FI Series Part IV: Why 4%, 401k, 403b, Lowering Expenses
Let’s be more specific about how to invest your hard-earned money so it can grow faster than your yearly expenses.
The goal is to build a large enough investment portfolio so that you can safely withdraw 4% each year to cover your living costs—while the remaining money continues to grow.
Why 4%?
Historically, a U.S. total stock market index fund has grown about 8–10% per year on average. By withdrawing only 4%, you leave enough invested to keep growing over time. This approach already takes inflation and investment fees into account, which is why it’s considered a conservative and sustainable strategy.
A simple example: • You have $500,000 invested. • You withdraw 4%, which is $20,000 for the year. • That leaves $480,000 still invested. • If that $480,000 grows at 8%, it earns about $38,400.
By the following year, your portfolio would be worth approximately $518,400—even after taking money out.
How much do you actually need?
Here’s the key math behind financial independence:
If your annual living expenses are $50,000, you need to amass $1,250,000. Why? Because 4% of $1,250,000 is $50,000.
Yes, $1.25 million sounds like a lot of money. And it is. Reaching that number usually means saving consistently over many years.
It helps if you have a partner and the two of you tag-team your savings. Just as important, though, is learning to lower your annual expenses.
The truth is, you don’t need a lot to live a good and happy life. I don’t need many material things to feel comfortable. If you’re frugal and keep your expenses low, you don’t need to save as much.
For example, if you and your spouse can live comfortably on $40,000 a year, then you only need $1,000,000 invested—because 4% of $1,000,000 is $40,000.
Lower expenses = a smaller target = financial independence sooner.
Where should you invest?
Start by making your investments as tax-efficient as possible: • Maximize contributions to workplace retirement plans like a 401(k) or 403(b). • If you don’t have access to one, you can invest through a regular brokerage account.
Well-known options include Vanguard, which offers low-cost index funds. Apps like Robinhood can also work, as long as you stay focused on diversified, low-cost index funds.
Financial independence isn’t about extreme sacrifice—it’s about aligning your spending with what actually makes you happy and letting time and compounding do the rest.
~ Bai, Wednesday, February 25, 2026, NorCal