Financial Frontlines®

Please join us for a Post 9-11 GI Bill Livecast on 6/29 at 12 Noon Eastern Time…

During this 45-minute live video cast, we will be sharing the latest information on the Post 9-11 GI Bill and giving you key action tips to make the most of this valuable benefit for currently serving service members, retirees and veterans.

Bookmark this link:

Post 9-11 GI Bill Livestream

You will have the opportunity to submit questions live and have those answered during the Q & A portion of the live cast.  Please note that your computer will need the most recent version of Adode Flash for optimum performance, which you can download here.

We hope to see you there!

Phil Dyer, CFP, RLP, CPCC

Bonds funds are being purchased at a blistering pace for the last several years.  The ups and downs of our stock funds have left us gun-shy about the use of stocks in helping us create the wealth we need for the future.  The purchase of bonds to counteract volatile stocks in combination with our nation’s and the world’s economic policies are setting up the next bubble that will pop in the future.  Bonds.

Bonds are tricky because they lure us into a false sense of security.  They’re always safe, right?  You can count on them to produce a steady return of interest payments.  Or said another way, they provide a consistent positive return, right?  This is true if you own individual bonds and hold them to maturity–assuming they are quality bonds and the bond issuer is financially solid.  With a bond fund however, you own a portfolio of bonds and those bonds’ values fluctuate with the bond market.  Since it’s the value of your account that tends to matter the most, when the value of those bond funds starts to drop, will you wish you had a smaller allocation percentage in bond funds.

Bond values are influenced by things like inflation and rising interest rates and the quality of the issuer.  Inflation eats away at your return.  If you’re getting 4% interest on your bond and the inflation rate rises to 5%, your value will drop.  If interest rates rise, the value of your bonds decreases.  Who wants your 4% bond if new bonds offer 5%?  What happens if people question the financial stability of the bond’s issuer?  Two things; the added risk due to the issuer’s financial problems decreases the bond’s value and people jump ship so the value of the bond drops.

Given the examples above, what do you believe are the chances of inflation and interest rates rising in the future?  What about the financial stability of the governments or corporations who issue bonds?

What is a person to do? 

If you still contribute to your funds on a regular basis–as a 401k at work.  You should be fine over the long haul.  Regular contributions take advantage of a strategy known as ‘dollar cost averaging’ or ‘averaging down.’  This strategy works by buying more shares of funds as the price of the funds drop.  You know, buy low.  Buying low lowers your average share cost which enhances your account value as the bond market values return.  If you average down, market downward swings are your friend provided you have a time line that allows the market to return before you need the money in retirement.

If you are close to or in retirement.  Consider the need to minimize the potential losses by diversifying your portfolio.  Ask yourself, if your bond funds go down in value can you afford to the take the hit in your account value?  If the answer to this question makes you nervous, you might want to talk to your advisor about alternatives to your bond funds to spread the risks.  Maybe it’s just a matter of diversifying the types of bond funds you own.  Not all bonds funds react the same to the factors listed above.  There are other vehicles besides stocks and bonds that could help cushion the impact of a negative bond environment.

MOAA does not sell investment products and we do not provide financial planning from our staff.  We act as financial counselors and educators helping people become savvy consumers.

Survivors of military members have an opportunity for two forms of survivors’ benefits.  The most common is the purchased benefit called the Survivor Benefit Program (SBP) where the military member pays premiums from retired pay.  Currently serving members are also covered by SBP automatically.  The other is a program ran by Veteran Affairs (VA) called Dependency Indemnity Compensation (DIC).  DIC is paid to survivors whose spouse died of Service-connected causes.

If a survivor qualifies for DIC and is covered by SBP, the DIC amount is subtracted from the SBP amount.  This is known as the SBP-DIC Offset.  MOAA has fought against this offset for some time and continues to fight against the offset on Capitol Hill.  Last August, 3 survivors fought in the courts against the offset for their specific situation and won.  They realized the law was worded differently for survivors who remarried after age 57.  In this specific case, the law does not stipulate an offset.  As a result, all survivors remarried after age 57 now receive full SBP and DIC payments.  The DOD is in the process of fixing the offset issue for survivors in this situation.

Here is the status of DOD’s progress in the process of fixing the offset for survivors who fall under the conditions of the lawsuit.  The DOD identified 737 survivors remarried after age 57.  All of these survivors are now receiving their full monthly SBP and DIC payments.  However, the lawsuit also has a retroactive period that requires survivors who qualify to receive back pay.  The retroactive period is from the date of remarriage but no earlier than 1 January 2004.  To date, 367 have received their back pay.  The remaining survivors will get their back pay over the next few months as DOD calculates the amounts due for each individual.

As for the rest of you, MOAA now has a new tool to use in fighting for the elimination of the SBP-DIC offset.  In 2008, Congress symbolically admitted the offset was wrong by passing legislation that authorized a supplemental pay to help restore some of the pay denied by the offset.  This program is known as Special Survivor Indemnity Allowance (SSIA).  SSIA is administered by the Defense Finance and Accounting Service (DFAS) as is SBP.  Here is the payment schedule for the SSIA:

Beginning                     Monthly Amount

October 2008                          $50
October 2009                          $60
October 2010                          $70
October 2011                          $80
October 2012                          $90
October 2013                          $100
October 2014                          $150
Increases thru 2017
October 2017                          $310

The SSIA was the first foot in the door for the repeal of the offset.  Now the Sharp case is another foot in the door.  We have support on the Hill for the repeal of the offset but the impediment has been the last minute consensus on how to pay for the offset elimination.  The fight will go on.

For more on the Sharp case, see this DFAS article.  General information on SBP can be found in this DFAS booklet.

AS FOR CURRENT LEGISLATION: the elimination of the SBP-DIC offset is not dead for this year but it is on life support.  There is a slight chance something (elimination or increase of supplemental payments) could get passed.  We will continue to fight for this issue as one of our top three initiatives.  We will update the final result through our Legislative Update and News Exchange electronic newsletters and this blog.