There’s one critical number you must calculate first

We all love a good FIRE, Gianluca! For me, this mainly involves sitting in front of one at the snow with my family and a glass of red wine. But your type of FIRE I certainly support. ‘Financial independence, retire early’ is a plan that many love the sound of and aim for.

FIRE would not work for me. Here I am at 68, still loving answering Money readers’ questions, writing articles and – while I try to avoid TV these days – I still do a bit of radio, plus sit on a couple of company boards, which I also enjoy. This is perfect for me: maybe two days a week of work stuff and five-day long weekends.

So, FIRE may suit some, but for me the FI is a goal we should all have. But the RE bit was of zero interest to me.

Let’s not worry about RE for a moment and look at FI. Financial independence is a good goal for all of us. But these are just words. What they really mean is totally different for me, you or anyone else.

I have single age pensioners who tell me, very happily, that they are financially independent. One example of this that really made me chuckle was Jim. He called me on Nightline on the ABC some years ago. He was retired, owned a small property and lived on the age pension, plus dividends from his small share portfolio. A keen fisherman, he caught fish, grew his own vegetables and made his own beer, of which he was very proud. He saved around $50 a week from his age pension. Jim is financially independent. His income more than meets his spending.

That is one end of the bell curve. At the other end, I meet with people who spend hundreds of thousands of dollars a year. No making beer or growing vegetables here. Their lifestyle is travel, usually a boat and a love of the theatre and dining out.

So, the starting point for me is FI. The amount you need for this is not too hard to work out. If you were thinking about financial independence as a goal at age 60, work out, in today’s dollars, what you would spend at that age and multiply by 17.

So, if you wanted $100,000 a year, you’d need investment assets of about $1.7 million. Sorry, your house does not count. Anyone have a house that sends them money? Unless you are renting out spare bedrooms, houses cost money.

If you are younger, say under 50, I’d like you to use a different formula. For younger people, you need your money to last longer. If you need $100,000, I’d use the 4% rule as the average earnings above inflation from typical growth-type investments. This means that $2.5 million in assets would be needed to be historically safe to spend $100,000 a year, plus inflation.

What lifestyle do you want?

Gianluca, you want to be a FIRE in your late 40s. What will you spend each year, including on your home or rent, replacing cars, travel, health, lifestyle, etc? As you will be relatively young, I think you’ll need to use the 4% rule. Basically, each $1 million you have will historically be good for $40,000 a year, plus inflation.

If you want first-class travel and boats, this number could be pretty high. If you are more like Jim and can live happily on $20,000 a year, but can’t yet get a pension, $500,000 should do it.

The key for you to achieve your FIRE goals is the amount you plan to spend. If you don’t have that number, you can’t be financially independent, let alone retire early.

Then we need to consider your super. Here angels would fear to tread without a plan in hand, plus a long conversation with you about your objectives, your career and how this all works with your scheme.

Most defined benefit plans will have an age where payments max out to you, either as a pension or a lump sum, and I doubt that is late 40s. If it is a multiple of your final three years’ salary, for example, you could be penalising yourself.

You don’t seem to have much confidence in your super administrators. If so, find a professional adviser with expertise in this area. You should agree in writing what the costs are likely to be, but it will be a small investment with potentially significant benefits to you. If you plan to retire early, that is fine, but at least understand how much upside you are giving away.

FIRE is a great idea for some, but it requires a pretty large lump of invested capital. If you can do that, great. For most of us, financial independence, let alone ‘financial independence, retire early’, would be a great result. Many Aussies, like me, have made it to a level of financial independence that fits our lifestyle needs. Some of us stop work completely; others, like me, enjoy a mix of ample leisure time with a bit of work to keep the brain ticking over.

This is all super personal. We all have different lifestyle income needs, depending on what we enjoy. The real trick is to have a plan. And that plan starts with the critical number. How much do we want to spend each year?