Mickey On The High Seas Decision ⋆ XRAYVSN

Johanna’s Take:

Dr. Cindy Rella and her husband, PC, would love to treat their three young children (ages 8 and under) to a Disney cruise to Alaska in summer 2020.

Since good spots on these cruises fill quickly, we wanted to get this analysis completed in time to book the cabins they want – if they can afford to do so!

The positives:

· Military pension

· Significantly higher opportunity to save when the kids are all in school in 3 yrs.

· Low tax bracket (no state taxes)

· PC plans on a long career (I kept it to only 5 years past Cindy’s retirement age)

· Healthcare for life

· GI bill credits transferred to kids

· No debt

· High savings rate

· Almost $150k in emergency fund

The negatives:

· Relatively low income for a 2-income, 1 doctor family

· She’s not sure whether she can make it another 9 years but would work longer and make more if she leaves early.

We used the military retirement benefits for our projections.

· Low balance in savings

Assumptions (I will use conservative estimates wherever there is an uncertainty.)

· 6% average long-term returns on savings (assuming no emotional mistakes in upcoming bear markets and corrections)

o By my calculations, you will have close to $6M at 2nd retirement (I assumed 15% savings rate on PC’s income of ~$100k/yr) when we add the NPV of the pension (more below)

· Average inflation

· No more children

· You have plenty of appropriate life and LTDI in place.

· No divorce

· You invest in an appropriately-diversified portfolio and do not make any behavioral mistakes

· No private school tuition

· No significant financial assistance for other family members

· Reasonably good health

The Rellas have quite a bit less in savings than what I like to see at this stage of a doctor’s career – but they have no debt.

And they have an advantage most civilians lack: a pension plus health insurance for life if Dr. Cindy can stick with her military service for 9 more years.

The Net Present Value (NPV) of her pension of $74,233/yr beginning at age 45 adds another $1.2M to their current portfolio – which puts a heavy thumb on the scale of retirement security.

I did not consider college savings or the wedding in the above calculation as I believe they will have enough free cash flow to adequately fund these goals after the nanny is no longer needed and daycare decreases.

In addition, the out of pocket cost of weddings and college can be adjusted, if necessary.

The biggest concern I have at this point is survivor benefits.

If Cindy were to pass unexpectedly, PC could be in a difficult position unless Cindy has adequate life and Survivor Benefits in place.

SGLI provides up to $400k of life benefits, unless Cindy decided to reduce or cancel the policy.
SBP pays up to the full amount of pension benefits to the surviving spouse unless the pension recipient opts to reduce the policy (it’s not possible to cancel it).

· While these benefits are not free, they are both very important if the spouse is the primary breadwinner.

We’ve been talking all about retirement, but what about the Disney cruise?

Given that the Rellas are on track for early retirement, thanks to the military, and that they have already saved an adequate amount for the trip, with the above recommendations, I give them…

Xrayvsn’s Take:

Having just been on an absolutely amazing Disney Cruise myself this spring break, my eyes lit up when I saw this request on the docket.

Whenever mouse ears are involved you can certainly expect to pay a premium and a Disney Cruise is near the top of the Disney offerings in terms of expense.

I am keeping my fingers crossed and hope that our young military doc can indeed afford this experience for her and her family as it truly will be a memorable one if it is anything like mine.

One of the things that first jumped out at me was Dr. Rella’s dilemma about continuing her medical military career for 9 more years in order to receive the coveted pension and healthcare benefits awarded at 20 years of service.

I have previously written about golden handcuffs and it seems that these are some pretty substantial ones on Dr. Rella.

In that post I mentioned that medical benefits is indeed one of the biggest carrots out there (along with pension benefits) and it may indeed be worth it to serve 9 more years to obtain them.

I am hoping the good doctor can extend her military career 9 more years and have thus based my opinion on her reaching these financial rewards.

Dr. Rella is way ahead of where I was at that stage as I was still heavily in debt (with a negative net worth of around $845k at the age of 36).

The fact that her family is debt free is remarkable and further highlights some of the benefits of a military career in medicine.

Now on to the financials…

This experience will cost $20k, taken directly from her savings of $149k, leaving a balance of $129k.

Given her current $140k annual living expenses, this still leaves a healthy 11 month emergency fund buffer.

Assuming that she can make it to the coveted 20 year mark of military service, the pension of $74k/year will be a HUGE safety net going forward.

Given the desired $100k/year spending allowance in retirement means that non-military income sources only need to provide an additional $26k/year.

Thus at retirement this family requires just $650k of income producing assets to hit this mark (using the 4% safe withdrawal guideline).

Given that Dr. Rella already has retirement and brokerage assets exceeding this value ($716k) means that any additional savings moving forward will only increase the margin of safety for retirement as well as give the ability to just cash flow her desired additional expenses such as wedding contributions for her kids.

I do agree with Johanna that Dr. Rella needs to have adequate life and disability insurance in place to provide adequate protection for her family in case the unexpected or unthinkable happens.

The Decision:

Johanna: Thumbs up – and a hearty thank you for your service

Xrayvsn: A salute and thumbs up. Thank you for your service.