Many, if not most, people on the path to Financial Independence (FI) ultimately adopt the frugality mindset to reach their FI goal. During this time, the focus is on accumulating enough assets (and/or passive income) to have the option of not working for money to support a chosen lifestyle. At that point one has reached Financial Independence.
What many people on that path fail to realize, until you actually get there, is that it is very hard to shift from an ingrained accumulation mindset to the required distribution mindset needed to actually begin living off and spending down the assets you worked so hard to accumulate.
My Experience Once I Reached FI
I officially retired from employment at the end of 2015 and have not earned any income from work since then. The first few years were really hard to mentally shift from saving a percentage of every dollar earned to the idea of actually withdrawing from and spending down my portfolio.
In fact, I avoided it for two full years. How? I owned a classic car that was sitting in the garage and not getting much use. By selling it, I saw a way to fund my lifestyle for year one.
In year two, I was lucky to avoid drawing down again after receiving a buyout of the small minority equity position I owned in the private company I worked for prior to retirement.
The amount was just enough to cover my living expenses for my second year of retirement. (I never counted on this as I had no control over its liquidation and was uncertain of any ultimate value.)
Down the Rabbit Hole I Went
Prior to retirement, I had only a general idea of how capable my portfolio would be to support my family going forward. My backup plan was to go back to work if needed.
Facing the reality of relying on my portfolio to do all the heavy lifting if I did not (or could not) seek employment, I needed a better plan.
This was when I first found the Financial Independence Retire Early (FI/RE) community and the treasure trove of information regarding Safe Withdrawal Rates (SWR), Sequence of Return Risk (SORR), and the 4% Rule (guideline).
I went even deeper down the rabbit hole when I found the blog EarlyRetirementNow and the author’s significant work on the ultimate safe withdrawal rate and blog post series. (A few years later, I was lucky enough to meet Karsten Jeske, aka BigERN, and even be his roommate at CampFI Southwest outside of San Diego.)
I also read numerous articles on further fortifying my plan with things like safe withdrawal “guardrails” and skipping inflation adjustments. (Morningstar Safe Withdrawal Rate white paper)
Ultimately, I settled on a SWR of 3.25% (thanks to BigERN’s work) and, for even further fortification, skipping inflation adjustments after years in which the portfolio suffers a decline. It appeared that my portfolio, based on the 2017 year-end value, since I didn’t withdraw anything for the first two years, was sufficient to cover my living expenses post retirement.
I was officially Financially Independent according to my calculations.
While all this was well and good, I still could not bring myself to fully withdraw this ultra-conservative amount that I had calculated would be safe. I was consistently drawing only about 2% from the portfolio annually.
A Timely Encounter with a New Friend
After attending my first CampFI Southwest in the fall of 2021, over 5 years after leaving employment, and more than 3 years living on 2% or less of my portfolio each year, I had a fortunate discussion with a relatively new friend at the time, Kevin LifeinFIRE.
After discussing FI and FI/RE into the wee hours of the next morning and hearing my reluctance to spend from the portfolio he simply said: “You need a Fun Bucket.”
Of course my reply was “What is a Fun Bucket?”
The Fun Bucket
After five years of portfolio growth, which not only didn’t suffer from a bad sequence of returns, but actually experienced a very good sequence of returns, Kevin simply pointed out that there was a good bit of frosting on top of the proverbial portfolio cake. In fact there were sprinkles and decorations too.
He said carve some of that excess off the top and move it into a separate account and label it the “Fun Bucket” and fund it with an amount that won’t affect the viability of your financial independence portfolio one bit. Since I was already withdrawing less than I was permitted to using my super safe withdrawal rate, there was plenty of excess even if the portfolio returns hadn’t been as good as they actually were.
As soon as I got home, my Fun Bucket was officially created. Now what to do with it?
Overcoming the Frugal Mindset
When I attended another financial community event, Roger Whitney’s Rock Retirement Club annual Roundup, I received further enlightenment on how to utilize my newly established Fun Bucket.
In a breakout session with Kevin Lyles entitled none other than “Overcoming Frugality,” he suggested that participants move the dial by allowing themselves to spend on small indulgences such as staying in a nicer hotel, hiring a house cleaner, or even flying first class.
The light bulb went on for me! This was exactly how I should use the Fun Bucket – spend on things I’d prefer not to do (house cleaning), upgrade to a better seat when flying or pick up the dinner check when out with friends. These are all things I have now done with my Fun Bucket.
Lately, now that I have become more comfortable with the idea of spending a little more freely, I have splurged on some memorable life experiences.
I recently read the book Die With Zero by Bill Perkins, which discusses the idea of enjoying the resources you have accumulated during your lifetime without regret. It also highlights the fact that there are certain seasons in life that are best suited for certain experiences when you have the health and ability to appreciate them most.
After losing my wife to cancer, this certainly resonated with me. I am now using the Fun Bucket resources to enjoy experiences with family and friends and create those lifetime “memory dividends” that Bill Perkins discusses in the book.
How Big is the Fun Bucket?
I get asked this question frequently when I mention this concept. For me, it was an amount equal to about 25% of my normal annual spending funded for a four year period. Once depleted, I plan to replenish it with a similar amount.
Having this amount specifically allocated for this purpose in a separate account – it is in a high yield saving account actually nicknamed “Fun Bucket” – has enabled me to use it for the intended purpose without hesitation. That’s what it’s for!
I have also found that a number of things that I have permitted myself to spend on, due to having this Fun Bucket, have actually fit within my normal spending pattern. However, had I not had that separate account, I would likely have not made the decision to spend on those experiences given my usual frugal mindset.
The Fun Bucket has reprogrammed my brain to adjust to this new phase in my journey – from the frugal / accumulation mindset, to getting more comfortable with spending during the distribution phase of life.
One quote that frequently comes to mind when I have challenges spending what I could without jeopardizing my financial plan’s success is:
“If you don’t spend it, your inheritors gladly will.”
Is There a Risk of Running Out of Money?
That is something I have thought about very carefully. In fact, I have come across a fantastic podcast called The Retirement and IRA Show that addresses this very concern.
They have a financial planning approach that is unique and substantially differs from the Safe Withdrawal approach to spending in retirement.
Stay tuned for a future post on this topic and an upcoming Catching Up to FI podcast interview I recently recorded with hosts Bill Yount and Becky Heptig outlining this in detail.