Lessons Learned from Achieving Financial Independence

By Dr. Erik Hofmeister, WCI Columnist

We 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? 

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