the property resides in; each year’s expenses (write-offs & deductions) per rental property will also vary widely.
Stocks: 15% federal tax rate on qualified dividends since my taxable income will exceed $80,000. California treats qualified dividends as ordinary income.
Bonds: Federal income taxes only
Savings interest: Federal and state income taxes

Because taxes are so fun, we also have more taxes:

Social Security tax: 6.2% (only for earned income)
Medicare tax: 1.45% (only for earned income)
Additional Medicare tax: 0.9% (only for earned income above the $250K married filing jointly threshold)
Net Investment Income Tax: 3.8% (only for unearned income like interest from savings accounts, dividends, rent, etc. above the $250K married filing jointly threshold)

As you can see, unearned income has better tax treatment than earned income. Usually, FICA taxes (Social Security + Medicare) would take a combined 7.65% tax from income plus the additional 0.9% Medicare tax, but because my income would all be considered unearned income (income earned passively), it’s all exempt! However, the Net Investment Income Tax of 3.8% definitely applies.

Now, breaking down the total ordinary vs unearned income by federal vs state, we get:

Ordinary Income (Federal): $240K + $20K + $5K = $265K
Unearned Income (Federal): $100K (qualified dividends)
Ordinary Income (State): $240K + $100K + $5K = $345K
Unearned Income (State): $0

Finally, we can calculate the taxes we’ll have:

Income	Taxes*
Ordinary (Federal): $265K	$51,759
Unearned (Federal): $100K	$18,800
Ordinary (State): $345K	$26,422
Unearned (State): $0	$0
Total	$96,981

*These taxes were precomputed based on 2020 tax brackets.

To avoid making the tax calculations more complicated, I’m staying conservative and ignoring all the other deductions and write-offs I will have (e.g. real estate expenses, itemized deductions). Finally, we can subtract taxes to reach our estimated post-tax income:

Pre-tax income: $365,000
Taxes: ($96,981)
Post-tax income: $268,019

But Why $10,000,000?

To sum up, my $10M FIRE number yields $365K pre-tax and $268K after-tax. My current expenses average $180K annually. So why do I need about $90K more when I reach financial independence? Well, I probably don’t. But as I mentioned earlier, when it comes to financial planning, I am very conservative. I also want a large buffer for unknown expenses that may increase my annual expenses over the next decade and beyond. Having an extra $90K in discretionary income gives me peace of mind. And, lastly, I fully intend to use part of that $90K buffer to pay down all my mortgages so that I’ll be debt-free one day.

Biggest Risks And Unknowns

As is the case for everyone, there are many factors that may hinder me from reaching my FIRE number by 40. To name a few:

Real estate debt. Not only will I have a jumbo mortgage on my primary home, I will also have about $7M in loans in rental properties. Should the real estate market tank, some of my properties could go underwater, renters could stop or delay rent payments, etc.
Stocks. Large swings in the stock market could negatively (or positively) impact my trajectory, especially since I’d have 50% of my portfolio allocated in stocks.
Allocation. The current allocation is heavily weighted in riskier assets like stocks and real estate. Over time, I intend to reallocate more of my portfolio into less risky asset classes like bonds.
Taxes. Changes in the tax code may motivate me to allocate my investments differently, depending on the pros/cons of the changes.
No one can predict the future. I have less than a decade before I reach 40 but still quite a few years from now until then. The more years to predict, the harder it is to estimate the size of my future nest egg. If I were only a year or two away from reaching my FIRE number, I’d be in a much better place to predict when I’ll reach financial freedom.

Conclusion

All in all, everyone’s FIRE number will be different. How I derived mine is certainly not the only method out there, but I believe it is a very conservative one. A $10,000,000 FIRE number is not necessary for everyone, particularly if you’re not planning to retire in a high cost-of-living and high tax state. Check out this blog post by Road To FIRE for a different approach to achieve financial independence.

If you are interested in determining your FIRE number, I urge you to consider as many factors as you can think of and plan out your retirement carefully. If you already know yours, comment below! If you need assistance, comment below or reach out to me via my Contact page. Best of luck on your journey to FIRE!

Reaching Financial Independence in Silicon Valley With $10,000,000