The Doctor's Bill: My Golden Handcuffs Verdict ⋆ XRAYVSN

Johanna’s Take:

How should you value golden handcuffs?

Is it worth forgoing a $200k bonus for an extra two years of “freedom”?

I was really excited to get this submission because it is a dilemma many corporate executives and HNW [High Net Worth] professionals struggle with.

XRAYVSN has even written about his situation.

After all, $200k sounds like an awful lot of money – because it is an awful lot of money.

It’s ½ year’s salary for Mr. Health Executive (“HE”).

On the other hand, how do you put a price tag on two bonus years of retirement – not tagged on at the end of your life, but at the very beginning, while you’re in your prime?

If you had a terminal illness and you were FI, I think it would be easy: no amount of money could buy the extra time with your family and doing things you love.

But in this case, it appears that is not a factor in our health executive’s decision.

He just wants to know if he would be crazy to stop working only two years from his arbitrary “finish line”.

Of course, in some ways, this is a very subjective decision.

Many professionals love their work and a bonus at the end is only gravy.

And then, there are those who count the days, hours, and minutes until they are liberated.

I’m thinking our applicant may find himself in the latter camp.

So, is this an easy decision – or not?

Let’s take a look.

The positives:

* A respectable $3.7M net worth

* A $50k/yr inflation-adjusted pension. I’m valuing this as an additional asset on top of the “hard” assets, calculated at a straight $50k/yr over a 92-yr life expectancy. Thus, a value of $1.6M if he retires at age 60, $1.5M at age 62.

* Mortgage-free rental property returning 6%/yr

* Free health care? Priceless.

* Children are grown and on their own

The negatives:

* A car loan at 58 and you’re worrying about the mortgage? Seriously?

* At 58 and on a $400k/yr salary, I expected to see a little more saved, but this is tempered by the pension and free health care.

* Not really a negative but need to seriously increase emergency fund at retirement.

Assumptions (I 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)

* Average inflation

* You live to 92

* No future long-term nursing home needs

* No dependents (other than spouse)

* No divorce

* No significant financial assistance for other family members

Let’s get numerical:

* Our exec has a net worth of ~ $3.7M

* Assuming 6% annual returns (Which should never be “assumed” in the short term – this is only for comparison purposes.):

o The value of his portfolio would be ~$5.236M at age 60 (again, including an assigned value of $1.6M as the PV of his inflation-adjusted pension) and would grow to ~$5.585M with growth at age 62 (not assigning any “growth” to the PV of pension).

o The value of his portfolio would be ~$6.052M at age 62 (assigning a value of $1.5M as the PV of his inflation-adjusted pension). This includes additional retirement contributions of $120k/yr for 2 years.

Now let’s look at the net effect of working 2 extra years for a $200k bonus (after taxes)

If he retires at 60, Mr. HE will begin receiving his pension of $50k/yr 2 years earlier.

I’m going to assume a 30% tax bracket (state and federal) in retirement, or $70k net.

When we offset the $200k net bonus by $70k net pension, this brings our “net-net” bonus to $130k.

I haven’t taken the additional Medicare taxes (which will be zero on the pension) into effect, which would reduce the bonus even further!

Additional commentary:

I find it interesting that Mr. HE is focused on the mortgage.

Many people consider themselves to have failed if they aren’t shed of their debt by retirement.

But is that really so?

What is a mortgage but leverage on assets?

To look at it any other way brings emotion into the calculation and, as I like to say, combining emotion and money are like putting a lit match to gasoline.

The results are rarely optimal.

(Note – same could be said for the car loan, so a zero-rate loan would get a pass from me, even though on a highly depreciating asset.)

So, could Mr. HE justify liquidating investments to pay down an (estimated) 3.5% mortgage just because he is now receiving a pension instead of a paycheck?

Just putting that out there for you to chew on.

Mr. HE wants to know if he will be able to achieve his $150k/yr retirement.

After the $50k pension and without even considering rents of $25k/yr, that leaves him with an annual withdrawal of 2.75% from a growing portfolio, which should be easily achievable.

Given that he is giving up golden handcuffs that net to, at most, $130k, what would you do?

Xrayvsn’s Take:

I will admit that my eyes lit up when I saw this particular submission come into my email as a potential Doctor’s Bill case.

As Johanna mentioned, I have written a post about my own Golden Handcuffs and will face a similar dilemma when my planned milestone of financial freedom will likely be 2-3 years shy of my last vesting handcuff (20 year employment).

When I analyzed the financials submitted, there were some highly prized assets that stood out:

Free healthcare for life
Inflation indexed pension of $50k/yr

To have a guaranteed income floor of $50k/yr inflation adjusted is indeed a luxury and ensures that regardless of what is happening to the stock market the belt doesn’t have to be tightened as much as others without this benefit.

Eliminating the worry of rising healthcare costs bring a ton of financial peace of mind. (So much so that if the question instead was should I stay an extra 2 years for lifetime free healthcare I would wholeheartedly endorse the decision to stay on.)

I confess, I did not even think to factor in the true financial difference of staying on two years with regards to the $200k golden handcuff.

As Johanna broke it down, this boils down to a true net bonus of 130k if staying on the extra 2 years.

This is a little more palatable to walk away from than the perceived $200k initial enticement.

[Of course there is the financial benefit of an extra 2 years of base salary to pad the nest egg but this particular exercise aims to look only at whether the bonus amount is worth staying for.]

With a projected portfolio supporting the $150k/year desired annual spending at less than 3%/yr withdrawal puts this submitter in the Fat FIRE range and eliminates the need to be bound by these golden handcuffs.

THE DECISION: