Why should we invest our money?

If you can see the world a little more broadly, calculate risk, and plan long term, the rat race actually has an exit.

In this post: Cost of living · Ownership, not trading · The S&P 500 baseline · Cost of waiting · Safe withdrawal rate · Time to escape · Withdrawal tax · Retiring abroad · Staying in Japan · What the math doesn’t cover

This is a simplified calculation based on a single-person budget, without a large house or luxury car. Raising a family calls for a different budget, with an example at the end.

Annual cost of living: Seattle

How much do you need per year to live comfortably? Take Seattle, where I am, as the example.

Category $/month
Rent (1-bedroom, non-luxury) 2,000
Food 700
Car (insurance, gas, maintenance, amortized depreciation) 500
Utilities (electricity, gas, water) 150
Communications (internet + mobile) 150
Healthcare (employer insurance plan) 150
Personal / discretionary 300
Travel + misc (annualized) 500
Effective monthly 4,450

Annual: about $53k/year during working years. The $150/month healthcare line assumes an employer insurance plan. In retirement you lose that subsidy and buy ACA marketplace coverage instead, closer to $500/month, so retirement expenses come to about $58k/year. Yes, you need a car here. Public transit covers the urban core, but not enough of daily life to go car-free.

So escaping the rat race in Seattle needs investment returns alone to cover ~$58k/year. Call that point the rat-race escape zone, commonly known as early retirement or FIRE.

The mental model: ownership, not trading

Most people picture investing as buy low, wait, sell high. That is trading, and it is not what investing for financial independence is about.

Investing is slowly converting income into ownership, then guarding that ownership for decades. Every dollar in a broad equity index buys a tiny slice of hundreds of real businesses. That slice grows as those businesses earn, reinvest, and compound over decades. The compounding does the heavy lifting, not the entry price, not the daily news, not the next hot fund.

Think of the portfolio as something you protect, not inventory waiting for the right moment to sell. The default action is do not sell, not this year, not next year, not after a 30% crash. You add to it on a schedule and don’t subtract from it on impulse.

That framing matters because equities are volatile by nature. A broad stock index will fall 30 to 50% more than once over a multi-decade horizon. That volatility is the price of admission for the long-run return. A 30% drop is not your portfolio losing 30% of its value, it’s the same number of shares temporarily priced lower. You only lose money if you sell. The prerequisite is backbone: keep contributing, don’t sell, ignore the headlines.

The S&P 500 as the investment baseline

Buying individual stocks is too risky, so diversify across a broad-market index ETF. The S&P 500 is the popular choice. It goes back to 1926 and has lived through the Great Depression, 1970s stagflation, the dot-com crash, 2008, COVID, and every recession in between. With dividends reinvested, the annualized nominal return from 1926 to 2024 averages ~10.3%, and the post-1957 modern-index era averages ~10.5%. Inflation has averaged ~3% over the same period, so the real return, what matters for purchasing power, is closer to ~7%.

$100 invested in the S&P 500 (total return), 1928–2025$10.0$100$1,000$10,000$100,000$1,000,000$10,000,0001930195019701990201020252025: $1,157,591Value (log scale)

$100 invested in the S&P 500 (dividends reinvested) at the start of 1928 grew to roughly $1.16M by the end of 2025, about a 10% nominal annualized return over 98 years. Log scale, because on a linear axis the early decades vanish into the floor. The visible drops (1929-32, 1973-74, 2000-02, 2008, 2022) each looked terminal at the time and each recovered. Source: Aswath Damodaran, NYU Stern, “Historical Returns on Stocks, Bonds and Bills: 1928-Current” (annual S&P 500 total returns, 1928-2025, updated Jan 2026).

The past 50 years (~1976 onward) have been more favorable still, about 11.9% nominal and 8.2% real, partly by skipping the stagnant, high-inflation late-1960s and early-1970s. For planning I use the full-century ~7% real baseline. It is the more conservative anchor, and that’s the right side to err on when forecasting decades ahead.

The cost of waiting

The most reasonable-sounding case for staying out of the market is waiting for the next crash to buy in cheap. Crashes do happen, roughly every decade. What that argument gets wrong is the cost of waiting. Over a multi-decade horizon, the single biggest risk to your financial independence isn’t a crash, it’s not being invested at all. Five years on the sidelines compounds into a six-figure shortfall against someone who kept buying through every drop. Crashes recover. Decades of missed compounding don’t.

$100 of uninvested cash vs. $100 invested in the S&P 500, 1928–20250.0010%0.01%0.10%1.0%10%100%1000%1930195019701990201020252025: 0.0086%Cash as % of S&P 500 value (log)

Same window as the first chart, showing what waiting out of the market costs. Both lines start at $100 at the beginning of 1928, one held as uninvested cash (stays at $100 forever), one invested in the S&P 500 with dividends reinvested. By the end of 2025 the cash side is worth about 0.009% of the invested side, roughly 1/11,500. (Nominal dollars, not inflation-adjusted, same source as the first chart.)

Why the safe withdrawal rate is much lower than the return

You might be tempted to plug ~10% (or ~7% real) directly in as your withdrawal rate. That’s wrong, for two reasons.

  1. The horizon problem. A 30-year retirement is shorter than the window needed to mean-revert through a downturn. The long-term average assumes you can wait out any decline. A retiree drawing from the portfolio cannot.
  2. Sequence-of-returns risk. Two retirees with identical portfolios, drawing the same inflation-adjusted amount, experience the same set of annual returns but in reverse order. The average return is identical, but the retiree who hits the bad decade first runs out of money while the other dies wealthy. Returns are not commutative once you start withdrawing.

This is why the safe withdrawal rate sits well below the average return. The well-known answer is the 4% rule, from Bengen (1994) and the Trinity Study (1998), the maximum constant inflation-adjusted withdrawal that survived every 30-year window in U.S. history, including the worst sequences. Modern revisits push this lower. Wade Pfau and others argue 3.0-3.5% given today’s elevated valuations and lower bond yields. For this post I use 3.5%, a personal judgment call.

Seattle: how long to the rat-race escape zone

The rat-race escape-zone target for a Seattle retirement:

rat-race escape zone=$58,0000.035≈$1.7M\text{rat-race escape zone} = \frac{\$58{,}000}{0.035} \approx \$1.7\text{M}

The compound-interest formula with monthly contributions gives the time to reach it:

target=P⋅(1+r12)12t  +  income⋅(1−tax)−expenses12⋅(1+r12)12t−1r/12\text{target} = P \cdot \left(1 + \tfrac{r}{12}\right)^{12t} \;+\; \frac{\text{income} \cdot (1 - \text{tax}) - \text{expenses}}{12} \cdot \frac{\left(1 + \tfrac{r}{12}\right)^{12t} - 1}{r/12}

Where PP is starting capital, rr is the real return (using real keeps the target in today’s dollars), tt is years. The first term is starting capital compounding monthly. The second term sums the future value of each monthly contribution, added the same way you’d sum a geometric series, which is why the bracketed sum collapses to (1+r/12)12t−1r/12\frac{(1+r/12)^{12t}-1}{r/12}.

Assume a software engineer starts at 22 in Seattle with P=0P = 0:

  • Career-average income: $200k (representative of a Seattle engineer averaging first 10-15 years, from $130-150k new-grad to $250k+ senior)
  • Effective tax: 20% (federal only, WA has no state income tax)
  • Working-years expenses: $53k
  • Real return: 7%
  • Target: $1.7M
200,000⋅0.80−53,00012⋅(1+0.0712)12t−10.07/12=1,700,000\frac{200{,}000 \cdot 0.80 - 53{,}000}{12} \cdot \frac{\left(1 + \tfrac{0.07}{12}\right)^{12t} - 1}{0.07/12} = 1{,}700{,}000

Solve on Wolfram Alpha →

Result: t ≈ 11 years. Rat-race escape zone at age 33.

Same $107k/year savings, one invested at 7% real return, one sitting in cash (both in today’s dollars):

%%{init: {"themeVariables": {"xyChart": {"plotColorPalette": "#c62828,#000000"}}}}%%
xychart-beta
    title "Portfolio growth at $107k/year savings (inflation-adjusted)"
    x-axis "Years" 0 --> 12
    y-axis "Portfolio ($M)" 0 --> 2
    line [0, 0.11, 0.23, 0.36, 0.49, 0.64, 0.80, 0.96, 1.14, 1.34, 1.54, 1.77, 2.00]
    line [0, 0.11, 0.21, 0.32, 0.43, 0.54, 0.64, 0.75, 0.86, 0.96, 1.07, 1.18, 1.28]

Red = invested at 7% real return. Black = cash that at least keeps pace with inflation. The invested line hits the cross-border target ($800k, next section) around year 6 and the Seattle target ($1.7M) around year 11. If cash instead sits at ~0% while inflation runs 2-3%, its real value erodes and the line bends downward. Doing nothing isn’t neutral, it costs purchasing power.

A quiet bonus: withdrawal-phase tax is essentially zero

The $58k target above assumes the withdrawal doesn’t need to be grossed up for tax. For a retiree pulling from a long-held S&P 500 index in a taxable account, that’s correct, because of how the U.S. taxes long-term capital gains.

Long-term capital gains (positions held over a year) have their own brackets, and the bottom one is 0% federal. For tax year 2026, the 0% LTCG bracket covers taxable income up to $49,450 single / $98,900 MFJ (after the standard deduction of $16,100 / $32,200), so you can realize roughly ~$65k single / ~$131k MFJ of gross long-term gains at $0 federal tax, and the thresholds adjust for inflation annually.

A single Seattle retiree pulling $58k/year sits below that ceiling, and only the gain portion of each sale counts, so a $58k withdrawal against a $40k cost basis only taxes $18k. Federal: $0. WA state: $0. The plan reaches the rat-race escape zone and stays tax-free below it indefinitely.

An alternative: retire outside the US

The Seattle math assumes staying in Seattle through retirement, but cost-of-living gaps make retirement location one of the biggest levers here. Take Tokyo, since it’s the one I have direct context on. A comfortable single-person budget in central Tokyo today:

Category ¥/month
Rent (1K/1LDK, central-ish) 120,000
Utilities (electricity, gas, water) 15,000
Communications (internet + mobile) 15,000
Transit (no car) 15,000
Healthcare (national plan + out-of-pocket) 30,000
Food 60,000
Personal / discretionary 50,000
Travel + miscellaneous (annualized) 50,000
Effective monthly 355,000

Annual: ~¥4.2M, about $28k/year USD at ¥150/$, under half the Seattle figure. Two reasons: no car needed (the train network works), and a lower assumed healthcare budget than the $500/month ACA line in Seattle.

Healthcare is priced differently, too. In the US, Marketplace premiums before subsidies are more like a monthly subscription, priced by plan, age, location, and other factors rather than income. Income-based ACA subsidies can reduce what you actually pay.

For an early retiree in Japan, National Health Insurance premiums include income-based and per-person charges. Lower retirement income can mean much lower premiums. They generally use the previous year’s income, though, so the first year after leaving work can still be expensive. The ¥30,000/month above is a planning allowance for premiums plus out-of-pocket costs, not a fixed fee everyone pays.

Neither system makes all healthcare a fixed subscription. Even covered care can involve deductibles or copays, and treatment outside insurance coverage costs extra.

Target in USD at the same 3.5% withdrawal rate:

rat-race escape zone=$28,0000.035≈$800k\text{rat-race escape zone} = \frac{\$28{,}000}{0.035} \approx \$800\text{k}

Same Seattle-engineer income and savings rate against the smaller target:

200,000⋅0.80−53,00012⋅(1+0.0712)12t−10.07/12=800,000\frac{200{,}000 \cdot 0.80 - 53{,}000}{12} \cdot \frac{\left(1 + \tfrac{0.07}{12}\right)^{12t} - 1}{0.07/12} = 800{,}000

Solve on Wolfram Alpha →

Result: t ≈ 6 years. Rat-race escape zone at age 28.

Earning at U.S. tech salaries while spending at Japanese cost of living roughly halves the timeline. The same math applies to Lisbon, Chiang Mai, Mexico City, or other lower-cost destinations, just with different numbers.

One caveat: currency risk. ¥150/$ is today’s rate and the yen is historically weak. If it strengthens to ¥100/$ (the 2010-2020 average), the $28k/year budget becomes $42k/year and the target balloons past $1.2M. Hedge, or carry a larger buffer than the headline number suggests. Moving logistics and immigration are out of scope here.

Tokyo native: same target, much longer path

For engineers in Tokyo who plan to stay, the retirement target is the same physical amount as the cross-border path, just in yen: at ¥150/$, ¥120M is $800k. What changes is the savings rate. Japanese tech salaries run well below U.S. ones: ¥9M career-average for a mid-senior engineer, 22% effective tax, ¥7.02M take-home, ¥4.2M expenses, so ¥2.82M/year into the portfolio. Starting from zero at age 22:

9,000,000⋅0.78−4,200,00012⋅(1+0.0712)12t−10.07/12=120,000,000\frac{9{,}000{,}000 \cdot 0.78 - 4{,}200{,}000}{12} \cdot \frac{\left(1 + \tfrac{0.07}{12}\right)^{12t} - 1}{0.07/12} = 120{,}000{,}000

Solve on Wolfram Alpha →

Result: t ≈ 20 years. Rat-race escape zone at age 42.

More than three times longer than the Seattle-to-Tokyo path. Japanese tech compensation relative to local cost of living simply isn’t where U.S. tech is.

That gap also assumes people invest, which many in Japan don’t. Households here hold roughly half of net financial wealth in cash and deposits, versus about 15% in the U.S. Two historical reasons: post office savings paid roughly 7% through the 1970s, so just save in the post office was rational for a generation. Then the late-1980s bubble peaked, the Nikkei 225 hit 38,915 on December 29, 1989, and didn’t recover that level until February 2024, more than 34 years later. A generation that did invest watched portfolios stay underwater for three decades, and the lesson stuck: investing is dangerous, saving is safe. That lesson is now backwards, but the cultural memory persists. The math today says save aggressively and invest, not save or invest.

What this math doesn’t cover

Two foundational assumptions the math depends on: no excessive debt and staying healthy. Consumer debt, credit cards, car loans, student loans, destroys the savings rate. Burnout, chronic illness, or a serious mental-health stretch destroys the income side. The math is only as good as those two foundations.

Life has other ups and downs too: medical events, divorce, lifestyle inflation, a market crash early in retirement. Any of these can stretch the timeline.

Planning for a family changes the budget. Rule of thumb: a family of four roughly doubles the expenses above (Seattle family ~$106k/year working, ~$116k/year in retirement, ¥8.4M/year in Tokyo), which roughly doubles the target too, to about $3.4M for Seattle. The timeline doesn’t automatically double, though. Two Seattle engineers earning $200k each contribute ~$214k/year combined and hit $3.4M in ~11 years, close to the single-person timeline, because the math is approximately scale-invariant when both partners earn similarly. With one income, reaching the same target takes longer: one $200k earner with $106k family expenses contributes only ~$54k/year, and the same $3.4M target takes ~24 years. Same target, very different timeline.

We can’t predict life’s ups and downs, but knowing what’s possible, escape in your late 20s cross-border or early 30s in Seattle alone, is itself hopeful. The hard part is the decades of discipline: staying invested through downturns, not lifestyle-inflating, not raiding the portfolio for one-off purchases. Most people who don’t reach the rat-race escape zone don’t fail at math. They fail at discipline.

If you’re earlier in your career: start now, automate it, and don’t touch it during downturns. The rest is bookkeeping.

For the operating manual, the actual portfolio, account order, and rules that make it easy to stay invested for decades, see investing strategies.

Read more like this