Financial Frontlines®

Here’s the Washington Post take on the Homeowners’ Assistance Program for military members.

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/24/AR2009022403793.html

Key points:

• For members required to sell their home due to reassignment, base closure, combat injury, or because you are a surviving spouse.
• Member can choose from one of these payments:

1. An amount that is the difference between 95% of the prior Fair Market Value and Fair Market Value at the time of sale, or,
2. An amount not more than 90% of your home’s prior Fair Market Value or the amount of the outstanding mortgage.

• No limit on home value has been established.
• Only applies to members who bought homes before 1 July 2006.
• Only applies to a member’s primary residence.

This program is an enhancement of the DOD’s Homeowners’ Assistance Program that has been used in the past to help members affected by a base closure.

As military members, the bottom line is that buying a home a gamble; pure and simple. When you buy, you gamble that the housing market will go up during your tour. ‘Going up’ depends on timing and the market at your location–neither of which you can predict. Plus, you can never be sure how long you will be assigned to your current posting.

Over my career, we bought every time and made $10,000 on one home one time. Just enough to cover the costs of selling it. We lost on every other home. I assumed the risk every time I bought and was ready to face the consequences. However, during the same period, I knew people making money because of their locations. It’s a gamble…period. Please don’t read this as though I’m bitter about this home bail-out plan. Far from it. I’m glad some members will get relief during this time of war and economic crisis. Just don’t think big brother will be there for you next time.

Don’t buy unless you can live with the worst case scenario.

You hear these words frequently on radio and TV lately. Don’t be so quick on the draw. The Federal Trade Commission (FTC) provides the traits of a good credit counseling and debt relief firm.

• Firm offers a range of services; counseling, classes, trained and credentialed counselors, financial and debt management, and budgeting.
• Counselors spend time collecting the appropriate information to analyze your situation and offer the best option for your situation. A debt management plan isn’t their one-size-fits-all plan.
• The firm is licensed in your state.
• Information about their services is free.
• There is a formal written contract.
• Non-profit firms are a good thing.
• Charges and fees are in writing and known up front.
• No bad reports with the Better Business Bureau, state Attorney General, local consumer protection agency, or the Chamber of Commerce.
• Counselors are trained and certified by an outside reputable firm/school.
• Your privacy is protected.
• The employees/counselors are not on commission.

Danger signs:

• Guarantees to stop your foreclosure.
• Requires up-front money before anything is delivered.
• Being told not to contact your lender directly.
• Signing over your title or deed for services.
• Sending payments to their office address rather than your lender.

Check out the FTC for more info at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm

In my discussions with people, the Thrift Savings Plan (TSP) (the federal govt’s 401k plan for you non-govt types) always comes up as a common topic. Usually the questions are about the Lifecycle funds; are they any good? Before I start, please be aware that to me there are no investments that are totally good or bad. It’s all about what’s the “best” fit for you.

I have to admit, I’m not a fan of the Lifecycle funds. But I also have to admit I’m biased. You see, I’m comfortable with managing money. My own included. So I find a lifecycle fund a bit restrictive. Here’s why.

For one, the companies that manage lifecycle funds all have their own portfolio management philosophy. Ten lifecycle funds from different fund companies will have unique investment mixes even when the ten funds have the same target retirement date, 2020 for instance. Some more aggressive and some more conservative.

Next, you always have to be aware of a fund’s cost. Not a problem for the TSP L funds. Lifecycle funds outside TSP tend to cost a bit more because they consist of multiple individual mutual funds.

Finally, you can’t control whether they will be aggressive or conservative when it’s appropriate. I’m not a market-timing-trader but you still have to be aware of the market environment and your portfolio allocation at certain times.

Let’s say you have the Lifecycle 2020 fund for your retirement in 2020. The current stock market environment is in the pits and your investment time line is 11 years. You may want to be pretty aggressive right now to scarf up cheap shares of stock funds that have the greatest rebound and value recouping potential. Right now you are 40% bond/cash in your allocation. In Jan 2010, you’ll be 42% bonds/cash. In Jan 2011, 43%. Point being, you’ll be getting more conservative during a potential bull market.

Let’s say the bull market continues into 2014-2015. As you get closer to retirement, 5 to 7 years out, you need to get more conservative to lock-in some of your stock profits. In Jan 2015, the 2020 fund has you at 50% bonds/cash. Our example has the bulls running in 2014 and now storm clouds are on the horizon for 2015. 50% bonds/cash may not be conservative enough to ensure you’ll be able to retire in 2020 if the stock market takes another dive in 2015-16.

In 2020, the fund puts you at 80% bonds/cash. It is questionable that this portfolio will keep up with taxes and inflation over the long haul. There is not enough growth potential. Especially if the market is on the upswing again.

How many TSP savers back in 2006-7 are now wishing their Lifecycle fund had been more conservative? How many future TSP retirees for 2015 are wishing their Lifecycle fund was more aggressive right now? Play with your Lifecycle fund allocation at http://www.tsp.gov/index.html. You don’t have to be a stock market expert. You just have to pay attention to the general direction and the major media news reports. History indicates bulls eventually get tired and take a rest but they last longer than bears. If you are closing in on retirement in a bull market, start taking some profits off the table. If you are closing in on retirement in a bear market, feed heavily on the cheap stocks. Lifecycles don’t allow for this flexibility.

Back when I was a lieutenant (slightly after the earth cooled), there was another lieutenant in my squadron talking about the “good” insurance that he had for his car.  I think his name was Joe Bagadonuts.  Anyway, Joe was pretty sure he had really “good” insurance for his car because his deductible was only $50.  Unfortunately Joe didn’t realize (and I wasn’t smart enough to point it out either) that the deductible doesn’t define “good” insurance.  What Joe needed to do, was remember why we insure things to begin with.

Insurance is best used to cover for losses that would be catastrophic in nature and relatively unlikely to occur.  So, while Joe most likely needed insurance to cover the “catastrophic” loss from an accident, he might not have needed a $50 deductible.  Perhaps Joe could have covered the first $500 or $1,000 dollars of a loss.  Joe most likely could have saved quite a bit on his insurance premiums if he had carried a higher deductible.  Yes, it would have hurt if he had been in an accident with a policy with the higher deductible, but he wouldn’t have been wiped out financially.

So, what can we learn from Joe?  Take a look at your insurance policies…especially your homeowner’s and auto policies.  If you are carrying very low deductibles you might want to consider increasing the deductibles to save some money on your insurance bill to around $1,000 or more if you can (one note of warning…the holder of your auto loan or mortgage may require a certain deductible).

What should you do with your savings from the reduced premiums?  Well, first see if you might have an exposure to an event that is relatively unlikely to occur, but the results would be catastrophic.  A lot of Americans have insufficient liability insurance.  You should take a look at your auto and homeowner’s policy liability coverage.  If your auto is less than 100k/300k you need to think about increasing that.  If your homeowner’s policy has a liability limit of less than $100,000 you need to look at that too.  If you have both of those limits in place, it is time to consider an umbrella liability policy for probably $1M-$2M.  Just imagine, you have an auto accident or an accident at your home that involves a death.  You could be looking at a $1M plus wrongful death lawsuit.  If you don’t have the insurance to cover it your savings, potentially your home and even your future earnings are at risk.  Granted, an unlikely scenario but with those catastrophic results, it is exactly what you should be thinking when you think of “good” insurance.

If you’re fortunate enough to have proper liability coverage in place look at your emergency fund and make sure you can cover the increased deductible.  If you’ve got that covered too, then enjoy the money or set it aside for another goal…like your retirement or a vacation.