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.