Your Military Money

Thank you Blogger!

2013-04-02T04:07:00.002-07:00

I've relocated this blog to Yourmilitarymoney.com. I'd like to thank Blogger for four years of hosting this site. It was a great experience but it was time to move to the next level.

If you're a regular reader, please consider following me to the new location.

Roth TSP Limitations

2013-03-21T05:26:00.002-07:00

If you've deployed in the last 10 years to a combat zone you probably made some TSP contributions that were tax exempt. About 10% of my own TSP balance today is tax exempt. Earnings from that portion of my portfolio will be taxed as ordinary income when I take them out. If I could move the tax exempt portion to the Roth TSP, however, the earnings might grow tax free. That's very attractive, particularly for military members still on active duty.

Unfortunately it isn't possible at this time. I spoke with a the TSP representative yesterday who informed me that today there isn't an option to convert traditional TSP contributions to Roth TSP. She advised me to continue to monitor the TSP website for updates and changes.

This brings us to the point of this article. I previously commented about contributing to a Roth IRA compared to the Roth TSP. In most cases you'll have more flexibility with the IRA.

NOTE: IRS Pub 590 reminds us that your traditional or Roth IRA contributions are limited to the taxable compensation for the year or $5,500 ($6,500 if 50 years old and older) whichever is lower (corrected per comment by Jonathan). Congress recognized that if you are deployed for the entire year you might not have any taxable compensation, so they passed legislation that still allows you to contribute to either a Roth of Traditional IRA. (See IRS.gov "Miscellaneous Provisions — Combat Zone Service" question 34 for the explanation.

Markets Break New Records: Time to Rebalance Your TSP?

2013-03-10T11:01:00.001-07:00

If you've been following the stock market for the past two weeks you already know that we're at all time highs on the Dow Jones Industrial Average. If you've been fully invested in the C-Fund in your TSP account, you might be asking yourself if you should take some profits at this level, or as Ray Lucia would say, "Scrape off some cream."

This may very well be a "be fearful when everyone else is greedy" moment, to quote Warren Buffett, but on the other hand, we don't really know what the future will hold.

Short term I thinks it's likely that we'll see institutional investors do some profit harvesting at these levels, and offset gains with sales of some of their dogs for tax purposes. That mean some volatility for the markets in general, usually a good thing for those who dollar cost average.

One line of thinking suggests that you set a semi-annual or annual goal for your portfolio, say 8%, and if your returns exceed this target you sell shares to the point that the stock portfolio has the target value. In years where your portfolio lags your target, you add money to it to bring it as close to the growth target as possible. This is value averaging.

Value averaging works great if you have a sufficient cash reserve to backstop the portfolio in lean times. If, for example, You started contributing to your C-Fund in the TSP in 2002 and added $5,000 per year. By March 2007 you had steady and significant growth at or above the 8% target, but in 2008 you saw a decline of 38%. You would have had to have had about as much in your G-Fund, your cash fund essentially, to bring your balance up to the 8% target. In 2009-2012 you would have sold C-fund shares each year to reduce the growth to 8%, restocking your G-Fund for future lean years.

Or...

You can remain fully invested. I think this makes a lot of sense for those of us who are more than 15 years from retirement. The reason, as Mr. Lucia states so frequently on his podcast, is that there has never been a 15-year time period where the S&P 500 has lost money.

If you are a younger military member still with years ahead of you I believe that you can assume more risk than what you'll find the Value-Averaging model. It's also more simple, a set it and forget it process. There is still room for rebalancing to prevent becoming over-weighted in any one area (your C-Fund bulges while your I-Fund deflates) but this should be done very periodically, say once per year. Let your winners run.

Max Out Your TSP in 2013

2013-01-03T04:49:00.002-08:00

For the fourth year in a row we've calculated the required percentage of your military pay to max out your TSP. Here's the link.

Here's how you use it. In this example, a Major (O-4) with more than 18 years of service would go to MyPay.gov, select the TSP link, and select 20% as their monthly contribution.

Similarly, a Lieutenant Colonel with 16 years of service would contribute 18% of their base pay to max out their TSP for the year.

The contribution limit for 2013 is $17,500 for those under 50, and an additional $5,500 for older military members.

5 Financial Moves for Military Families to Make in New Year

2012-12-29T07:41:00.003-08:00

: angela7dreams / Foter / CC BY-NC

With New Years just around the corner it's a great time to set goals and re-evaluate your financial plan. Here are five financial moves military families should consider making right now.

Take the 8% Challenge. This is a great way to increase your emergency fund and prepare for life's eventual events. Simply save 8% of your pay each month in a savings account. At the end of the year you'll have a month's worth of take-home pay in the bank. After a three year assignment you'll have a fully funded emergency fund.
Open a ROTH IRA. If you don't have a ROTH IRA account, take your annual pay increase and deposit that directly into the account. ROTH IRAs are not the same as ROTH TSP accounts. You have more flexibility and access to your money in the IRA version.
Re-balance your TSP savings. If you have a TSP account, the beginning of a new year is a great time to examine your accounts and determine if your money is allocated properly. One easy way to re-balance is to invest in the lifestyle funds.
Update your will. If your circumstances have changed significantly in the past year, like a marriage, divorce, new baby, or change in state of residence, it's a great time to make an appointment with the legal office to update your will. While you're at it, update your power of attorney too.
Set a goal for your financial life. Make the goal specific and achievable. The best goals are based on factors completely under your control such as increasing savings as a percentage of your income, or reducing debts by a dollar value each month. After setting the goal, set up automatic withdrawals to put your financial life on what David Bach describes as "autopilot."

If you have questions, please let us know. Good luck in the New Year!

Get Ready for a Pay Raise

2012-10-20T05:43:00.000-07:00

According to Government Executive magazine, military members will see a 1.7% increase in their paychecks in January 2013. While some may argue that this lags the true rate of inflation, it will provide some much needed cashflow in the new year.

What should you do with this raise? This site will always recommend that you add it to your retirement nest egg, beginning with your ROTH IRA until maxed out, then to your TSP and finally to your taxable investment accounts.

Expanding Civilian Job Certifications for Military Veterans

2012-06-10T21:34:00.001-07:00

http://www.defense.gov/news/newsarticle.aspx?id=116587

10 Tips Military Members Miss

2012-06-03T06:42:00.000-07:00

Robert Powell is a frequent contributor to MarketWatch.com, a favorite resource for YMM. In his article, "10 Overlooked Retirement Tips" he offers differing views on various retirement savings techniques. Here we examine 10 more techniques for military members, some that might be misunderstood and that create paralysis of action, preventing you from achieving your early retirement goals because you are afraid that they are not reachable.

1. The 8% rule. A key foundation to planning is a safe and secure emergency fund. The first tier is a three-months stash of ready cash. That is, three months of your budgeted expenses put somewhere you can get to it in an emergency. Emergencies could be a delayed military pay-day (it's happened only once in my career, but it can happen!), an unexpected bill, or Hurricane Katrina! By saving 8% of your pay each month you can put away your emergency fund in three years.

2. Max out your ROTH IRA before you save in your TSP account. ROTH IRAs have lots of attractive features that give you flexibility that the TSP, even with the ROTH option, doesn't have. For example, while you can't take a loan out against your ROTH account, you can withdraw your contributions at any time without tax or penalty. Only your gains must remain in your account until age 59 1/2.

3. Watch the fees. Banks have generated billions of dollars in profit by simply changing us fees to use our own money. Consider USAA Savings Banks or military related Credit Unions to reduce or eliminate fees. Also, keep track of your bills to avoid unnecessary late fees. Consider allowing auto-payments of your regular bills to avoid fees, particularly when you are traveling or deployed.

4. Get a second quote...on everything. Whether you are buying furniture or financing your new home, get a second quote. This is particularly useful for home improvements where a second quote will either validate the first one or catch a contractor trying to gouge you because you look and act like a sucker.

5. Don't skimp on insurance. If you are driving a new car it's likely that you owe more on it than the car is worth. If you don't pay a little extra to cover that gap, in an accident that isn't even your fault, you could end up making payments on a car that you don't even own! When it comes to life insurance, if you're married with children your SGLI will likely not be enough to provide your family with everything they need if something happens to you. Consider doubling the coverage you have. You'll be surprised how little that will cost.

6. Buy the car you want now...in 3-4 years. To prevent going upside down on your car (owing more on it than it's worth) consider buying a used car the next time around. Compare a 2012 Mustang with a 2008 version. According to Kelly Blue Book, the fair price for the new car is $21,645. The used version, similarly equipped, is $13,549 in very good condition. You save $8,000. Put $2,000 away for repairs, and you're still $6,000 ahead.

7. Save 15% of your pay for retirement. This is the simplest rule of thumb, but can sometimes seem like the most difficult to achieve. The key is to take this off the top, before spending anything else. If you've loaded yourself up with debts and then try to save this money it becomes much more difficult.

8. When planning your retirement location, consider the taxes. Most of us know that Texas doesn't have income tax. Did you know, however, that property tax there is very high? RetirementLiving.com is a great resource to research areas of the country where the total tax rates are the lowest.

9. Your post-retirement health care costs are minimized in military towns. You'll likely continue to depend on Tricare long after you hang up your uniform. Health care providers in military towns are familiar with Tricare procedures because they depend on them for a large amount of their revenue. In addition, you may find that military treatment facilities have space available for you to be seen there.

10. When creating a retirement fund asset allocation, remember that your retiree benefits are fixed assets with very low risk, on par with Treasury Bills. Many veterans build their investment portfolios without considering their retirement pay as an asset. This is likely their most valuable asset, however, an inflation protected monthly income secured by the US Goverment. Your retirement savings, therefore, can be aggessively invested in stock mutual funds, including international funds. The younger you are the better these investments look. The fluctuations you see today in the stock market are perfect for long term investors since they'll buy more shares when the prices are low and fewer when the prices are high.

Buy or Rent?

2012-04-04T05:12:00.001-07:00

A recent article in the Air Force Times newspaper discussed the topic of whether military members should buy or rent a home following a PCS move. With the summer move cycle upon us, many active duty service members are considering the options now. The desire to own the home you live in is a strong one. We've owned four homes over the years and the experience has been generally good, but also with a significant amount of emotion and, at times, stress as all of us can imagine.

Noted radio talk show host Dave Ramsey often hears from military couples (often the non-military and female spouse of an active duty member) saying that they've PCS'd and either have a vacant home at their last duty station or are renting their home. With real estate resales at record lows, we are currently in a buyers market and for some military members who want to sell, their homes linger on the market well after their "Report Not Later Than" date. Mr. Ramsey almost always uses these opportunities to urge military families not to buy since they will not be able to recoup their aquisition costs (loan fees, real estate broker expenses, and prep-for-sale costs such as repairs and painting).

On the other hand, if you are a buyer now may be a singular opportunity to maximize your housing allowance. If you will likely be in your destination base for a minimum of three years, now just might be the time to buy instead of renting.

So, how do you decide? A good way to start is to pre-qualify for a mortgage. There isn't much point to getting all worked up about buying a house only to find out that you cannot get a mortgage or can't get one sufficient to buy in the market you're assigned to.

Once that hurdle is passed, and now that you have an idea about the size of the mortgage you can get, take a look at the base allowance for quarters (BAH) for your next duty station. (You can find it at http://www.defensetravel.dod.mil/site/bahCalc.cfm.) By keeping your mortgage payment, including taxes and insurance, as close to your allowable BAH you'll ensure that you'll be able to afford the home, and if you become a landlord in the future, that your potential military tenant will also be able to cover most of your expenses.

Next, you've got to have some money set aside for purchase expenses. Some people will take military pay advances related to their PCS to help defray these costs, but it's not the best choice. The very best option is to plan ahead, perhaps using the 8% solution we've talked about earlier. Using this method you save 8% of your net pay every month. In a three year assignment you'll save three months net pay, which should be the minimum you have set aside when you decide to buy.

You've probably heard the top three criteria for real estate. Location, location, location. It couldn't be more true for military members. We want to be close enough to minimize the drive to work, without so much jet noise that is keeps the kids up at night. We also want to be close to good schools, shopping, restaurants, and for some, nightlife.

After the desired locations are mapped out, you can create your wish list. Number of bedrooms, size of yard, garage spaces, bathrooms, custom kitchens, media rooms; some or all of these may be important to you, but they'll all have to be tailored to your budget and your priorities. We compromised on commute for schools on more than one occasion, and we didn't always get the room sizes that we hoped for. We also had laminate countertops when all our friends had smaller yards and granite. For each, it's a decision about what's important and what's not as important.

One "advantage" of buying is that you can often tie up a house months before the PCS date, allowing you to work towards a door-to-door move. I put "advantage" in quotes because it's also a long-odds bet that everything will get done on time and that the keys will be in your hands when you need them. And, how many of us have had our orders changed at the last minute. To have a home purchased in a city (or country!) you don't live in could definitely maximize the stress level at home.

Our personal experiences have been that home ownership has been a financially break-even activity. Our housing expenses have exceeded our BAH when all costs are factored in, but we had a level of freedom that we appreciated.

In our "simple plan for military families" we suggest that members purchase a home only after five years of saving and personal growth. After that, you'll be positioned personally and financially to make a good decision about owning a home. We suggest purchasing that home on a 15 year mortgage and buying using the techniques described above. WIth today's interest rates on a 15 year mortgage, and with the inventory available in most markets, you'll get a lot more for your money.

We invite you to comment on these ideas whether you agree or disagree. What have your homeownership experiences been like?

Roth TSP or Roth IRA

2012-03-17T08:17:00.004-07:00

Now that the official announcement is out regarding the ROTH TSP accounts, it's time to evaluate the options. First, review the details.

ROTH TSP:

Contributions are post-tax
No income limitations for ROTH TSP contributions
Contribution limits are $17,000 for taxpayers younger than 50 years (plus $5,500 catch up if older than 50)
Earnings are tax free if account is held open 5 or more year and the taxpayer is over age 59 1/2 at the time of the distributions
You can take out TSP loans up to 50% of your balance, up to a limit of $50,000

ROTH IRA:

Contributions are post-tax
Income limitation to contribute to a ROTH IRA: Single $110,000, (with decreasing eligible contributions up to $125,000; Married $173,000 (with decreasing eligible contributions up to $183,000.)
Contribution limit is $5,000/$6,000 for those 50+
Earnings are tax free if account is held open 5 or more year and the taxpayer is over age 59 1/2 at the time of the distribution
Contributions can be withdrawn at anytime without penalty
You cannot borrow against your ROTH IRA

So, while the ROTH TSP option allows all of us to contribute up to the limit regardless of income, the ROTH IRA gives you some added flexibility, particularly the ability to make withdrawals of contributions.

So, now to the decision, should you contribute to one or the other or neither. For those who are in the 15% tax bracket (single taxpayers earning 8,700 – $35,350 or married filing jointly (MFJ) earning $17,400 – $70,700) you're best bet is likely to fully fund the ROTH IRA, then begin contributing to the ROTH TSP. For those in the 25% bracket (single $35,350 – $85,650 or MFJ $70,700 – $142,700) you can fully fund your deductible conventional TSP and have tax savings of enough to almost fully fund a ROTH IRA ($17,000 * 25% = $4250 tax savings). It's also likely that you'll be in a lower bracket at retirement.

In the end, the ROTH IRA remains our top choice for flexibility and tax free growth. The ROTH TSP is a great option for lower income military members, and for those who have large amounts of tax free earnings from deployments. For higher income military members we recommend a combination of deductible TSP and ROTH IRA for tax savings and flexibility.

- Thanks to http://www.taxbrackets2012.com/ for the bracket breakdowns.

In Consideration of Living Abroad

2012-01-24T02:55:00.000-08:00

Photo Credit: Dreamstime.com

The popularity of HGTV's House Hunter International program demonstrates that Americans are at least intrigued with the idea of living abroad. The images of beach-side hideaways and cobblestone streets are appealing, and all the real estate agents speak English without an accent.

Marketwatch published an article about the world's top 10 retirement locations. They go from Asia to Europe to South America. Each location offers something completely different than the American model of retirement. Here you may still be able to golf, but you're probably not going to do it every day.

Probably the best advice that you can get is that if you are considering an overseas lifestyle that you remember to be flexible, adapt to the local surroundings, and not expect to have things look, smell, or taste the way they do "back home."

Postscript: The Peace Corps recently withdrew 150 volunteers from Honduras due to a lack of local security. This suggests that Americans spending extended stays outside the country should continue to monitor US State Department travelers advisories and be prepared to move if conditions deteriorate.

New Raise...Keep It

2012-01-15T04:01:00.001-08:00

If you're an active duty military member, you just received your first paycheck for 2012. Like me you saw a raise of 1.6%. If you haven't already done so, consider contributing this increase to your personal savings program, whether that's your TSP, a ROTH IRA, or just a savings account. Over time this process of increasing your savings will lead to big improvements in your overall wealth building capability.

I have posted previously about the 8% challenge. This technique allows you to save a month's pay per year. Over a three year assignment, you can create a 3 month emergency fund that will anchor your financial life as you prepare for your next move, whether that's to a new duty station, discharge, or retirement.

Perhaps this is the year that you get on the 8% Solution, and the Government will get you started with the first 1.6%.

Happy New Year,

YMM

Max Out Your TSP in 2012

2011-12-03T06:14:00.000-08:00

We've just updated the "Max Out Your TSP" table for the proposed 1.6% military active duty pay increase for 2012. Here's the link.

Here's how you use it. In this example, a Major (O-4) with more than 18 years of service would go to MyPay.gov, select the TSP link, and select 19.8% as their monthly contribution.

Similarly, a Lieutenant Colonel with 16 years of service would contribute 18.2% of their base pay to max out their TSP for the year.

Here are a couple of notes. First, this table assumes that the Congress will approve the 1.6% increase and that the President will sign the bill into law. Second, it assumes that you will want to max out the TSP at $17,000 for the year. If you are older than 50 the max contribution is $22,500. This table does not account for the extra $5,500 catch up provision.

TSP Limit for 2012

2011-12-01T08:45:00.001-08:00

Internal Revenue Code (IRC) 2012 contribution limits — You can contribute up to $17,000 in tax-deferred money to the TSP in 2012. If you are a member of the uniformed services, you can contribute a total of $50,000 in tax-deferred and tax-exempt money. If you will be age 50 or over in 2012, you can also contribute up to $5,500 in additional "catch-up" contributions, as long as your regular contributions for the year are expected to reach the $17,000 limit. (The catch-up contribution limit has not changed from 2011.)

Source: TSP.gov

SBP DIC Offset Headlines Making Headlines

2011-11-25T05:18:00.000-08:00

If you're a military member now or a disabled retiree you have probably been watching the recent headlines about spouses of now deceased veterans having to remarry to collect benefits.

First, let's think about the Government's intent. The intent is to provide every surviving spouse a stipend in the event of a military member on active duty or suffering a duty related disability.

The minimum benefit from the VA is the Disability and Indemnity Compensation, or DIC.

For those military members who elected to pay premiums for the Survivor Benefit Program and retired due to a duty related disability, their SBP is offset by the DIC dollar for dollar. If the DIC payment exceeds the SBP benefit, then they receive only the DIC and the SBP premiums are refunded.

There is a loophole, however, that allows surviving spouses aged 57 and older who remarry to collect both benefits concurrently. The Military Officers' Association of America did the best job of explaining this situation.

There are a number of Veterans Associations who are lobbying Congress to eliminate the offset and allow surviving spouses to receive both the DIC and the SBP benefits. This will be a challenge in a shrinking budgetary environment, however noble the cause might seem.

The important thing for military members to consider is to protect their spouses from the worst possible situation. Plan on SBP or offset it with life insurance and the DIC if you have a service related disability. Don't count on any change to the current policy (except the possible end of the dual payment option for remarried spouses!)

TRICARE Supplement Policies

2011-11-11T10:51:00.001-08:00

Here's my current list of available TRICARE Supplements. Please comment on any/all of them if you have experience with the companies.

Air Force Association
American Military Retirees Association
Uniformed Services Benefits Association
Military Officers Association of America
Military Benefits Association
Retired Association of the Uniformed Services
Reserve Officers Association
TRICARE Reserve Select
Association of the US Army
Society of Military Widows
Naval Enlisted Reserve Association
AF Sergeants Association
Marine Corps Association
CHAMPVA AMRA Supplement

Federal Publishing has a chart online that allows you to compare the costs associated with the different plans.

Before purchasing a policy, TRICARE recommends that you consider several aspects of the available coverage. Check their web site for details.

Finding the right Post-Military Health Care Insurance

2011-11-11T10:28:00.000-08:00

I've been researching the private health and dental options for our family, specifically as my oldest is about to graduate from college. Fortunately, Tricare Young Adult will help us bridge the gap, but I thought I could do better than $180+/Mo, with a 20% co-pay and deductable. Turns out that unless we spring for a high deductable plan, TRICARE will be the best bet.

Also, because my son is still looking for work, we are not eligible to participate in a Health Savings Account.

There are significant differences in coverage based on your region and needs. Also, it will be more difficult if you have an existing health issue that needs to go with you and your new coverage. I'll continue to report on what I find. Please add your comments if you have health and dental coverage recommendations.

Top-Paying Post-Military Careers

2011-10-10T10:23:00.001-07:00

Here's a link to a great article about the best paying Post-Military Careers. What I like about it is the active links to the available jobs and the career overview with salary statistics. This could be valuable when negotiating a salary and benefits package.

Living Well on $40,000 a year or less

2011-10-09T13:22:00.000-07:00

There have been a number of articles written recently about how to live in America on less money. Whether it is a function of the unemployment rate, the populist counter-Corporate movement, or a back-to-basics philosophy of consumption vs. value, these articles seem be be getting a lot of attention.

There's the story of the school teacher who makes less than $40,000 a year who still has money to save for the future. Or the college graduate who plans of living in 10 cities in 10 years...just to experience them, on about $20,000 a year. US News ran a story last year about living abroad in order to live life on Social Security payments alone.

Of course all of this is relevant to a military retiree who either is planning for transition to civilian life or hopes to retire completely when their military service is complete. I recently corresponded with a military retiree who moved to Mexico to live after they left the service. This gentlemen encourages anyone interested in doing so to learn the language and adapt to the culture.

He wrote:

"Living on my pension here in Mexico wasn't difficult since rent and food is inexpensive away from the international communities; however, one needs to speak the language and respect the culture. Of course, now that I'm also getting social security, it's much easier.

If another retired AF member were to do what I did now, he or she could find an apartment or a small house for around $150 in a small community. Groceries would run around another $150. Miscellaneous costs would probably be around another $100. Since there is adequate public transportation, there's no need to buy a car--so add in another $50 a month. As for medical, one uses TRICARE Standard; however, a lot of people buy the Mexican socialized medical package which costs less than $200 a year if you're under 50, and after two years, you're fully covered. Our little clinic here in Santa Cruz Tlaxcala, Tlaxcala is quite nice and the staff is adequate for normal medical maintenance. Looking at what I've given here, it looks like a person could live quite comfortably for less than a $1,000 per month. But you would have to be ready to accustom yourself to a retired life.

I've been here going on 18 years now, and I've found the Mexican people to be quite congenial and welcoming, especially after they find out you speak their language. Of course, one needs to be outgoing, respectful, and kind and always remember that you are an outsider even if you feel totally integrated. If one finds it difficult to meet people, then integrating him or herself in Mexican culture probably wouldn't be his or her cup of tea. Interestingly enough, I've read that there are approximately one and a half million Americans living in this country. And I've found them everywhere."

For those who choose to remain in the United States, millions of American's live for less than $40,000 a year, and they don't live in crime infested ghettos. US News ran an online article recently of ten additional choices. They included:

Auburn, AL
Blacksburg, VA
Boone, NC
Cheney, WA
Mount Pleasant, MI
Murray, KY
State College, PA
Sunland Park, NM
Syracuse, NY
West Lafayette, IN

In each case, affordable housing is the key to stretching each retirement dollar. So, where you decide to be is the key to living well for less money. This issue is so important that we launched a new page to focus on the best locations for military members to consider for their retirement. Click this link to learn more.

Military Retiree Health Care Costs Go Up Today

2011-10-01T05:18:00.000-07:00

Today military retirees will pay 13% more for their Tricare For Life benefit. For the first time in a generation, the Tricare enrollment fee has gone up. The Department of Defense has been trying to raise the fee for years, but were only able to do so this year.

What did this increase cost? $60 per year for a retiree and his or her family.

Not much? No, but for those who have gone before us who have fought consistently for our benefits, it is a significant setback.

It's reasonable to say that the Government is focusing on the military as a way to cut costs. Consider joining organizations like the Veterans of Foreign Wars who are working with Congress to ensure our interests are considered.

Should we change the military retirement system?

2011-09-05T13:37:00.000-07:00

According to the non-partisan Pentagon Advisory Board only 17% of military veterans ever collect a pension for their military service. This small but vocal group is screaming to ensure that the current system is left untouched.

As a military member with more than 20 years of service, I am glad that they're fighting for the current benefits, but I also appreciate the great cost to the Nation for this plan, and the fact that many who have served, and some who have faced combat, only have basic veterans benefits and no retirement contributions. Fortunately we did gain access to the Thrift Savings plan about ten years ago, but before that we were completely left out.

So, do you think we should throw out the current system and install the system that the board recommended? This would have the government contribute about 16% of your base pay to a TSP account for each year of service. You would likely not be required to contribute, but would have to opt out formally with automatic enrollments deducting about 3% of your base pay to add to the government contribution.

While you would not be able to withdraw this money until you are 59 1/2 without paying a penalty, you would be able to borrow 1/2 of the value of the account, up to a limit of $50,000 with a pay-back period of 5 years, or as much as 15 years for the purchase of a home.

I see great value in giving all veterans a benefit for their service, particularly if it installs a habit of savings right from the very beginning of their careers. On the other hand, this move fails to account for the fact that military members pay a high personal price for serving, and we are unlikely to be able to continue to work into our 60's as military members.

What do you think we should do?

SBP or Life Insurance?

2011-09-03T13:03:00.000-07:00

If you are nearing retirement you may be considering purchasing life insurance instead of taking the full survivor benefit plan (SBP). In making this choice you might be wondering how much coverage you need to make up the difference. It's an important question, so approach the subject carefully.

First, consider what you're comparing. The SBP provides the spouse of a military retiree a guaranteed income for life. Period. The amount of the benefit is based of 55% of the "base amount."

The SBP has some attractive features, including a cost of living allowance, pre-tax deductions to pay for the cost of the benefit, and a program that is, in fact, subsidized by the US Government.

So, to state a simple example, if the base amount is $4,000, the spouse would be assured of an income of $2,200 per month, or annual benefit of $26,400 per year.

The amount of life insurance you need to equal this benefit is entirely dependent on the age of the spouse when they begin taking their benefit. Because the decision to take the SBP must be made in the first year of retirement, you have to assume the worst case scenario...that the spouse begins to take their benefit immediately. Assuming that the spouse is 40 years old, and female, she will need income for 41 years. The present value of this stream of payments, assuming a 3% rate of inflation is $618,000. This amount is padded a bit because your spouse will be eligible to begin taking a reduced Social Security benefit at age 60 and the full benefit at age 67.

Still, this figure does give you a point of reference to consider when you develop your options. If, indeed you decide to reject the SBP, purchase term life insurance, and invest the difference with the goal to be self-insured, then you can compute what your investment might be worth.

The SBP premium, in our earlier example, would be $260 each month. If the life insurance costs $60/mo for 20-year term, then you'd have $200 to invest. If that investment were invested in the SBP equivalent of Treasury Bills, the investment would be worth about $62,000. If at that time the spouse needed to begin taking benefits, assuming a 4% distribution, she would only be able to take $200 per month! Even with a Social Security Benefit, the veterans spouse's ability to maintain her current lifestyle would be in serious doubt.

Could you do better than T-Bills in your investment? Sure. But remember you are comparing two alternatives with very different levels of risk. By comparing the interest rates at the T-Bill rate you get a better understanding of the risk adjusted value of the Survivor Benefit Plan.

Secretary of Defense Vows: Any retirement changes won't affect serving military

2011-08-22T04:38:00.001-07:00

Panetta: Any retirement changes won't affect serving military
By Jim Garamone
American Forces Press Service

WASHINGTON (AFNS) -- In his clearest statement on the subject to date, Defense Secretary Leon E. Panetta said today that if the military retirement system changes, it will not affect serving service members.

"I will not break faith," the secretary said during a roundtable meeting with military media representatives in the Pentagon.

Panetta's predecessor, Robert M. Gates, asked the Defense Business Board to look at the military retirement system and make recommendations. The final report is due later this month, but Panetta said he is familiar with the outlines of the proposal.

"I certainly haven't made any decisions" on retirement, he said.

"People who have come into the service, who have put their lives on the line, who have been deployed to the war zones, who fought for this country, who have been promised certain benefits for that -- I'm not going to break faith with what's been promised to them," Panetta said.

People in the service today will come under the current retirement system, which gives retirees 50 percent of their base pay after 20 years of service.

"Does that stop you from making changes?" Panetta asked. "No, because obviously you can 'grandfather' people in terms of their benefits and then look at what changes you want to put in place for people who become members of the all-volunteer force in the future."

One aspect of the retirement issue is one of fairness, the secretary said. Most service members do not spend 20 years in the military and therefore do not get any retirement benefits when they leave the service.

"They are not vested in any way," Panetta said. "The question that is at least legitimate to ask is, 'Is there a way for those future volunteers to shape this that might give them better protection to be able to have some retirement and take it with them?'"

Health care is another area that has to be dealt with, the secretary said. In fiscal 2001, the DOD health care bill was $19 billion. It is more than $50 billion now, he said, and it soars to the neighborhood of $60 billion in future years. Among proposals Congress is contemplating is an increase in some TRICARE military health plan premium payments.

"I think those recommendations make sense," Panetta said. "Especially with tight budgets, it does make sense that people contribute a bit more with regards to getting that coverage."

The Defense Department -- which is responsible for a large part of the nation's discretionary budget -- will do its part to reduce the budget deficit, the secretary said. But while Defense has a role to play, he added, Congress has to deal with the more than two-thirds of the federal budget that represents the mandatory spending.

"If you are serious about getting the deficit down," Panetta said, "you have to deal with the mandatory side of the budget and taxes."

DOD has a responsibility to look at all aspects of the budget, the secretary said, and officials at the Pentagon are doing that.

"This is not because it is necessarily going to hurt areas," he added, "because frankly, a lot of this can be done through efficiencies, a lot of it can be done looking at the administrative side of the programs: What can we do to make these programs more efficient?"

The secretary said he believes the budget crunch can represent an opportunity to make DOD a more efficient, effective and agile force that still can deal with the threats of the future.

The department also needs to ask how to provide benefits for troops and their families that will be effective at ensuring the nation always has a strong volunteer force, Panetta said.

"That's a debate and discussion that is important for the Defense Department to have, the White House to have, the Congress to have and the country to have," he said. "(We) need to have that debate about 'How are we going to do this in a way that maintains the best military in the world?'"

The Defense Department will face some tough choices, Panetta acknowledged.

"I think the bottom line is this can be an opportunity to shape something very effective for the future that can still represent the best defense system in the world," he said.

TSP Fluctuates, but your strategy should remain constant

2011-08-16T02:45:00.000-07:00

If you've been watching the stock market fluctuate over the past several weeks you're likely a bit dizzy. If you haven't been following the news, it's been a wild rides with some of the market's biggest dives and climbs in history! Want to join the chaos? Try to decide what's going to happen this week!

Or, forgettaboutit.

Previously I've written about the phenomena of pilot induced oscillation. As a primary jet instructor pilot I had to teach my students that sometimes the very best thing they can do is relax their death grip on the controls, take a breath, and focus on the horizon. By trying to predict the airplanes next move, the student pilots (and even some seasoned pilots) would over-correct, setting the airplane into increasingly dramatic ups and downs. In the worst cases I told the students to let go of the controls completely. If the aircraft is properly trimmed it will quickly return to the desired flight path. In a financial context, if your portfolio is properly weighted and diversified, if you leave it alone and continue to make your contributions over time, you fly right through these oscillations and come out the other side with either a lot more shares purchased at lower cost, or a higher account balance because of the higher stock prices (and hopefully both!)

So, relax, put the business page away, read a book and play with the dog. Put your investment accounts in the hands of seasoned professionals at TSP and good mutual funds. In other words, put your investing decisions on autopilot and enjoy the ride. As Dave Ramsey has said, the only person who gets hurt on a roller coaster the the person who jumps off in the middle.

Greatest Risk to Military Retirements: Changing the Rules After the Game Begins

2011-07-31T17:27:00.001-07:00

Despite discussions in military circles of fundamental changes to the military retirement system, the Senate is actually working towards changing the way the government adjusts retirement pay to account for inflation. Currently the government uses a pre-defined basket of commodities to gauge the growth of inflation. This basket is called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and has been in use in the United States since 1975. Instead of sticking with the current CPI-W adjustment, the Senate has endorsed a plan to use a new method, called the "chained-CPI." This method uses economic theory that says that consumers will change their buying behavior to find substitutes for higher priced products, thus reducing demand for other more expensive alternatives. The index adjusts to account for this change in behavior instead of remaining tied to the fixed basket.

By using this method, Military Times reporter Stephen Losey reports that the military retirees COLA will go down by about a quarter-percent annually, which will result in thousands of dollars less over the life of the retiree and his or her spouse if they elect to receive the Survivor Benefit Plan.

The issue, as always, is fairness and a commitment by the United States to stand by the agreements that they made with military members who served proudly for more than twenty years. We have paid our income taxes along the way, and will continue to do so, but the government should consider paying its debts to its military service members before paying foreign nations that we may one day be forced to engage in combat.