More Boring Investment Insights for Your Retirement Account

Oct 21 2014

“Ugh! Another boring investment article, right?” If only it wasn’t so important to your future wealth and quality of life. First a little set-up before getting to my real points which are strategies for your use.

shutterstock_67583179A little background.

The media are all over the “the next correction” in the stock market (“correction” equals a significant drop). After all, it’s been up since 2009; surely it has to pop sometime soon. “So what”, you ask. Word of these stock market events spreads eventually causing us investors to act in silly and costly ways.

To recap, the stock market hit a bottom in March 2009 and began the rebound. There was a correction (drop) in 2010 of about 13%. Again in 2011 of about 15%. In 2012 there was an 8% dip. But the big picture is a solid up since March 2009.

Besides the stock market correction is the inevitable inflation and interest rate hikes that will drive down bond prices. Meaning, if you hold bond funds in your 401k/TSP, their value will drop. Between the sluggish economy and the resulting government actions to fix it, we have economic conditions that are ripe for inflation. Inflation leads to higher interest rates. Higher interest rates lead to decreased bond values.

Example: You buy a bond for $1000 that pays 3% interest. Say interest rates rise to 4%. You want 4% so you decide to sell your 3% bond. No one wants your 3% bond when they can buy a 4% bond. You have to drop your price to sell your bond. Voila! Bond values decrease in a rising interest rate environment.

Finally, the real points.

What is a 401k/TSP/IRA investor to do? The financial journals are all over the map on opinions. Simplify the discussion.

We boil down the types of investors into two pots: wealth accumulators and soon-to-be retirees seeking preservation of assets but also requiring some growth to stay ahead of taxes and inflation. While there are other types of investors with rather specific or sophisticated needs, the majority of you fall in the wealth accumulator category.

Wealth accumulators require a down market to accumulate the maximum shares of ownership (mutual fund shares in retirement accounts). Ownership equals wealth. “What?!”

You read me right. Wealth accumulators need the stock market to go down. Only in a down market will your regular payroll contributions have a chance to buy enough ownership to build wealth.

Here’s the rule of the game; s/he who retires with the most shares wins! Stop judging your success on your account value. Account value is a by-product of ownership.

Wealth accumulators shouldn’t worry about market corrections. In fact, they should welcome it. They should be dollar cost averaging and have an allocation that leans heavily to stock funds. Rebalance your portfolio after your allocation is off by more than 5% (these bolded strategies are explained in the articles linked below).

Soon-to-be retirees should have an allocation that won’t follow the market all the way down. Say, a portfolio of no more than 30 or 40% stocks. This is a proportion of stocks recognized as being able to maintain enough growth to offset taxes and inflation without too much risk.

Examples.

From September 2008 to March 2009, the stock market dropped 48%. A portfolio of 80% stocks dropped 38%. For wealth accumulators, that’s great. You are raking in ownership at bargain basement prices. A portfolio of 40% stocks went down 18%. If closing in on retirement, you can survive that reasonable drop in portfolio values to ultimately catch the rebound in stocks.

Details are missing in this article. For more go to:

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Depositor Insurance; FDIC and SIPC – They’re the same, right?

Oct 08 2014

Published by under Investments

Sign_Brodway_crossing_Wall_StreetKinda and kinda not. FDIC is the Federal Deposit Insurance Corporation. An agency of the federal government. SIPC is the Securities Investor Protection Corporation. A non-profit, non-government, corporation funded by the securities firms who belong to the SIPC organization. Both provide insurance protection over a depositor’s money but that protection is not all-inclusive.

With a FDIC insured bank or savings institution, a customer’s money is insured safe. With FDIC, the U.S. government protects depositors’ money in banks by insuring your deposits with the bank. FDIC insurance covers your checking accounts, savings accounts, money market deposit accounts and certificates of deposit and a few other accounts. If the bank fails, your money would be at risk without FDIC.

FDIC insurance does not cover other financial products and services that banks or savings associations may offer such as stocks, bonds, mutual funds, life insurance policies, annuities or other securities. These products and services are not typically held at the bank or savings institution. These investments and products tend to reside outside the bank or savings association.

The standard insurance amount is $250,000 per depositor, per insured bank. All accounts at one bank for the same owner are typically added together. There are a few exceptions as always. Learn more at www.fidc.gov.

The SIPC protects customers of SIPC-insured brokerage firms facing financial difficulties. The SIPC coverage insures your cash and securities being held by your broker. It’s important to understand the coverage details.

The coverage amount for securities is up to a maximum of $500,000 which includes a coverage limit on the amount of cash at $250,000. The coverage limits are effective when the SIPC trustee is appointed to oversee the liquidation of the brokerage and process customer claims. This may be months after the brokerage becomes insolvent.

The market value of your securities is not covered but the amount of securities you own is. Say you own 100 shares of ‘ACME Coyote’ stock. The SIPC trustee will see that your 100 shares are returned to you. However, if the 100 shares of stock are not available, then you will be insured for the value of the 100 shares at the time the SIPC trustee was appointed—up or down.

SIPC covers most forms of securities like stocks, bonds, mutual funds; generally any registered securities. It does not cover unregistered securities or limited partnerships, annuity contracts, futures, or precious metals, to name a few. Learn more at www.sipc.org.

 

Image by Benoît Prieur (Agamitsudo), Cc-by-sa-3.0 [CC-BY-3.0, CC-BY-SA-3.0 or GFDL], via Wikimedia Commons

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Frequently Asked Questions About VA Loans

Sep 30 2014

iStock_000004276434XSmallBy Joe Gladden, Veteran Realty Serving America’s Military, Inc. and Susan Wallace, Senior Loan Officer Access National Bank

This is a follow up to our previous posts about VA Loans. It is an accumulation of questions we have seen over the years covering various personal circumstances and dual eligibility. We hope you find these helpful.

Entitlement…What is it? Entitlement can be explained as the amount of money available to you from the VA to use as a guarantee for the lender providing your VA Loan in the event that you default.

Why is it important? Entitlement is the reason you can have a 100% loan with no down payment. When the VA gives a guarantee of your entitlement to the lender, it is kind of like a down payment to the lender. No money is exchanged, but there is a written guarantee from the VA that if you default the VA will pay the lender that specified amount.

Here are some common questions about VA entitlement:

Q – I purchased a home with my VA loan. I am now divorced but my ex-husband still lives there. Can I get another VA loan?

A – Yes, in most cases you can. You would use 2nd tier entitlement. Please see the article specifically addressing it here.

Q – When I was married my husband used his VA loan to purchase our home but we have since divorced. I have VA eligibility as well based on my service. Can I assume the mortgage in my name only?

A – Yes you certainly can. You also have the option of refinancing the home in your name only and substituting your entitlement for his. You would still need to credit qualify in either instance.

Q – We purchased a home using my eligibility for a VA loan. Both my wife and I have eligibility. We have to move and would like to purchase a new home but I don’t have enough entitlement without selling the old one. Is there any way to still get a new home?

A – Yes, you would use dual entitlement. That means you could use a portion of each of your entitlements to get the home. Or you could use your wife’s eligibility of entitlement.

Q – Both my wife and I have entitlement. Can we use both to double our county limit buying power?

A – No. The VA guarantees only up to the county limit even if there is more entitlement available.

Q – Ten years ago my VA financed home was foreclosed on. How does that affect me today?

A- This is the instance mentioned in the beginning of this article. It means that the VA paid out to the lender a specific amount of money and that money was then charged against your entitlement unless you repaid it. To find out the exact amount of money charged against your entitlement you would need to obtain a copy of your certificate of eligibility. That amount would then be deducted from the amount of entitlement you have available today based on the county/state you are purchasing or refinancing in.

Example:
You are purchasing in TX with a $104,250 of entitlement available to you. That is reduced by the $36,000 paid out by the VA to the lender for your foreclosure which leaves an entitlement of $68,250. $68,250 x 4 = $273,000 which would be the maximum 100% loan (zero down payment) amount available.

Q – I heard that you can only have your entitlement restored only one time, is that correct?

A- No. If you sell the home you financed with your VA entitlement, you can apply for restoration of your entitlement as many times as you would like. If you still own a home that is now PAID OFF that you used your VA entitlement to buy, then you may ask for a one time restoration to purchase another home. However once you purchase another home with that one time restoration, you would not be able to use the VA loan again until you sold the original “paid off” home.

Remember, this only applies to a paid off home, meaning you own it free and clear. If you own a home that has a VA loan on it still, you can more than likely qualify for 2nd Tier Entitlement and have a 2nd VA loan.

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Lured Out of Your TSP

Sep 25 2014

piggy_bank_savingsThere’s been a good deal of press lately about federal workers and uniformed service members being lured from their Thrift Savings Plan (TSP) after leaving government employment. The TSP is the 401k retirement savings and investment equivalent. The spin is that TSP participants are victims of unscrupulous financial advisers.

Here are some of the issues behind the TSP decision after federal service.

When you leave federal service, you can keep your TSP, transfer it to your IRA, transfer it to your current 401k, or withdraw the money and put it in your pocket. According to the TSP office, around 45% close their TSP account after leaving the government. The reasons given for closing their TSP come down to paying debts, making purchases or desiring more investment options.

None of the reasons given above for closing their TSP accounts indicate victimhood. Withdrawing assets from these accounts prior to retirement is a problem for several reasons but that’s on the individuals.

The main reason for the victim spin is based on costs. It is undeniable that the TSP is the cheapest investment account you will ever own. The fees are so low, it’s practically free—an average of 29 cents for $1000 invested. An inexpensive index fund in a do-it-yourself/no help brokerage account with an on-line firm will run around $1.70 to $5.50 per $1000. Full-service firms may charge around 1% of assets under management or have an upfront sales charge of up to 5.75% of the initial invested assets. There could also be accounts with commissions for each account transaction.

Just because you pay more, doesn’t make you a victim. It may be worth it to you to pay for full-services. The TSP offers minimal service. I worked with plenty of clients who needed all the help they could get. I also worked with clients who chose to pay full-service prices because they wanted to focus their personal time on other life priorities or they wanted professional services or they wanted professional experience.

The TSP investment choices are 4 simple index funds, a super pseudo-money market fund called the G Fund (2.33% return to date), and several asset allocation funds (these adjust your portfolio based on your retirement timeframe). These are familiar and comfortable choices for many TSP participants. But some people want more investment options. Or they want a product not offered by the TSP.

There are many good and bad reasons for closing your TSP. There are some wolves looking to take your money in all facets of your life. To jump to a conclusion that you are a victim is presumptuous.

Interested in learning about your investment options?  Check out MOAA’s Investors’ Manual, available for PREMIUM and LIFE members.  MOAA’s Investors’ Manual is packed full of solid investment concepts based on history and experience, so now you can relax about your investments and future and concentrate on your life.

Not a Premium or Life member? Join or upgrade your membership now.

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Divorce Issues within the Uniformed Services Pay and Benefit Programs

Sep 16 2014

Service members’ and veterans’ benefits are administered by either the Uniformed Services or the Department of Veterans Affairs (VA). Since there are no VA benefits for former spouses, all potential benefits for former spouses come from the Services. This summarizes the major programs affecting divorcing Service member couples.

For detailed or personalized information, you need to consult legal or functional experts within the Services. Look to the Uniformed Services Former Spouse Protection Act (USFSPA) for greater detail (http://www.dfas.mil/garnishment/usfspa/legal.html) into Service information

Retired pay

The USFSPA allows state courts to treat “disposable” Service retired pay as property of the marriage (definition of “disposable”: http://www.law.cornell.edu/uscode/text/10/1408). This means that disposable retired pay can be split between the divorcing couple. There are some misconceptions about the law and how it works.

The law allows disposable retired pay to be treated as property. It does not state it has to be split. Also, the law does not state the former spouse gets 50% of the retired pay automatically. State divorce courts will award whatever amount they feel is appropriate within their laws to a former spouse. Many courts use a formula to determine what portion of the retired pay a former spouse gets.

The 10/10 Rule. If the marriage and the member’s Service time overlap by at least 10 years, then the pay agencies (like DFAS for the military Services) can directly pay a spouse up to a maximum of 50% of the disposable retired pay amount—assuming the court awarded the former spouse 50% or more.

Note the nuance in the paragraph above. This is an administrative limitation on the amount of retired pay a pay agency can directly pay to a former spouse. The court can award more or less than 50%. If 50% or less, the former spouse can be paid directly by the pay agency. If more than 50% (yes, it can be more than 50%), then the Service member must figure out how to get any amount over 50% to the former spouse.

By law, a Service member’s Service disability compensation is not considered part of the divorce property eligible for award to a former spouse. Specifically, Service disability pay under the medical retirement law (10 USC Chapter 61) is not considered “disposable” retired pay for division as marriage property. However, VA disability compensation is not protected from the requirements of family or child support by a state divorce court as is commonly believed.

So again note the nuance of the two paragraphs above. The court doesn’t have to award, meaning specifically assign, disability compensation whether from Service retired pay or VA disability compensation to a former spouse. A court may order a general amount to be paid by the Service member to a former spouse or family. Where the money comes from is up to the Service member even if disability pay has to be tapped.

Other Service Benefits

20/20/20 Rule. For a former spouse to be entitled to Service benefits (health care, ID card, base benefits), the Service member must serve for 20 years and the couple has 20 years of marriage with 20 years of overlap. This is the rule of law used to determine a former spouse’s eligibility for the following Service benefits (10 USC, Sections 1072, 1078a, 1086a). There are a few exceptions to the 20/20/20 Rule but they are based on old rules from 1980s that probably won’t apply to current day cases. There are also some special rules for abused spouses.

Health care. The 20/20/20 rule must be met before a former spouse is eligible for Tricare health care. But there are two catches:

#1, the former spouse can’t remarry. Once remarried, the former spouse loses Tricare forever (one exception, you get Tricare if you remarry a retired military member).
#2, the former spouse can’t have an employer-sponsored health care plan or a purchased health care plan. You must choose between your employer/purchased plan or Tricare.

There are a few exceptions to the 20/20/20 rule above but they involve at least 15 years of overlap or limited Tricare eligibility (no more than 1 year) or eligibility for the Continued Health Care Benefit Program (CHCBP) which is like purchasing a plan through the health care marketplace. CHCBP is for unremarried former spouses and is limited to 36 months.

ID cards. Processing the application for an ID card will require the following documents:

  • Certified copy of marriage certificate.
  • Certified copy of final divorce decree.
  • Notarized statement that you have not remarried.
  • Notarized statement that you do not have medical coverage under an employer-sponsored health plan. Provide the name, address, and telephone number of your employer.

Spouses previously enrolled in DEERS can get service from any ID card office. To locate your nearest ID card office, go to: www.dmdc.osd.mil/rsl/owa/home.

Initial applications must be accomplished by the parent service.

Base benefits.

If you have an ID card, you have base benefits; commissary, exchange, MWR, and other benefits that come with an ID card. Any questions can be addressed to the parent service or to the nearest Uniformed Services ID Card issuing office for advice.

Unlike the Tricare health care, if you get remarried and the remarriage ends because of death or divorce, a former spouse can get base benefits back by re-applying for an ID card.

The Survivor Benefit Plan (SBP)

The SBP is the only program that provides a monthly lifetime income to a beneficiary that is based on the Service member’s retired pay amount. A beneficiary gets 55% of the Service member’s base amount which is usually the amount of retired pay.

The 20/20/20 rule does not apply to the SBP. If a divorce decree states a former spouse is to get SBP, it happens, if timely notification is made to the pay agency by the Service member or the former spouse.

The former spouse provides an official copy of the court document to the Service pay agency and declares a “deemed election.” This means the former spouse makes a claim for the SBP based on legal grounds whether the Service member is involved or not.

The deemed election changes the beneficiary on the SBP to “former spouse.” It also allows “former spouse and child” coverage. The deemed election must be made to the pay agency within a year of the divorce date.

Remarriage does not cancel the coverage but it will be suspended until the remarriage ends in death or divorce and the SBP is reactivated. If the former spouse is receiving survivor payments because of the Service member’s death and the former spouse remarries, payments are suspended if remarried prior to age 55 and can start again if the remarriage ends. Remarriage by the former spouse at or after age 55 does not stop the payments.

The Service member is not allowed to have another beneficiary as long as the former spouse has the beneficiary status. If a former spouse dies as the SBP beneficiary while the Service member is still alive, the Service member loses the SBP as the policy is cancelled.

VA benefits

There are no benefits for former spouses under the Department of Veterans Affairs (VA). If you want to make sure there are no special circumstances in your situation, you can contact a local Veteran Service Office to determine eligibility for VA programs. Find your local Veteran Service Office at http://www.va.gov/statedva.htm.

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