Can You Buy Your Way Out of the Rat Race?

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If you're tracking your spending, you know how much money it takes to live on. If you're tracking your investments, you know about how much return you're getting from your capital. With those two numbers, you can get a pretty good estimate of how much money it takes to buy your way out of the rat race.

In its simplest form, the cost to buy your way out is just your annual spending divided by the return on your investments. I used to do that calculation a lot. When I got my first job interest rates were in double digits, so I could imagine getting $30,000 or even $40,000 a year — plenty of money to live on — from an investment as small as $300,000.

A simple theory

Of course, that model is over-simplified. For one thing, you have to account for the possibility that in some years spending will be higher. (What if you need a new car or a new roof or to send the kids to college?) I knew how to handle that one, though: The same way I was already dealing with it when my income came from a regular job — covering major expenses by cutting other spending.

More fundamentally though, the simple model doesn't account for inflation. And, at the time when interest rates were in double digits, inflation was similarly high. It wasn't a problem you could just handwave away.

I spent way more time than it was worth trying to construct a mathematical model for living off capital — a model that accounted for taxes, provided for reinvesting enough after-tax income to keep me even with inflation, and still paid out enough money for me to live on. All this, mind you, while my net worth (after a student loan) was probably negative.

Anyway, that was my first guess at my number: a capital sum of $300,000, properly invested, would yield enough that I wouldn't have to work. That's what it would have cost me to buy my way out of the rat race. Other people have done the same sort of thinking and written whole books about it, and come up with better-researched models for accounting for taxes and inflation. I've written reviews of a couple of good ones: Bob Clyat's Work Less, Live More and Joe Dominguez and Vicki Robin's Your Money or Your Life.

The less simple reality

In practice, though, for most people, buying your way out doesn't work out.

First of all, it's really expensive. Unless you're extraordinarily frugal, it's still going to cost you tens of thousands of dollars a year to support your household. And (as you can't really count on double-digit returns on your investments), it turns out that you need around a quarter million dollars to stand behind each $10,000 of annual income.

More fundamentally though, no amount of capital provides complete security. Your money can be lost any number of ways. The economy could turn down. Even if the economy goes up, your investments could go down. You could lose your money to theft, natural disaster, lawsuits, or government seizure (not to mention simple overspending). You can try to protect against any of those things through a combination of due care and proper insurance, but there's no such thing as perfect protection.

Your real protection against those things is your own productive ability — which is something that can't be stolen, taken in a lawsuit, or seized by the government.

Buying your way out of the rat race is a suboptimal strategy. It can work — people do it all the time, although not very many of them — but it's hard. It also doesn't leave you so very much better off than you were — you may be able to quit worrying about losing your job, but you have to start worrying about low interest rates.

Now, accumulating some capital is a great idea. In fact, I think everyone should have a medium term goal of accumulating enough capital that the income from their investments could cover their bare minimum expenses. Once you get beyond that, though, adding more capital starts yielding diminishing returns.

The real way to escape the rat race: Refuse to race with rats.

So, what do you do instead? Basically, invest in your own skills.

Improving your skill at the job you already have can help you earn more (important if you don't yet have that basic level of capital), but developing skills at entirely new things gives you a whole new layer of protection against economic downturns and incompetent managers.

Broaden the kinds of work you look for. Don't focus only on finding the highest pay — look for work that's interesting and that's useful. It's more fun. It's also more secure — there's only one job that pays the most.

Beyond that, learn how to do, make, grow, and find things for yourself. To the extent that you can directly provide the things your family needs, you're not dependent on either your capital or your job.

Each of these things improves your security. Taken together, they can give you as much security and freedom as a human being can achieve.