Your FIRE Number Is Probably Wrong — Here’s Why

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2:30Mindy Jensen:Everybody in the five community has the same question. What is my fine number? But the biggest risk is not failing to meet your fine number. it's spending 10, 15, 20 years pursuing a FIRE number that's incorrect. Today, we are breaking down the six biggest mistakes people make when calculating how much money they will need in early retirement, why the standard internet formulas can be dangerously incomplete, and how to build a FIRE number that works in real life, not just on a spreadsheet.

3:06Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my knows-his-fi number co-host, Scott Trench. Thanks, Mindy. Great to be here and excited to spend some time with you talking about this important subject. And yeah, your fine number is one of the most important things you need to have dialed in to work toward financial independence. And today we're going to be talking about the biggest mistakes that you need to avoid in computing that number. Mindy, Do you want to kick us off with the first one? Okay. The first mistake is using your current expenses and your current income rather than your retirement expenses.

3:41Mindy Jensen:Scott, if you took your current expenses and said, well, this is how much I'm going to need in retirement, you are going to have incorrect numbers because you are paying for childcare right now. Are you going to be paying for childcare in five years? Nope. Nope. So that's a number that's going to go off. If you look at your actual expenses, there's lots of expenses that are going to fall off. But on the other hand, Scott, might you travel a little bit more when you retire? I hope so. So then those expenses are going to go up. There are expenses that are going to be very different once you're retired.

4:17Mindy Jensen:So think about what you want your desired retirement to be like if you're going to be traveling a lot. or, hey, Scott, do you have any hobbies that you haven't had a chance to do and want to do and might cost money? These are a lot of questions for me, but yes. I'm throwing them all at you, Scott, but I'm also throwing them at our listeners. First of all, do you even know what your expenses are? Every single expense, because when you think, oh, I spend about$40 ,000 a year or$60 ,000 a year, let's be more realistic, are you gonna be spending$60 ,000 in retirement? If so, then yes, that's the right number, but you really need to have your expenses dialed in in order to know what you're gonna be spending when you're retired.

4:57Mindy Jensen:I mean, making up numbers, what's the point of even having a fine number? Yeah, I agree. I think that the average American is so shockingly and appallingly underdeveloped in their financial literacy toolkit that they need these rules of thumb in financial planning, like, oh, you're gonna replace 80 % of your income, your current income in retirement. That's how we're gonna plan for your retirement number. It's crazy. It's a random number that has no meaning. Your retirement portfolio needs to cover your expenses. This is an obvious point that everyone should be able to grasp here. The challenge, though, is that what are those expenses going to be?

5:27What are they today? What are they going to be over the next few years? And what are they going to be at retirement? And there's a lot of complexity that goes into that. And most withdrawal rules of thumb, like the 4 % rule, assume a very constant inflation adjusted spending target because they have to. What else are they going to assume? They're going to map out your particular life's journey of expenses? No, only you can do that. And you've got to figure that out. So the biggest mistake is if you go to some generic financial planner, you might hear, or some financial planning resource, you might hear, oh, replace some percentage of your income or all of your income.

5:58Obviously incorrect. Big mistake.

6:00Mindy Jensen:Scott, your income includes most likely the amount of money that you're putting away for retirement. Once you're retired, you're not putting any more money away. That's a huge chunk that you don't need to replace anymore. Your expenses around going to work go away. There's lots of things. What I want our listeners to take away from the first mistake is to start tracking their expenses. Really, really track them granularly to see what money is actually going out and where it's going, because they're going to change a lot in retirement. What I do for this is every week I go through and I review every transaction.

6:35This is not a very cumbersome process, although it is cumbersome to set it up initially, potentially, depending on how many accounts you have and where you know where your spending comes from, whether it's from a bank account or various credit cards. But we use Monarch. That's Monarch.com. Use the code pockets for 50 % off your first year. If you're a bigger pockets money listener, Monarch is a awesome tool for this. And I can go through all of my transactions on every credit card, see who has spent the money, what it was on and ask my wife in our weekly meeting about any transactions that I'm not sure about.

7:04So it's, it's literally five to 10 minutes and it makes a huge difference. And then of course I can get very detailed statements about spending in the past month, the past year, by month, by week, any type of breakdown that I want. So that's the powerful tool. And that drastically increases the odds of accurately forecasting expenses in any future period.

7:24Mindy Jensen:Yep, absolutely. Scott, Carl and I use Monarch 2, and it is so easy to hop onto the site and just look at what's going on. The way that I have set up my dashboard, and you can customize it however you want. But the way I've set mine up is that in the upper right is where my spending is. So I can pop on and look there. Oh, you know what? It's halfway through the month, that looks about normal. Or hey, it's a little bit off. Let me dive deeper into it. So when you're keeping track of it all the time, it becomes second nature to just pop on and look at it. Yeah. One more really good tool is to combine this with AI.

7:58Monarch has an embedded AI, but you can also just export all your transactions into a CSV. And I've done this and all of your accounts, upload it into Plot or ChatGPT or whatever your favorite AI is, And then ask it to analyze your spend, normalize any one timers and give you an idea of what your spend ought to be or how it compares to other people in your household category. So I've done this and spent hours of happy times going down that rabbit hole with the AI. So pretty big, you know, improvements. And, you know, are there any areas to make changes? Oh, your insurance. Let's talk about that.

8:29Here's what it looks like. It's pretty incredible how much a valuable data set like that, which you're building in Monarch or whatever, wherever you track your net worth is worth when you actually upload it to a smart AI.

8:40Mindy Jensen:Wow. I have not gone that deep yet, Scott. I guess I'm going to have to catch up. Yeah. Many happy hours, like I mentioned. Mindy, what is the second big mistake for early retirees in spending? Scott, I'm going to say treating the 4 % rule like it's gospel, like it's written in stone. Instead of treating it like a rule of thumb, everybody always leaves off the of thumb. The 4 % rule is awesome. Way back in 1994, Bill Bengen was a financial planner and his clients kept asking him, what is the safe withdrawal rate? So he did the math and he said 4%. Actually, it was like 4.12 or something like that.

9:19Mindy Jensen:and it's been downgraded to 4%. There are a lot of differing opinions because his research was based on a 30-year time horizon. People are saying, well, because I'm an early retiree, I need to withdraw less. I need to withdraw three to three and a half percent just to make sure I have enough for my longer horizon. That math makes sense, but you might not need to go that low. Bengen has since expanded his research and now it's closer to a 5 % withdrawal rate as being safe. There's people in the space like Aubrey Williams, we've had him on our show, who suggest you set up drawdown guardrails. I love his idea of the guardrails.

10:00Mindy Jensen:You don't change your spending even if your portfolio goes up. You don't change your spending even if your portfolio goes down. Something like 40%. If you have a drop in your portfolio of 40%, he's suggesting that you don't change your spending. There's lots of different ways to do this research. There's lots of different rules of thumb that people are coming out there with, but just hearing, oh, 4 % rule, I can withdraw 4 % and stopping right there, I think, is not doing yourself any favors. Yep. One of the big things with the 4 % rule beyond the endless quibbles that really smart people seem to have with the core premise, right?

10:37There's Bill Bengen's research. There's Karsten Jeske, who has arguably done even the most rigorous research in analyzing the 4 % rule with valuation tilts and those kinds of things. There's work from Michael Kitsis. There's work from Aubrey Williams. There's so many people that are talking about this and there's a range that's developed, right? On the low end of the conservative range, you've got things as low as three to three and a quarter percent safe withdrawal rates for early retirees. And on the higher end of that range, you can start bumping against 5 % safe withdrawal rates for 30 year retirements.

11:09And so it just depends on who you wanna follow and what you wanna believe there. I would argue that the best analyst or one of the best analysts in the space right now is Karsten Jeske for early retirees. And I think his work on safe withdrawal rates is something you should check out at early retirement now if you're looking for the most rigorous defense of that in the context of the current environment with very high Shiller P.E. or very high stock market valuations, for example. So I think Karsten's got a really great grip on the problem, although plenty of smart people would disagree with him and take issue with some of his findings there.

11:40The big problem with all of this research, though, is that the 4 % rule assumes that you're going to spend statically relative to inflation, right? If you're going to have a withdrawal 4 % of a$2.5 million portfolio, it assumes that you're going to spend$100 ,000 per year adjusted for inflation forever. And that is not going to be your reality. It's not what we see in practice. And that is where the 4 % rule breaks down. And these guys who direct tremendous amounts of brainpower to analyzing safe withdrawal rates can't do anything other than assume static inflation adjusted spending. So that's the part that we should cover next here is what is your spending going to look like in retirement?

12:20And that changes how we think about the 4 % rule.

12:24Mindy Jensen:OK, Scott, that brings us to the third mistake people make when they are calculating their fine number. What is one of the biggest expenses that's going to change, Scott? Health care. Yep. The 4 % rule already accounts for inflation-adjusted spending. Inflation covers everything in the basket of goods and services that you're going to buy. But healthcare is different than the rest of your spending because it rises separately from inflation. As a 35-year-old, if I get a health insurance policy quote right now, I'm going to get a much lower price for my family's health insurance than if I just change my age today to 60.

12:58That's not inflation. That's the law enabling insurance carriers to charge older people higher premiums for the same health insurance today. That is, I know that even before I factor in inflation and healthcare, I'm going to see my health insurance premiums rise. And I probably, if I'm smart, should also assume I'm going to spend more and more out of pocket each year as I age. And that's, you know, age is the number one correlate to healthcare expenses. So you have to model this in. For someone like me, it's like adding another$200 ,000 to$250 ,000 on top of my FIRE number to account for the structural rise in healthcare costs that I'm going to experience over the next couple of years.

13:40If I want to spend$85 ,000 a year on everything but healthcare and my health insurance premiums are$15 ,000, then I need something more than$2.5 million to cover that rise in healthcare costs from$15 ,000 to literally$30 ,000 to$35 ,000 by the time I hit age 64, 65. After 65, I go on Medicare and my healthcare costs drop. So it's just a bridge. It's not a permanent increase in spending, but it is a rise every year through to traditional retirement age. That's the biggest mistake people make with healthcare. And it's particularly a killer to the lean fi crowd who may not be able to absorb the costs of those rising health insurance premiums the same way that somebody with a traditional or chubby fire number might.

14:18Mindy Jensen:Scott, another thing that early retirees make a mistake on is assuming that the subsidies that they are taking now will continue in perpetuity. I think that that is a very dangerous thing to assume. We have been writing checks as a government for a long time and something has to change. Somebody's gonna have to pay that back eventually. And I believe that the subsidies, they've already given them a cliff. I also believe that subsidies are going to, in the future, have a net worth component. Oh, your net worth is X, then you can't receive any subsidies. And that's going to affect a lot of the early retirees.

14:58Mindy Jensen:Or subsidies could just go away completely. I don't think that's going to happen, but I think that that cliff could get sharper. I think that there's a lot of uncertainty around subsidies. So if you are planning on your retirement being subsidized by the government for the healthcare, you could be making a very big mistake. Yeah. The Affordable Care Act subsidies are designed for households making some multiple of the federal poverty line. These are poverty line subsidies. And the American taxpayer may at some point decide that they're not willing to subsidize the early retirement of a millionaire for their health insurance.

15:36Now, people get upset about this. Oh, I've paid my taxes over my time and I deserve the subsidies. Fine, fine. I'm not saying don't take the subsidies. I'm saying your plan should not depend on you being subsidized across a 30-year early retirement. If it does, that's a bad plan. Take the subsidies while they're available, but know that you're at risk of having to pay those premiums in some form or other at some point in your early retirement. And if your plan can't handle that, your plan could blow up. Real risk. Yep, absolutely. Mindy, what's the fourth mistake people make?

16:05Mindy Jensen:Ooh, the fourth mistake is leaving out the big expenses, the one-time expenses. Hey, Scott, do you have two daughters? I do. And traditionally, does the daughter's family pay for the wedding? Yep. Are you planning on paying for your daughter's weddings? I think, yes, I am planning on paying for my daughter's weddings. And yes, they're probably going to be pretty nice given the size of the Disney princess dress collection that is already progressing in our household. Hey, are they going to go to college maybe? Would you pay for that too? Mm-hmm. There's big things that are coming up down the road.

16:46Mindy Jensen:Your daughters are three and one. So weddings in college aren't in your mind right now. If they're not part of your current situation, it's real easy for those to just get forgotten about. I know you have a beautiful house, but something's gonna break. Sorry to burst your bubble. Something is gonna break in your house and you're gonna need to pay for that. And a roof in Colorado, a roof costs$12 ,000 to$15 ,000 if you're paying for it out of pocket. and like$30 ,000 or$40 ,000 if your insurance company is paying for it. There's also HVAC systems. That's going to be about$12 ,000 to replace the whole thing.

17:21Mindy Jensen:There's appliances, water heaters. Your house has a lot of things that are going to break. I promise you everything in your house is going to break at some point, depending on how long you own the house. So you're going to need a budget for those repairs too. Caring for your parents. There's all sorts of big expenses. Having an extra little bucket of big expense money. Maybe you fund this as you are going and you're having a bunch of really up years. You're like, oh, I'll just siphon off a little bit more and put it in my big expense bucket. Or maybe you make a big expense bucket that you continue to replenish as these big expenses come up.

17:58You know, when I was earning a very high income as CEO of BiggerPockets, I didn't have time to really shop many of these things. And I had to make quick decisions with a reliable contractor, basically. Now I can take care of large chunks of these projects or rigorously shop each one of these areas. I can make much higher quality decisions and spend time to reduce those costs pretty meaningfully. So that's a real offset to some of these life capital expenditures, if you will, or the big expenses that come up infrequently. On the other hand, they're real expenses and you have to account for them.

18:31And I think that some people take projections of their best case spending, which is obviously irresponsible and don't factor in a very nice margin or buffer every month or every year for these types of things. And if you know certain big ones are coming up and you're not prepared for them, they can catch you by surprise. Personally, I'm choosing to consider my FIRE number, you know, inclusive of having to fund college, a full, you know, pretty expensive college education for my two kids. Many people choose not to go that far or not to fund any college for their children at all. That's a personal choice, though.

19:05But you have to make a decision about each one of these big expenses and where you want to end up. And I think for me, it's I want to cover college and I'm probably going to cover, you know, I'm planning tentatively on covering some nice weddings if my two daughters choose to get married. Yep.

19:19Mindy Jensen:And it's just, it's a choice. All of these options are choices. All of these mistakes are things that you might not be thinking about when you're calculating your FI number, which is why we're bringing it up. You don't have to pay for your weddings of your children. You don't have to pay for college, but why are you saving all this money and then not going to help out your kids too? If you have kids, not everybody has kids. Mindy, I have a quick question on a side tangent here. Which season of life do you think that people want to spend the most money in? You know, like it wasn't 23 for me. It's certainly, I'm certainly grateful to be able to spend more money now at 35 with two kids.

19:54Will I want to have peak spending now or will I want to have it when they're in high school after they graduate? What do you think about that?

20:00Mindy Jensen:Oh, that's a really good question, Scott. I'm almost thinking because it's the season of life I'm in right now is when my kids are in high school and college. So I'm 53. I have one kid freshman year in college and the other kid is a sophomore in high school. I want to take trips with them now that it's enjoyable to take trips with them. When they're three and one, there's a lot of nap times. There's a lot of like their routine gets messed up and they don't have the ability to go with the flow. They're just little and they're used to. I don't know. Have you ever had a meltdown on a vacation? Yes, we did a whole analysis of the trip to Breckenridge and the tier to dollar ratio, which is extremely high versus trip to local library water fountain, which was free, full of giggles.