By Dr. Erik Hofmeister, WCI ColumnistWe achieved financial independence three years ago. Even though we kept working for a couple of years, I remember some changes that happened almost immediately. I’ve read hundreds of blog posts and numerous books, but it was quite remarkable to discover the difference between aiming for FI and reaching FI. I have two math lessons and two psychology lessons to share with you.
Let’s start with the math lessons.
The Math Lessons of Reaching Financial Independence
Here's what I thought about as we approached financial independence.
Should You Have a Cash Cushion?
A cash cushion is a bundle of money you have in very safe investments that you can spend in the event of a market downturn, theoretically minimizing the effect of sequence of returns risk. The writers at Our Next Life have a three-year cash cushion, for example. The problem with having a cash cushion is that you necessarily have fewer stocks and/or bonds, so the growth of your portfolio is decreased. This is often called the “cash drag” since cash is dragging down your portfolio’s earnings.
In addition, you are giving up some upside potential. Since you have fewer stocks, your likelihood of your assets increasing substantially is reduced. This isn’t a problem if you intend to die with zero, but if you have an interest in leaving a large amount after you die, there will be less there if you have a cash cushion than if you don’t. Before FI, you have an emergency fund that is usually kept in cash. Once you achieve FI, you can begin to build up your cash cushion with future contributions (if you continue to work) or rebalance your existing assets to create the cash cushion. Be aware that if you do this in a taxable account, there will be tax consequences to selling stocks or bonds and moving the proceeds into cash.
There is variable evidence for the value of a cash cushion, and it depends on what the market does. If there is a sharp downturn shortly after retiring, having a cash cushion is tremendously helpful. If the market is flat for years and then dives down, the cash cushion will be less useful because it will have been eroded by inflation. It also depends on how you use the cash cushion—do you replenish it from stocks when they go up, or do you just deplete it down? Replenishing it is basically a forced whole portfolio approach, so the cash cushion isn’t superior to rebalancing a traditional portfolio. Deplenishing it forces you to move more into stocks, a rising equity glidepath, and there is some evidence for that being better than a balanced portfolio.
We decided on a two-year cash cushion because it was easy to achieve between when we reached FI and when we planned to retire. We plan to deplete it in the event of a poor market to achieve a higher stock exposure percentage. We keep it in Vanguard’s Federal Money Market Fund (VMFXX) because that’s where we keep the rest of our investments and because it seems easy. We also don’t feel a strong need for FDIC protection. As I wrote this at the beginning of 2025, it was in the 4%-5% range with an expense ratio of 0.11%, and that suits our needs just fine.
Should You Build a Bond Tent?
A bond tent increases your bond exposure as you approach your retirement date and then decreases it as retirement progresses and the sequence of returns risk decreases. If the market crashes before your retirement date, you are relatively protected, given the fairly high bond exposure the bond tent provides the closer you get to your retirement date. A bond tent may be better than having a mixed portfolio throughout your working career, since stocks historically do better over the long term and you don’t need bonds to buffer market losses because you’re not going to sell stocks during your career.
We had partially built a bond tent of three years in a municipal bond fund. And then 2022 happened.
Bonds are supposed to cushion your portfolio—when stocks fall, bonds go up. That did not happen because we owned our bonds in a bond fund. If you hold a bond to maturity, you get your money back plus the coupon rate. Bond funds rarely hold them to maturity, so they are greatly affected by interest rates. In 2022, rising interest rates killed bond funds. I was absolutely stunned that stocks and bonds fell simultaneously. I thought the whole point of having bonds in a portfolio was because of the negative correlation with stocks. Seeing bonds completely fail to do their job in our portfolio makes me extremely pessimistic/suspicious of bonds now.
After having learned that lesson the hard way, now we are building a TIPS ladder to cover Years 3-5 of retirement. If our stocks do well, we will probably sell the Year 3 bond funds and buy a Year 6 ladder step. If stocks do poorly, we can live off our cash cushion and then our TIPS. Hopefully, stocks will have recovered after five years. If not, we can always adjust our spending down a bit.
More information here:
Retirement Income Strategies — And Here’s Our Plan for When We FIRE
I’m Retiring in My Mid-40s; Here’s How I’ll Start Drawing Down My Accounts
The Psychological Lessons of Reaching Financial Independence
Now that the math is done, how did reaching FI make me feel?
Work Became Less Satisfying
This happened remarkably quickly. Even though I enjoy being an educator and a clinician, I noticed that I was generally less “gung-ho” than usual. I said “no” a lot more to things I really didn’t want to do. I offloaded as many unpleasant tasks as I could think of. I started to spend more time thinking about how I could hang out with my friends and wife more. I realized that I probably wouldn’t see any long-term projects through before I retired. I still wanted to do a good job—I didn’t slack off or ignore students or patients. I just became a lot more selective about where I directed my energy.
While this generally resulted in me feeling better and having more “me” time, it also started to make me feel like I was treading water at work. What was I even doing there day to day? I still had enthusiasm for some things—like educating students about finances and doing research—but offloading the “uninteresting” tasks also made me realize that I would like to offload even more job tasks. Like, almost all of them. This eventually led to a degree of senoritis, particularly in the last year leading up to retirement.
I know that Dr. Jim Dahle has often said that getting to financial independence might help with burnout, but that wasn’t my experience. Maybe it's because I wasn’t burned out. I’m an academic—we’re not exactly overworked. It’s also possible it didn’t help because I can’t really cut back from 100% full-time equivalent. Academia doesn’t easily accommodate part-time faculty positions in veterinary medicine. I tried taking a fair amount of unpaid leave for a year, but that didn’t really help much either, because there were still a lot of administrative tasks lurking in the background when I got back.
Gaining Confidence That Our Plan Made Sense
The other feeling I experienced was that I felt better about money. It wasn’t necessarily a feeling of relief, but hitting our FI target number proved to me that it could work for us. I felt a sense of accomplishment with regard to finances. Shortly after we hit our FI number, the market went sharply down, so according to a standard 4% withdrawal rate, we were no longer technically FI. But I didn’t really worry about it, because I knew we could keep working and contributing to our savings and build back up. It gave me a sense of confidence that our plan made sense. It’s possible we just got lucky with our finances, but as the saying goes, I’d rather be lucky than good.
It was also strange to hit our FI number and then be below it. Were we no longer financially independent? Or had our sequence of returns risk hit early, and now we could have a higher withdrawal rate? If you use a CAPE-adjusted withdrawal rate, maybe we could still have retired. This was mostly a theoretical consideration, because the dip didn’t impact us materially or emotionally. We knew we were close at least, and that made all the difference.
More information here:
Beyond Financial Independence: Money Irrelevancy
Life After Financial Independence: Two Perspectives
The Bottom Line
As Jim often says, achieving FI should be a goal of every high-earning professional. Your life will be enriched in surprising ways. It allows you to dial in and decide how you really want to spend your finite amount of time on this planet. We decided to keep working for a while, because we were still enjoying our jobs overall. As our assets continued to increase, the thought of, “What am I doing here?’ began to get louder and louder until, eventually, we made the decision to actually retire. But that is a story for another column.
If you've hit FI, how did it feel when you finally reached it? What math problems did you ask yourself? What psychological answers did you find? Did you retire, or have you kept working?
We’re financially independent, yet my husband continues to work. He likes knowing there’s a paycheck coming in. I’d love to learn more about how you are building your TIPS ladder. Are you doing it in a retirement or taxable account? The whole TIPS topic confuses me.
The comfort of the incoming paycheck is certainly nice. But once you evaluate and reach a tipping point of your Saturdays being better than your Mondays and it being worth it to you to buy that time, then you can make the move! Our ideal plan would have been to do the TIPS ladder in our 457. That way, if we needed it, we could withdraw it. But, if not, it would continue to benefit from tax deferral. Unfortunately, our Fidelity 457 doesn’t offer the opportunity to buy individual TIPS. However, you could do it in taxable. One resource I found very helpful is https://www.tipsladder.com/. It will even give you the number of the lot and how many to buy.
Your feelings about bonds, while valid, suffers from recency bias. Generally bond funds increase when equities go down. But it’s no guarantee. 2022 proved that (though it has happened before) in an extreme way. In all our history we’ve never seen bond funds and equity funds down double digits in the same year. Just because it happened once doesn’t mean it will happen again. A single data point doesn’t make a trend or invalidate all previous datapoints that made the trend generally true.
Jbme, while I agree bond index funds over the long term will have superior yields and growth to individual TIPS or IBonds, it sounds like Erik is mainly concerned about overcoming SORR in the first 5-10 years of retirement and taking more of a rising equity glidepath. I believe individual short-term treasuries and TIPS have less risk of nominal loss over a 5-10 year period than intermediate/long term funds.
Stocks and bonds really aren’t inversely correlated. Almost non-correlated though, especially treasuries rather than corporates.
fair comment and more correct than what I said
Hello JBME, you are 100% correct and I love talking about and thinking about biases. Recency bias is on the long list of things that make us do suboptimal things. Fortunately, to reach our goals, we don’t really need bonds. Also, I’ve learned that my temperament can handle wild portfolio swings, so I don’t think I need bonds from an emotional standpoint. I just had them “because you’re supposed to” and I wasn’t sure how I would handle a plunging stock market. But the last few months I’ve had a bunch of people rant to me about their portfolio and my response has always been, “Stop reading the news. Forget about it. You don’t need this money for 20 years. The market is supposed to go down as well as up.” So, yeah, what 2022 taught me is the pain of losing money in bonds was _far_ greater than the pain of losing money in stocks, because I _expected_ bonds to be relatively safe. I _expect_ stocks to bounce all over the place, so I’m fine when they do.
Erik awesome article as always man. I sort of echo the comments above that bond funds, even short term treasury bond funds, are not negatively correlated to stocks, just that it is the lowest correlated asset class to stocks with the least amount of volatility. Btw, where you in a short term treasury bond fund? If you weren’t, did you consider making your bond part of your portfolio short term treasuries? It would seem your 2 years of cash is similar to the duration of a low cost short term treasury fund. did you see an advantage to the TIPS ladder 3-5 years vs. short term treasuries?
also, did you consider a reverse mortgage as another buffer asset for SORR as recommended by Wade Pfau?
Reverse mortgage may be the worst of the “buffer assets”. Funny how many people overlook cash….
Ha! Actually, I believe whole life insurance is the absolute worst buffer asset! Funny how Wade Pfau overlooks the lost money paying for insurance you don’t need all those years before you actually enter retirement!
Hello Rikki, thank you as always for the support! You are the best cheerleader for the Columnists. 🙂 Our bond portion was in VBTLX. For a while it was in VWIUX but I ran the numbers and we’re not in a high enough tax bracket for it to matter, so when I did a TLH years ago I moved into VBTLX. I have to admit that my knowledge of bonds is not the best AND they seem very complicated. So I just did what I heard people suggest rather than doing a deep dive of my own. Similarly, I haven’t done a deep dive of short-term treasuries vs. TIPS. It was more like, “I want to be fairly confident this money will be there for me in 3-5 years. TIPS seems to accomplish that objective.” But I welcome any advice you have!
And yes we have definitely considered the reverse mortgage. The main problem is you can’t really take out that much equity (40-60% I believe), and our small single-family home in a rural college town just isn’t worth that much. If we had an $800k+ house the reverse mortgage would be a much stronger consideration.
Np man helps that all us columnists are great and honest writers. Definitely that TIPS ladder is the best way to guarantee that money will be there when the TIPS mature. And VBTLX is definitely reasonable as its intermediate treasuries so medium level of interest rate risk but no credit risk so very safe to balance out your equities and no need likely to do more of a deep dive for you unless you want to. A lot of people say that intermediate term treasuries are the sweet spot of getting great yield with incredible safety 🙂 So much so that when people says the “equity risk premium” its the premium of equities above the 10 year treasury, an intermediate term treasury bond.
And about the reverse mortgage, follow the great Jim Dahle’s comment above- not a great buffer despite what Wade Pfau says.
I think I’d prefer whole life even to a reverse mortgage. But neither would be my preference.
You’ve got to talk to Wade Pfau about that. In his defense though when he suggests whole life or HECM’s (love the marketing acronym/ploy to avoid actually saying “reverse mortgage”) as buffer asset he doesn’t actually say to proactively buy these products. Unless you are absolutely killing it and filling up all other retirement accounts/vehicles during accumulation, he never says buy whole life insurance to have a cash value buffer asset. Nor is the HECM absolutely necessary unless you didn’t prepare well for retirement and your only source of non-equity funds during a bear market before 70 would be social security.
Still I’m a little bothered that he is so good at finding problems for these terrible solutions. his research has justified using whole life, HECM’s, variable annuities in niche circumstances. Often they are not the best solutions, but still writes how they can still work and his research is being used to promote these terrible products 🙁
I asked him about that when I interviewed him at the Bogleheads Conference a couple of years ago. It’s the 4th video down here:
https://boglecenter.net/2023conference/
Ha! I love how he prefaces before talking about whole life or reverse mortagages “this is when the tomatoes come out” 🙂
So Jim, what do you think of Wade’s decision when he uses whole life as his bond allocation, as well as to fund a legacy goal and that the cost of legacy was the premiums he paid for the whole life insurance, and finally using the death benefit to his spouse after he dies and his life income only annuity dies with him?
Personally, despite not being anywhere close to being as smart as he is, he might still be in the Ric Ferri complexity stage . He could easily just buy bonds as his bond allocation. He could also have just invested in VTI and not touch that money for his legacy goal. Finally just add the spouse onto the annuity. I mean, I didn’t crunch the numbers, but seems my solution would fit him much better than losing money on a whole life policy.
I really don’t have a problem with someone who understands how a policy works and what to expect from it who chooses to buy and use one. I’m confident Wade understands how the product works. He views the upsides as outweighing the downsides in his situation and I think that’s fine.
Whole life cash value should have very similar return to bonds in the long run. In the short run, it’s a much different picture. It’s also challenging to rebalance between whole life and other investments.
The other uses involve desiring a permanent death benefit. Well, if you want a permanent death benefit, whole life is pretty good product for that. I mean, take a look at guaranteed universal life too, but both are pretty good for those who really want that death benefit even at 80 or 90 years old. A death benefit is paid out tax free (just like inheriting real estate or mutual funds or whatever) and can easily be used to fund a legacy goal. While if you live to your life expectancy or more, you’re likely to leave far more money behind with traditional investments than whole life, that guarantee of how much you’ll leave behind has value, and if you die early, a lot of value.
As far as income annuities etc. certainly a reasonable use of a permanent death benefit is to allow the spouse to buy a pension when you die and it’s entirely possible to be able to come out ahead with that approach instead of an annuity that will pay out until both of you die. You just have to run the numbers and place your bets.
“After having learned that lesson the hard way, now we are building a TIPS ladder to cover Years 3-5 of retirement. ” I went through this as well, earlier than 2022, although what I decided is that in direct bond ownership the risk is we need the money quicker and sell low, in the fund “we” sell some bonds low all the time for the few of “us” who need to cash out so the bond mutual fund is NOT for us. Ie I hadn’t understood enough about bond funds to own them and since spouse wanted things much simpler if he had to manage our finances without me opted not to do TIPs for his sake. Therefore we have a CD ladder to plop about what we might need extra each month (we are in inflation adjusted annuities- ie pensions- from 4 entities until dropping to 3 reduced ones when one of us dies) and if we ever need a whole lot we can pay early closure penalties.
Psychologically I had intended working longer but the security of FI plus Covid work environment made me retire as soon as I vested in my pension. I’d have stayed longer had they been willing to give me parttime- all I wanted was JUST 40 hours- but no interest from my work. I am somewhat bored now and regret retiring every few weeks, but not enough to get back into any paid labor medicine or not.
Funniest financial quirk is that when MIL died, leaving us (him) another 20% of our net worth, I finally acknowledged we had more than enough and vowed not to ratchet up our net worth with that infusion (it being all cash/ CDs- as suitable for her age- helped as our CD ladder was suddenly more than complete). So aside from a new boat- named after her- most of the rest is going to her grandkids as it should have probably directly but this was her way of letting her son be the trustee of any funds going to them. (Wish though they were paying their tax rate on her IRA not us paying ours!) I also find myself eating out a lot more and tipping better with “her money” and once in a while warning kids when we are back down to pre Oma net worth the gifts may stop; we want to avoid having to return to them and ask for any of it back!
What a great example of the concept that it is easier to spend other people’s money, or spend a windfall, versus the hard-earned money that is part of our retirement plan!
My wife and I have had little success trying to convince my parents to use a trust or similar for the assets they intend to give my daughter, their only grandchild. The upside for society is that an extra helping will go to the public before making it to my daughter.
In 2022, bonds indices generally fell much less than stock indices. In my portfolio, the diversification still helped smooth the ride.
That’s a good point ARH. The difference for me is that I’m OK with the stocks going up and down but wasn’t OK with the bonds doing so. So I learned I don’t need a smooth ride and I’m fine with the bumps as long as it’s all stocks. 🙂
Erik, I second the comment about FI and burnout. After FI last year I cut out all the parts of my EM job I didn’t like, but found there was almost nothing left. Going to work at the same job seemed increasingly pointless. The problem with doing something for the money is that once you don’t need the money, the motivation vanishes.
What I did is something not every doc can do, which is to quit my benefitted position and became an independent contractor. Now I just pick up work on occasion at various places including urgent care, which I am enjoying more than I expected. For this reason I don’t see any point to setting up a bond tent or TIPS ladder, because for the 5 years it matters most, I can mostly likely generate a little revenue any time my portfolio dips below a certain threshold. My plan is just to maintain my (fairly aggressive) static asset allocation.
Surprisingly, working in different places—even though none are ideal—has improved my attitude, and not knowing whether I will work at all any given month has given me a sense of control and freedom I had been lacking.
Hello Brian, that sounds like a great plan! I had a similar one to do locums in early retirement. I like being on clinic duty and taking care of patients and teaching students, and have enjoyed every locum gig I’ve had. I’m not relying on it for sequence of return risk mitigation, though, because, in the event of another 2008-2009, the locums gigs in veterinary medicine would all dry up (as they did then). It was dark times for vet med then. We had graduating classes with maybe half of the students not having jobs when they walked across the stage at graduation.
The lost motivation comment is really ringing in my ear. I was a hypermotivated academician out of training, and then became an energetic private practice doc that was engaged in practice management as well as working a ton. I was never really burned out by any of it and in fact was usually quite engaged with all of it.
Now, as I am starting to creep up on FI, I suddenly have a lot less patience for the annoying parts of work, and am disengaging from a lot of things I was full throttle on just a few years ago. I was insensitive to all these little nuisances because I didn’t have a choice. It would be like being mad about rain, or traffic. Now as choice is becoming visible in the distance, I find myself more sensitive to and impatient about those things.
I worry a little bit that I’ll feel a sense of loss as this process completes. I’ll no longer want to deal with my workplace, but will end up missing out on the feelings that came from being highly engaged with my practice.
Motivation is a tough one and one I’ve been dealing with a lot lately. There are really four limited resources in life: money, time, health, and motivation. Some of my motivation for working was a need/desire to provide the basics and a better life for myself and loved ones, i.e. money. Without that motivation is definitely less when it has to be 100% driven by passion.
Exactly. I suspect that this is a big part of people growing their philanthropic goals as they achieve financial success
I can definitely start feeling that inversion, especially when the time marginal delta is basically going strictly towards buying investment assets that I’m merely 95% sure are going to be donated as appreciated assets.
About the only thing that keeps me balanced on that front is an experience I had when younger working with a lot of very senior scientists and engineers from our local national laboratory at a Habitat house, one of them remarking ‘you couldn’t pay me to do this work’. That really hit home, because the motivation and passion really showed as being involved tangibly is a meaningfully different thing than just looking at the donation offset from spending that time doing ‘primary job’ productive work and sending some of it to directly support that cause, instead a lot of the total enjoyment was with being involved doing dirty hard work with much lower technically added value… reminding myself of this actually helps flip the passion switch back on for a lot of things. Mentorship does a lot of the same… if I was the one in my family with the medical background, the medical missions and Docs sans Borders type stuff would carry a lot of the same appeal – and I see a lot of that in our future.
Great article, staring down the barrel of this very realistic possibility where needing work to remain fulfilling will require putting in at least 30hr/wk of average effort, but that will come with so many other side benefits (healthcare coverage plus knowing we can CoastFI-type drift while still maximizing every tax-advantaged investment available at our tax brackets) and keep situating ourselves better… I actually see this as that “barista’ FI type win condition, and it’s so much more attainable, I want to make this the default pursuit approach for more people.
I can absolutely see a lot of those very penetrating questions about offloading tasks I don’t enjoy bleeding over to other aspects. So far, it’s mostly been me trying to create cost justifications for hobbies (some of which even make trivial amounts of money, but if I’m paying somebody to handle other responsibilities while I’m doing that task instead, it’s definitely a resource drain).
I feel like the TIPS ladder plus bond funds (in a sense, I can make a fairly solid argument for leaning on the muni and other tax-advantaged bonds just as a partial tax offset to the existing diversification drag) is probably the way I should set that up. We kinda lucked our way into that when buying I bonds and TIPS when they were comically well-priced, but I guess building that as a deliberate strategy is something I need to lean into.
Thank you so much for this article. I find myself in this transition time, and everything you say rings very true.
Yepp, once we realized we were here, we did a one time re-allocation to create that cash cushion, planted it on a bond sofa, and even stashed some actual gold behind the cushion.
I also really appreciate every word you wrote in the Psychological Lessons. You describe my current situation well. I am still working, but it is so much harder than it was when we clearly still ‘needed the money’. Ironically, I am already living a popular “retirement goal” with my own consulting business. And I do enjoy the part where I help my clients. But it is still a business and things that I used to happily suck up and do – networking, sales, follow up, admin – are now a burden. I no longer seek networking or sales and I am pruning the rest of it. But at some point soon I will walk away entirely.