FIRE in the US: Financial Independence, Retire Early

Summary

Financial Independence, Retire Early (FIRE) means accumulating enough invested assets that withdrawal income covers living expenses indefinitely. The core formula: FIRE Number = Annual Expenses / Safe Withdrawal Rate. At the standard 4% SWR derived from William Bengen’s 1994 US market analysis, this equals 25x annual expenses. The 4% rule was built on US data (S&P 500 + bonds, 1926-1992) and has survived every 30-year historical period.

How it works

The 4% rule and US market returns

Bengen’s original study and the Trinity Study both used US stock and bond returns. The S&P 500 has returned approximately 10% nominally (7% real after inflation) over the long term. A 60/40 US stock/bond portfolio supports 4% withdrawals with a 95%+ success rate over 30 years.

US retirement account strategy for FIRE

Early retirees face the age 59.5 problem: withdrawals from 401(k) and Traditional IRA accounts before age 59.5 incur a 10% early withdrawal penalty. Common strategies include:

• Roth conversion ladder: Convert Traditional 401(k)/IRA funds to Roth IRA each year. After a 5-year seasoning period, converted amounts can be withdrawn tax- and penalty-free at any age.
• Rule of 55: Leave a job at age 55+ and withdraw from that employer’s 401(k) without penalty.
• Substantially Equal Periodic Payments (SEPP/72t): Take calculated annual distributions from an IRA without penalty at any age.

Average US spending

The BLS Consumer Expenditure Survey reports the average American household spends approximately $72,967/year (2023). Housing is the largest category at 33%, followed by transportation (16%) and food (13%).

The US personal savings rate averages roughly 4-5% of disposable income, far below the 50%+ rate FIRE enthusiasts target.

Worked example

$85,000 income, $50,000 expenses, $100,000 saved, 7% return, 4% SWR:

1. FIRE Number: $50,000 / 0.04 = $1,250,000
2. Annual savings: $85,000 - $50,000 = $35,000/year (41% savings rate)
3. Year-by-year simulation at 7%: Start $100k, add $35k/yr
4. Year 14 balance: $1,252,117 (exceeds FIRE Number)
5. Financially independent at year 14

Note: Social Security (average benefit ~$1,900/month at age 67) would effectively reduce the FIRE number once the retiree reaches eligibility, but is not modeled.

Key differences from other markets

• Tax-advantaged account access is the biggest US-specific FIRE challenge. The Roth conversion ladder and 72(t) rules have no equivalent in the UK (ISAs are freely accessible) or Australia (super is locked until preservation age 60).
• Healthcare costs make US FIRE significantly more expensive than in countries with universal healthcare. Pre-Medicare (age 65) health insurance via the ACA marketplace can cost $500-$1,500/month per person, adding $6,000-$18,000/year to expenses.