Financial Frontlines®

This content is provided courtesy of USAA.
By Joseph Montanaro, USAA Certified Financial Planner™ Practitioner

U.S. investors had more than $300 billion invested in target retirement date funds as of the end of the third quarter last year, according to the Investment Company Institute. With that type of participation, you’d think the funds would be better understood, but unfortunately, that’s not the case.

All things considered, I think this type of investment can be an excellent choice for investors who are unwilling, unable or uninterested in spending a significant amount of time managing their investment portfolio. Note that I’m not saying these investments don’t require time and attention — just not an extreme amount.

Overview

A target retirement date fund is a professionally managed mutual fund that allocates your investment among a variety of different types of assets: stocks, bonds, cash, etc. The portfolio is rebalanced by the fund managers and becomes more conservative as the target date nears. This type of fund is designed to be a one-stop shop — invest in this type of fund and you should have a diversified portfolio. The Lifecycle or “L” funds available within the Thrift Savings Plan are a good example of this type of investment.

Low Maintenance

Being a glass-half-full guy, let’s first look at some of the potential benefits of target retirement funds. You invest in a single fund and get a variety of investments that are managed for you. Since the portfolio of investments is picked, automatically rebalanced and designed to become more conservative as you approach the target date, this type of fund offers the advantage of allowing you to build and maintain a diversified portfolio. Then, keep your investments going and bump them up with each pay raise or promotion.

Look Under the Hood

You should understand that not all target retirement funds are created equal, even if they have the same target date. An informal survey of data available at www.morningstar.com reveals some sharp discrepancies between different funds with the same date. For example, when I looked at a few funds with a target date of 2020, I found the stock component of the portfolios varied from a low of 38 percent all the way up to 72 percent. And, expense ratios ranged from a paltry 0.18 percent to a whopping 1.96 percent. These differences impact the bottom line for you, the investor, and the returns reflect just that.

In both years, the performance varied substantially. In fact, in each year there was more than an 11% difference between the best and worst performers. That’s huge! What do you take from all this? You do need to do your homework. Look for a fund with low expenses, an equity weighting that won’t keep you up at night and performance. While past performance does not guarantee future results it can be a good indicator, so look before you leap.

No Guarantees

Target retirement funds do not offer a guarantee and are certainly not without risk. Unfortunately, some folks didn’t understand that and may have been shocked when their funds took a beating in 2008.

Any fund is just an investment tool and not a cure-all. You still have to figure out how much you need to save to meet your goals, monitor your overall portfolio and progress towards those goals, as well as set aside money for your short-term needs. But, if you’re looking for a convenient way to invest for retirement, a target date retirement fund may be worth considering.

Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Download a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.
Diversification and rebalancing does not protect against losses or guarantee that an investor’s goal will be met.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
The risks of the Target Retirement Funds reflect the risks of the underlying funds in which the Funds invest. The target date is the approximate date when investors plan to start withdrawing their money for retirement purposes. In general, the Target Retirement Funds’ investment program assumes funds will start being withdrawn for retirement purposes at age 65. The principal value of the Target Retirement Funds is not guaranteed at any time, including at the target date. The Funds’ objectives do not change over time.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

This content is provided courtesy of USAA.

Just as your good name may get stolen by identity thieves, reputable auto dealers may have their names and websites hijacked by hucksters. Other scammers put up fake websites and post the same car ad again and again, selling it over and over to unsuspecting buyers who’ll never see that set of wheels.

As director of the Better Business Bureau’s BBB Military Line®educating military families, Holly Petraeus sees many scams that target young military men and women. But, she says, these fraudsters use sophisticated techniques that put anyone buying a car online at risk.

“More and more of the scammers have become good at pretending to be an already legitimate website,” says Petraeus, who warns crooks are becoming especially skilled at targeting people buying used cars.

“There are some very good deals to be found using online car-buying services that take the hassle out of it for you, which can be reassuring,” Petraeus says. Yet she’s seen enough evidence of scam artists at work to develop a list of red flags to watch for when surfing for a good auto deal online.

1. The vehicle is located out of state.
   “That can mean they don’t want you to come and physically inspect the car because it doesn’t exist,” Petraeus says.
2. The price is too good to be true.
   Research what the price should be for that car, at that age and in that condition. If the price you’re being offered is thousands less, think twice. “Sometimes scammers will use the military, saying a car’s being sold by someone who’s deploying or pretending to be a parent selling for a deployed son,” Petraeus warns.
3. The dealer makes you wire the money.
   “They’ll have you wire it to an individual, not to the business itself,” Petraeus says. “If you do that, your chances of seeing the money again are pretty much gone.”
4. The website offers free shipping or can ship immediately.
   Anyone might jump at the chance to get his or her dream car for a great price in record time. But always investigate the shipping service and background of the seller if the shipping time frame or price seems too good to be true.

If you see these warning signs, call the dealer directly to learn how long it’s been in business and other details about its legitimacy. You also can call the BBB office in that area and ask for help researching the dealer and the offer, she says.

Complaints on the Rise

Though the Federal Trade Commission doesn’t keep statistics on online auto fraud in particular, it does report that auto-related complaints, classified under “auto/used” and “auto/others,” rose from 2007 to 2009. And the National Consumer League Fraud Center and the BBB continue to receive complaints about bogus online car sales.

In summer 2010, the BBB reported that one Memphis, Tenn., car dealer got more than 1,000 calls from buyers who thought they had been dealing online with the legitimate business. A fraudulent site had impersonated the Memphis dealer, using its name, address and contact information. The bogus site claimed to sell repossessed cars below market value and instructed buyers to wire a deposit to an individual instead of the business. Some buyers actually came to the Memphis lot to pick up cars they thought they had purchased.

In another example, Petraeus tells of one service member who thought he’d found a dream car for his son online. The online dealer promised to ship it to him right away. Suspicious, the father called the shipping company that the online business stated it had a standing relationship with. The company had never heard of that online dealer and had a several-month backlog on shipping. The seller likely would have taken the money and never shipped a car. In fact, that car probably never even existed.

Be Smart Online …

So, why do people fall for those too-amazing-to-be-true deals, even when the red flags are waving big and bright? “Sometimes people just want to believe in the pot of gold at the end of the rainbow,” Petraeus says. A military spouse for 36 years, she knows the worry and distraction that finances can cause the troops and offers these proactive ways to avoid online auto scams:

• Google the description of the advertised car. If you see it’s been sold 20 times, you know you’re dealing with crooks, says Petraeus, who explains scammers often lift the picture and description from a legitimate car ad and use it again and again.
• Insist on an inspection. “Tell them that you can pay someone to come and inspect the car,” Petraeus says. See if the online dealer balks.
• Get help from the local BBB. Sometimes the BBB will investigate the address of a business for you and make sure it exists. Or it already may have reports about a fraudulent company to share.
• Learn more about the company you’re dealing with by looking up the company on other websites. See if the contact information matches. Call the company directly.
• If you’re completely satisfied the deal is legitimate, choose a payment method that leaves a paper trail. “Absolutely never send a wire transfer,” Petraeus says. “You could offer to pay by a cashier’s check, but you have the best protection if you pay by credit card. If you’re getting a loan, arrange for your bank to pay the company directly.”

… and on the Car Lot

Even when you’re not dealing with scammers online, here’s how to make a wise purchase and negotiate a smart deal.

• Don’t divulge how much you want your monthly payments to be. “Some dealers will write you a loan to get you there, but you may be paying for five or six years and tacking on a huge amount of interest,” Petraeus says.
• Never say upfront you have a trade-in. Wait until you’ve settled on a price. “They’ll give you a big value on the trade-in and get the money back with the extra fees,” says Petraeus, who also advises that you research the value of your trade-in ahead of time.
• Go line by line over the contract. “Question everything,” says Petraeus. “If you’re not confident, get help. A legitimate dealer will let you take a contract for legal review.”
• Calculate the true cost of ownership. “Don’t forget about how much it’s going to cost for insurance, to keep gas in it and make repairs,” Petraeus warns. Before you sign on the dotted line, contact your insurer to find out how much insurance will cost.

The stock market drops for 7 out of 8 weeks losing 7%. The first week in August it rallies back, recouping most of the loss. The market then declines 7 days in a row, rebounds on the 8th day only to free-fall 500 points in the subsequent trading session. Now what should you do?

The wrong answer is: react. The right answer is: follow the personalized investment plan you created when times were less chaotic. If you never developed that plan then you are more likely to find yourself reacting to events instead of being prepared for them.

An effective investment plan is based on a customized Investment Policy Statement (IPS) that covers all major policy decisions (e.g., what are my specific objectives? how much risk should I take? what is the right investment strategy? what asset classes should I use and what percentage should I invest in each class?). A good investment advisor can help you construct your IPS.

Successful investing is all about how you make decisions. Having an investment plan in place before experiencing extraordinary events will guard against making rash decisions in reaction to the market. Your plan will tell you when you need to take action or if the best response is “don’t just do something, stand there.” Either way, your plan will help provide the right answer.

I’m getting ready to send my two boys off to college soon and college expenses occupy my mind quite a bit.  So, while recently doing some preparation for the IRS’s Special Enrollment Examination I came across something I hadn’t thought about for my own family’s tax situation that may apply to you as well.  And the issue is the combination of GI Bill and Scholarships.  Here are the basic tax rules:

1. Education benefits received from the VA are tax free.  So if your child is using your GI Bill benefits then all benefits, including the “housing allowance”, are tax free.
2. Scholarships/Grants used for qualified tuition and fees are tax free
3. Scholarships/Grants used for room and board are not tax free

So…

If the GI Bill benefits cover 100% of tuition and fees (which is most likely the case at an in-state public university), then, in my interpretation, any scholarships used for room and board are taxable income to the student.  There may or may not be an actual tax due for your child depending on other income sources.

On a related note, GI Bill benefits are “second to pay”.  So, if your child has scholarships that must be used for tuition and fees only, then those amounts will reduce the VA tuition & fees benefits received (again, assuming in-state public university).  In this scenario, it may make more sense to transfer the benefits to one child versus another based on “tuition only” scholarships or in-state versus out-of-state/private tuition.

Finally, if VA benefits (or VA benefits plus scholarships) cover 100% of qualified education expenses you cannot claim education expense tax deductions or credits.

Not end of the world stuff, but like most financial/tax related issues it is never as simple as it seems on the first look.

*Note:  Only post 9/11 GI Bill benefits are transferable to children and you must have been on active duty after 1 Aug 2009 to qualify.  Each Service defines its exact rules for transfer.