Let’s just get right to it. The SWR is a theoretical, projected percentage of your investments that you can safely withdraw each year (based on the rate of return of your investments) with the peace of mind that your portfolio will maintain its value.

In layman’s terms, let’s assume you have $1,000,000 saved. The standard, conservative SWR assumed in the FIRE community is 4%. What this means is that on average, your portfolio will return 4% or $40,000 a year, and so you can safely assume that you can withdraw and use that $40,000 while your portfolio remains around that $1,000,000 mark, in perpetuity. Your portfolio basically becomes this machine that spits out 4% a year (SWR) to you while it keeps its value.

This is why the SWR is so important. This is typically one of the key metrics used to determine the investment portfolio at which an individual can retire and live off of returns. I recommend you reverse calculate by starting with your expected annual expenses in retirement, figuring out what SWR you expect (since it doesn’t have to be 4%. It could be more or less but is just used as a guideline of your expectations. The stock market has returned 7-8% on average annually, so you might be able to get away with 7%, but 4% is recommended to avoid bad surprises and to remain conservative), and then finally dividing those expenses by the rate of return to figure out what investment is required to achieve that SWR.

As an example, perhaps you want to live a comfortable life, and in the area you expect to live, a comfortable life costs about $80,000. You don’t like surprises, so you conservatively assume you’ll get about a 4% return on your investments. Now, compute $80,000/.04 and you should get $2,000,000. That is your FIRE number with a SWR of 4%.

Alternatively, if your average rate of return was 8% instead, and you were comfortable with 8% being your SWR, you’d compute $80,000/.08 to see that you would need $1,000,000 of assets invested to retire.

In a nutshell, that is SWR. I hope you found this little blurb on SWR helpful!

But this poses another question. Using your SWR and expected returns, what is your FIRE number? Let me know your thoughts.