Financial Frontlines®

Are you being offered a starter loan late in your commissioning program or upon graduation? Will you take it…should you take it? What will you do with it? I know what they say about opinions but here are some points I think you should consider.

1. Take it. HOWEVER…

2. Don’t buy crap! Think…what will you think about your use of the money 5 years from now? Did you buy meaningless material goods that wore out, went out of style, or got upgraded 3-times over? How exciting is that car now after the new car smell has worn off and you’ve maintained it over the years? What’s that car worth now? Make sure that 5 years from now you can look back and say, “I’m proud of how I made good use of that loan money.” You don’t want to look back and think what a dummy you were. Experience can be a cruel teacher—get your brain ahead of your emotions.

3. Pay-off other higher interest loans hanging over your head. You’re already in debt so you might as well pay less for it. The bottom line is debt cost you and you want to pay as little as possible for it.  Plus by consolidating your loans, you simplify your life a bit.  The bottom-bottom line is you don’t want to be in debt period. Debt is a Chinese water torture that drips on your forehead every month. Every month you seethe at how much less money you have for yourself. If you can’t pay for an item outright, debt should only be used for an item you need right now for an important reason.

4. Start your permanent emergency saving account. Put $5k, $10k, $15k away in a savings account; you decide the amount. How boring! Exactly! Until you need it. This money is to ensure you stay debt free. This money has to be liquid and it won’t earn you a high return. A huge bill hits you in the head—car breaks down, refrigerator goes out, water pipes burst—and there’s your emergency account to the rescue. Voila!, no debt created. Now you’re feeling good about yourself for having a smart game plan in effect. Strive to keep the emergency account balance maintained at your set value.

5. Furnish your living space with must-have items. Every living space needs some items to make the space livable. Sofa, chairs, dining room table, pot/pans, utensils…okay maybe even a decent flat screen. Shop for the best prices and don’t go overboard. Think “must have” items.

Best wishes as you start your new life. Keep your head screwed on straight and study a few solid money management concepts (look in this blog). You are at a point in your life where a lot of more senior people wish they could go back and not make the mistakes they did. Use their experience to your benefit and don’t repeat bad history.

This content is provided courtesy of USAA.

It’s never too late, or too early, to plan for retirement.  Throughout life, you’ll experience many financial milestones: buying your first car or home, getting married, raising a family and paying for your children’s education.  But sometimes those milestones can be a challenge. Illness, a job loss or other unexpected emergencies can make investing for your future seem like a low priority.  If you don’t know how to get started or your retirement savings plan has hit a bump, there are strategies that can help you get and stay on track.

Use the guide below to figure out what you should consider. Check out ages besides your own, in case you missed a few steps earlier in life or want to get ahead of the game.

20s

• Harness your most powerful asset. When it comes to retirement planning, you’ve got something that older Americans envy: time. Thanks to the power of compounding and dollar-cost averaging, even small amounts saved at this age may turn into big bucks later.¹
• Set a budget. Nothing is more important to your financial success than spending less than you earn. Create a budget that keeps your spending in line and makes saving a top priority.
• Earn some free money. If your employer offers a retirement plan that matches your contributions, contribute at least enough to get every free dollar allowed.
• Take things into your own hands. If your employer doesn’t match your contributions, you don’t have a retirement plan at work or you’re self-employed, set up your own plan. Learn about IRAs.

30s

• Build the right mix of investments for you. To keep risks in check, a strong retirement portfolio combines many different types of investments.²
• Polish your credit record. A low credit score can cast a big shadow over your financial picture, resulting in higher interest rates, difficulty getting approved for a mortgage, steeper insurance premiums and even rejection by landlords and employers.
• Guard your life. If others depend on you, life insurance is a must. Start by figuring out the right amount of coverage for you. Term insurance will give you the most coverage for your dollar over the short term, but permanent insurance may be more economical over your lifetime. Permanent insurance offers the ability to accumulate a cash value not available with term insurance. While permanent insurance can establish extra cash at retirement, it isn’t considered an investment vehicle.³

40s

• Tackle long-term care. If an illness, accident or advancing age puts you in a position of needing help with daily activities, long-term care insurance can help cover bills that could reach more than $70,000 a year, according to the U.S. Department of Health and Human Services. If you buy it now, you’ll generally pay lower premiums over the life of the policy than if you wait until you’re older.
• Keep your priorities straight. If you have children, another big goal is probably on your mind: saving for college. A 529 college savings plan offers a tax-advantaged way to do that, but retirement should still be your top priority. Loans are available for college but not for retirement.
• Review your life insurance. Make sure your coverage has kept up with life changes, such as marriage, children, mortgages and other commitments. If you don’t have permanent insurance, consider switching some of your coverage to a longer-term solution.³
• Consider moving to a Roth IRA or contributing to a Roth 401(k) if it is provided by your employer. Internal Revenue Service rules allow you to shift money from traditional IRAs and employer plans to Roth IRAs. Why would you want to? Because, unlike traditional retirement accounts, qualified withdrawals from Roth IRAs are tax free. See how a conversion might help your bottom line.⁴

50s

• Simplify your retirement savings. If you’ve worked for several employers over your career, you may have retirement money scattered in different places. Managing your money may be easier when it’s all under one roof — use IRA rollovers to bring it all together.⁴
• Estimate your retirement expenses. The closer you get to retirement, the easier it is to see how much spending money you’ll need — and what you need to save.
• Double-check your investment mix. You’re getting closer to the day when your paycheck is going to come from your portfolio. If you’ve had the stomach for risky investments, it may be time to become more conservative in your approach. Guaranteed savings annuities help protect your assets, provide tax benefits and can be turned into income you’ll never outlive.⁵
• Plan for your estate. While everyone should have a will, living will, power of attorney and other estate planning documents, the need grows more urgent as you get older.

60s and beyond

• Make a savvy Social Security decision. Most people are eligible to begin receiving Social Security payments at age 62, but the longer you wait, the higher your income may be. Learn to maximize your payout.
• Make an income plan. Tapping your retirement portfolio can be more complicated than building it. Use a retirement income planner to figure out the best way to create the income you’ll need.
• Build your own pension. Ideally, you’ll have enough income from guaranteed sources, such as employer pensions and military retired pay, to cover your regular living expenses. If you don’t, consider using some of your savings to buy a guaranteed income annuity. It can provide income that lasts a lifetime.⁵
• Plan for a healthy retirement. While many expenses drop in retirement, don’t expect health care to be one of them. Before retiring, find out if your employer offers retiree medical coverage and learn about other options for securing health care in retirement.

¹ Systematic investment plans do not assure a profit or protect against loss in declining markets.

² Rebalancing and diversification does not protect against losses or guarantee that an investor’s goal will be met.

³ Permanent insurance may establish extra cash at retirement but is not considered an investment vehicle.

4  Since conversions are subject to ordinary income taxes, you should consult a tax advisor regarding your particular situation.

⁵ There may be tax consequences associated with the transfer of assets. Indirect transfers may be subject to taxation and penalties. Consult with your own advisors regarding your particular situation.

⁶ The fixed annuity guarantee against principal loss depends on the claims paying ability of the insurance company.

Investment and insurance products are not deposits, not insured by FDIC or any government agency, not guaranteed by the Bank. Investment and certain insurance products may lose value.

Annuities do not provide any tax-deferral advantage over other types of investments within a qualified plan.

There are costs associated with annuities, including surrender fees, early withdrawal penalties and mortality risk expenses.

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

A recent Cerulli Associates poll found that 47% of surveyed investors preferred paying commissions for investment advice.  While that is surprising, what is truly shocking is that 31% believed their advisors provided free investment advice. 

 This is a huge error in judgment because reducing unnecessary expenses is the easiest way to increase your investment returns.  You should know exactly what you are paying in commissions, “markups” (charges hidden in the price), annual fees (deducted directly from your account or indirectly from your mutual fund), or hourly rates.  Only then can you compare total costs to the services received and determine if you are paying a fair price.

 Advisors are obligated to inform investors about all charges but that information can be buried in an agreement or prospectus.  It is not rude to ask, “What will this cost me in direct and indirect charges?”  If you don’t feel comfortable with the answer you receive, at the very least get a second opinion if not another advisor.

 Expert investment advice has value so investors should expect to pay something in return.  If you work with an advisor you can be virtually certain that you will pay for his/her time and expertise – one way or another.    Assuming otherwise contradicts that cardinal rule of investing (if not of life): “you don’t get something for nothing.”

This content is provided courtesy of USAA.
By Wasif Latif, Vice President, Equity Investments

This week’s debt limitation negotiations remind us of the Eagle’s song, “Take it to the Limit.” This week both Moody’s and Standard & Poor’s placed the AAA bond rating of the United States on review for potential downgrade. These actions were prompted by the possibility that the debt limit will not be raised in time to prevent a default in the payment of interest or principal on outstanding U.S. Treasury obligations. Both agencies agree with us that the chance of an actual debt default is low, and that if it did occur, would likely be cured within a short time period.

We would also note that although a AAA rating is desirable, a downgrade to AA for the United States, while it would lead to higher borrowing costs, should not be disastrous. Japan, another large debt issuer, has successfully accessed the bond market with a AA rating and had an A rating from 2002-2007.

Debt limit negotiations in Washington between President Barack Obama and congressional leaders continued this week, with little progress being made, increasing the likelihood that negotiations will continue right up until a debt default deadline, currently stated to be Aug. 2.

Although U.S. Treasury obligations experienced a modest sell-off on Thursday in reaction to the potential credit rating downgrade, they rallied for the week as a whole. The yield on the 10-year dropped by 0.12% to close at 2.91%. Stocks, as measured by the S&P 500 index, declined 2.06% on the week, closing at 1,316.15.

Investors appeared to focus more on the negatives of the potential U.S. credit rating downgrade, weak retail sales and declining consumer confidence as opposed to positive corporate earnings reports and a decent jobless claims number. We note that gold hit an all-time high this week, closing at $1,594 per ounce, reacting in our opinion to the massive amount of monetary stimulus being conducted throughout the world.

Earnings season kicked off this week on an upbeat note with positive surprises from JPMorgan Chase & Co., Citigroup Inc. and Google Inc. Corporate earnings continue to provide support to stocks, and are expected to be 10% higher this year than last. Next week will be very active with earnings news, with key reports coming from Apple Inc., Intel Corp., Microsoft Corp., Coca-Cola Co., PepsiCo Inc., Johnson & Johnson and many others.

Another positive catalyst for stocks has been picking up: merger and acquisition activity. This week, Carl Icahn made a $12.6 billion offer for Clorox. Also, mining giant BHP Billiton Ltd. announced a deal for Petrohawk Energy Corp., an oil and gas exploration and production company.

Based on this week’s release of the minutes from the Federal Open Market Committee’s June meeting, the Fed expects slower growth, higher employment and lower inflation than anticipated earlier in 2011.

Participants voted to end its second round of quantitative easing at the end of June and keep its monetary policy accommodative. Most importantly, the Fed addressed the possibility of further stimulus by stating, “The committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.” To us, this means that another round of printing money to buy Treasuries is dependent on economic weakness going forward.

The U.S. consumer has become more cautious. Sales at U.S. retailers were weak in June (up only 0.1% from May), indicating the recent stock market volatility, high gas prices and weak employment have prompted consumers to rein in spending. Consumer confidence, as measured by the University of Michigan survey, dropped sharply to 63.8 in July from 71.5 in June, a level not seen since the recessionary days of January 2009.

Following generally dismal jobs reports during the past two months, initial jobless claims provided a mild positive surprise this week, dropping a more-than-expected 22,000 to 405,000 for the week ending July 9. Although the reduction is what the labor market needs, initial claims have exceeded 400,000 for 14 consecutive weeks. Lower numbers will be needed to meaningfully improve the currently high unemployment rate.

Next week’s key economic releases:
Existing home sales
FOMC monetary policy
Philadelphia Fed survey

This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.

Past performance is no guarantee of future results.

Investing in securities products involves risk, including possible loss of principal.

The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange.

Indexes are unmanaged and you cannot invest directly in an index.

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

I was doing some research on the Thrift Savings Plan the other day and discovered something I didn’t know and I suspect a lot of folks don’t realize as well.  What is it?  Well, you can move money into a TSP from IRAs and qualified retirement plans.

You can do this either before or after you leave government/uniformed service, but you do have to have a TSP in place before you can make the transfer (i.e. you can’t open a TSP account with a rollover/transfer).  And, you can only open a TSP account while you are still employed by the government.

Why would you want to do this?  Expense ratios are a pretty good reason.  TSP has an overall expense ratio of .025%.  Even a low expense leader like Vanguard has an expense ratio of .07% on its Total Stock Market ETF.  The difference in expense ratios for target date funds is even greater (.025% for TSP vs. a .59% industry average).  Expenses matter and in a recent Morningstar research report they stated that expense ratios are a very strong indicator of future performance.

Using TSP might not be the right choice for everyone, but once you’ve left government service you won’t have the choice if you haven’t opened an account already.  Something to think about…

For more information, see the link below.

https://www.tsp.gov/planparticipation/transfers/benefits.shtml