If you've read this or any other physician finance blog, odds are you've encountered Gasem. He is a retired anesthesiologist, a prolific writer with guest posts spanning the blogosphere, and his ubiquity and depth as a commentator has few rivals.
Gasem now has his own blog at MD on FI/RE, where this piece was originally published, but he kindly permitted me to re-post his riposte to my post.
One of the great pleasures of blogging is connecting with peers and mentors and following ideas that germinate from the ensuing cross-pollination of ideas. This post evolved from the blow-and-parry of one such post-and-comment.
To provide a brief context, everyone and their mother seems to be adopting variations of intermittent fasting as a means of portion control, metabolic conditioning and fitness enhancement. To perform intermittent fasting, one shortens the duration of hours during which one is permitted to eat - for example, one might restrict feeding from noon to 8pm.
Gasem rocked my world by revealing that he had performed what I'd consider to be the financial equivalent as preparation for his pending retirement - he'd voluntarily restricted his spending in order to feel firsthand what it would be like to live on a budget that covered bare essentials without any extras.
Here's his experience with financial intermittent fasting:
I wrote a response to a blog post over on Crispy Doc's site regarding disability insurance. Going out on disability is the equivalent of retiring. If you’re disabled your addition of human capital to your situation ceases. What you have is what you got.
In my working life I never budgeted. I had a vague idea of my expenses but my money mostly went into investing. I wasn’t frugal in the least but I was always parsimonious in my dealings. If I wanted a new car I bought a new car and I figured out the best deal at the time from available options.
When I retired I had no real clue about how to budget. At the point of retirement you move from accumulation to spend down. Numbers plucked from thin air are plucked from thin air and may or may not have a basis in the reality of your need. In my case I had 2 kids in college and a trip to Europe planned and I knew I would need a new air conditioner within a year.
I also wanted to start retirement with a new car, so before I pulled the trigger I made sure all of those expenses were accounted for. All of that came off like clock work. I still have 1 kid in college but its completely funded and doesn’t affect my monthly expense. I also am Roth converting and needed to cover that seperately.
What I needed was a number to plan around that had some basis in reality. I could easily afford 10K/mo. If you believe FireCalc I could afford more like 14K/mo. I don’t put much stock in FireCalc but it gave me a place to start. So I chose 10K/mo and pulled the trigger. It’s like prunes is 6 enough? Is 12 too many? 10K turned out to be a good bet for a budget ceiling.
To track my expenses I created a Mint account. My Mint account tracks my main credit card and my bank account. Bills get paid out of the bank (some direct deposit) and the credit card gets paid off each month out of the bank account. Mint allows a data export of a CVS file which I download and import to a spread sheet.
The data therefore is down to “purchase specific” data. I effectively can track every cent. My wife pays her credit cards in the same way but I don’t track her purchases just her payments. I don’t care what she buys I just need some idea of how much over the course of a year.
The CVS file shows debits and credits so I take the list and anything that’s a debit is a positive. Everything that is a credit I set negative by hand. There are always some credits but debits overwhelm. I then Autosum the list and that’s how much I spend in a month.
I can track partial months, and I can track averages. I can see what months are expensive months, typically when insurance or taxes come due. Once the system was devised it was all I needed. Over the course of 2 years my monthly settled down to 8500/mo on the average, with some months peaking as high as 12K no big deal. Some months are 6500 so I use the excess saved in the 6500 months to pay for the 12K months.
I now know where my money goes 100% I track things like quarterly tax payments separately. My taxes are a function of my Roth conversions and can be quite variable but it’s always handy to know what’s been paid when it comes to calculating what will need to be paid.
In the first instance people retire on their number and have some notion they will tighten their belts if it hits the fan but unless you actually tighten your belt you don’t know how that feels. This system allows you to easily test what tighten your belt feels like. You simply cut back till it starts to hurt and live like that for a while.
I ran that experiment with my wife’s permission. After a while we had a clear idea of subsistence spending as well. Subsistence for my lifestyle is about 7000/mo. That pays my obligations. I am thus far always below the 10K ceiling I imposed on myself so we have room to grow as necessary.
Knowledge is power and this is real knowledge. It is from this real knowledge I’ve been able to project the future and build in the proper safety come rain or come shine.
A few take home points on a brilliant and, to my knowledge, novel approach to retirement:
- No physician would encourage an aspiring undergraduate to apply to medical school without some modicum of clinical experience, because it would be naive to make such a profound career decision without the experience to know you can pull it off.
- Many high-income professionals feel they could tighten the belt and reduce expenses if sequence of returns risk caused their portfolio value to drop at retirement, but they have never tested their hypothesis.
- Gasem cut spending until it hurt to determine his core level of expenses. Then he tracked every penny for two years. He found that he could live on a budget despite never having needed one previously. He also learned how to predict high expense months (taxes, insurance) and apply savings from low expense months to smooth the ride.
- Limiting spending for a year or two to practice financial intermittent fasting is a form of conditioning yourself for the retirement marathon. If the hill turns out to be steeper than you'd anticipated, you'll adapt more easily to your new reality.
- Some fellow finance geeks may feel tempted to conduct this experiment unilaterally, without obtaining the consent of a partner. This is not the time to let enthusiasm run roughshod over collaboration. Explaining your rationale and framing this test as a form of concern for your partner's financial well-being in retirement is key.
- As a final note Gasem was kind enough to provide a tutorial on how to create a budget spreadsheet, which you can access here.
Comments 10
What is it Dirty Harry Callahan said as he pointed his blue steel .44 Magnum in some punks face? “A man’s gotta know his limitations”. Tnx for the “riposte” hope folks enjoy it
I’m glad you helped spread knowledge on Gasem’s blog and work CD.
I love his analysis because it goes outside of my wheelhouse (I am more of a “fluff piece” writer myself, LOL. Whereas Gasem imparts great financial knowledge with all sorts of math analysis.
I had 3 questions.
1) cost and type of healthcare you carry? Apparently not on medicare
2) any passive cash flow income (other than portfolio?)
3) as we’re anonymous here, and because the calculator is a bit complex for me: what is the approx size of the portfolio?
10k seems very small to me.
I am 67 and on Medicare. My wife is younger and I have a daughter in college still at home, and they carry a Liberty Healthshare policy. My other daughter lives in KS in grad school and carries her own Healthshare policy. with healthshare some things are not covered like pre-existings or mental health but if your healthy you can be rewarded for that. It covers stuff like broken bones and surgery xeays and the like. If you’re interested you can check em out. I’m satisfied.
I live entirely off my portfolio. My portfolio is extensive and I’ve spent a great deal of time and investment in optimizing it for safety longevity and tax efficiency. I use Roth as a form of self insurance and a ready source should the “bad diagnosis” occur like cancer or NDD. The stats are 1/3 will get some kind of cancer in their lives and of the 1 20% will be fatal. That means 80% live. On the average of the people that live 40% will go bankrupt in 4 years treating their disease. NDD like Alzheimers has an incidence of 1/10 at age 65 rising to 1/3 at 85. The average longevity of that disease is 12 years post diagnosis though some live longer and generally leads of some kind of memory care facility. If you are married there is a pretty good chance at least 1 if not both will have a brush with something like this. The advantage of the Roth is it grows tax free and if you just let it grow a lot of money comes available in case of disaster.
My portfolio is divided other wise into classes of accounts, TIRA, Brokerage, and cash. TIRA holds a portfolio of 20/80 stocks to bonds which gives the best return for the least risk. I cleaned out the TIRA and into the Roth all but 500K. I also will take SS but not till 70. The small TIRA plus SS will give me about 60K income and slowly grow because of the 20/80 AA This keeps me in the 12% bracket for a long time, my calculation is for 2 decades. If I had a 80/20 allocation the growth would kick me to 22% in 5 years. At 12% capital gains on the brokerage is 0%. When you get to 22% cap gains on stock you sell rises to 15% so it’s to the advantage to basically turn the TIRA into a annuity that pays you the RMD amount every year. The RMD amount is progressive so there is no way to control the WR. It goes up every year. It starts at 3.56% by the 10th year is over 5% and by the 20th year is over 8% so that’s the WR for that aspect of your portfolio set by the government. It’s the cost of the “MAX OUT YOUR PRETAX” mantra and the government is counting on you to fund their needs with those “pre-tax” accounts. As the income goes up the taxes go up. If a spouse dies the taxes go up. If a spouse dies you loose 1 SS payment as well and they got you (or her) by the short ones. So my post RMD income is SS + RMD + some brokerage which I can sell at 0% cap gains and stay in the 12% bracket. My disbursement schedule is designed to last 20 years and I calculate my retirement will cost about 2.6M for those 20 years. After 10 years in the Roth will be big enough to support some withdrawal up to about 2.5% for buying a car or something.
I realized about the “MAX OUT YOUR PRETAX” gimmick at age 50 so I aggressively invested in the brokerage which is quite large. I also tax loss harvested along the way so I can take money out of the brokerage tax free almost like a Roth. My Roth conversion strategy is to pull out 250K/yr from the TIRA while living on cash. 250K avoids all the surtaxes and games the government plays so overall the taxes of conversion is smaller compared to converting to the top of the 24% bracket. To convert I sold 600K in stock tax free, which gave me about 5 years of living expense while I Roth convert. All of my taxes go to pay for conversion which makes conversion very cheap. Since I’m living on cash my brokerage account is closed to withdrawal and it sits there and grows awaiting my need in the future. My Roth continues to grow while my TIRA dwindles to the 500K level to be an annuity when I finally pull the trigger. There is a bill about to be passed by congress called the SECURE act which will extend the age of RMD to 72 meaning you have 2 more years of Roth conversion possible. You can either convert at the 250K level and get more out of the TIRA or you can convert a smaller amount and pay less taxes. For me I’m converting aggressively from now till 70 when SS kicks in and I will have the majority of my conversion done by then so I can convert the smaller amounts to fill out the 250K. At 73 everything will be converted and funded, my wife will be completely covered no matter when I kick the bucket. The SECURE act will force an accelerated sale of assets to your heirs to a 10 year period. Another sneaky way to soak the rich. 10 years means a bigger tax bill for your heirs. The point of this is you can actually quantitate your future and through that optimize the situation for yourself as opposed to letting the government “optimize” for themselves. The tax code is written to soak the rich despite all the “fair share” arguments.
I came up with 10K by actually creating an accurate budgeting method. 10K for my needs is adequate. Personal Capital claims I can take out closer to 20K/mo and still have a 99% chance of success even if we experience bad times for the next 20 years. I have no need for “passive income or side gigs”. I spent 30 years running a business as well as practicing medicine and being a tycoon hold no interest for me. I got plenty of money, more than I can spend and don’t need to waste my time making more. My future is not leveraged meaning I don’t have to over risk my future. If things go average I will die with 2-3 million more than when I retired. If things go bad for 20 years (10% Monte Carlo line) I will die with a couple million less than I retired on but still plenty to send to the kids.
7.5 prunes is the number for me. Cutting them in half may be questionable, but a necessity.
An expense fast seems like a great idea particularly for those on the high income/expense side of things. It might also help prep a spouse understand what things might look like when things get tight. Are you on traditional Medicare?
Max
Yea and a AARP supplemental. I went with the supplemental as opposed to the HMO since the supplemental is portable and United Healthcare is pretty much accepted by everyone. It turns out if you have a HSA you can use that as a means to pay for Medicare but not the supplemental. So my wife and I have a couple decades of Medicare payments in the HSA, which comes out tax free. It’s like a Medicare annuity.
I always love reading Gasem’s comments, so this was a fun blog to read. I track our expenses every month but do it all by hand and have gotten it down to taking about an hour a month. It’s the one of the most educational hour for me every month 😉
BC look at my spreadsheet tacked on to the end of the article. I can get you down to 5 min a month. I check twice a month. Your words are very kind.
Nice contribution, and nice site, Gasem. I’m liking the numerical analysis and Monte Carlo simulations.
— TDD
TU for the kind words TDD and enjoy!