Financial Frontlines®

This content is provided courtesy of USAA.

Make sure you understand the financial realities of divorce. You may feel 110% ready to divorce, but have you considered the financial implications of splitting up?

“When people are thinking about divorce, many are just ready to get out at any cost. That is exactly the wrong attitude to have. You have to plan carefully,” says June Walbert, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA. “In virtually every divorce, there is a major lifestyle change. You have to keep in mind the financial ramifications for today as well as for decades to come.”

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The Right Paperwork

If you’re splitting funds from your spouse’s 401(k) or other retirement account or pension, you’ll need a Qualified Domestic Relations Order, which:
– Officially directs the ex’s employer how to pay your portion of the account, as determined by the divorce decree.
– Must be submitted to the plan administrator.
If an annuity is divided in a divorce decree, a similar document may be required to finalize the payment plans. Check with an attorney for additional legal information regarding your particular situation.
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Dollars and Divorce

The good news is that many people seem to grasp the connection between their bank accounts and their marital status. Among the 44 states that collect divorce stats, divorce rates dropped by 5% between 2006 and 2009 — just when the economy was at its worst, according to the Centers for Disease Control and Prevention. In fact, 38% of those who responded to a survey by the National Marriage Project at the University of Virginia who were considering separation or divorce said the recession caused them to put aside their plans. However, law firms nationwide are reporting a recent surge of business, as couples feel more confident that the improving economy can more easily sustain two households.

“The economy affects whether people can afford to divorce. It affects what you do with the house, a family business, child support and alimony,” says Linda Lea M. Viken, president of the American Academy of Matrimonial Lawyers and a Rapid City, S.D., family law attorney with more than 30 years of experience. “If people don’t have money, they can’t even afford appraisers or lawyers. When considering divorce, you have to take off your emotional hat and put on your business hat because you’re making business decisions.”

Even if the recovering economy has boosted your confidence in your ability to afford divorce, make sure you have a clear picture of your financial reality.

Make a Budget

Before you divorce, sit down with a paper, pen and calculator to figure out how you will pay for everything, Walbert says. A divorced couple will suddenly have two households to maintain financially and two retirement accounts to fund.

“When going through a divorce you need to know how the numbers shake out, so know what you can afford and what you can’t,” she says. “The numbers don’t lie.”

Even if one party earns the bulk of the income, it is unlikely that person will walk away with the bulk of the monthly income or assets. Keep in mind, however, that in many states a great deal of discretion is left to the judge or courts. If children are involved, child support and even spousal maintenance often are awarded, making the keeping of the proverbial lights on in two homes a question mark for both parties.

Tax Impact

Even if you calculate your current income and expenses down to the nickel, you probably still don’t have an accurate picture of what your checkbook will look like after a divorce. Divorced couples lose out on the tax benefits of filing jointly, and only one person will have the tax advantage of filing as head of household if awarded primary custody of the kids. Child tax credits, child care deductions, and the family home’s interest and property taxes likely will be declared by just one of the parties — assuming the couple’s house was not sold. “It’s a big difference whether you have those deductions or not,” Viken says.

Further, make sure to tidy up past years’ filings before calculating your new bottom line. There is nothing worse than finding out too late that a dishonest spouse lied about paying or filing previous taxes — or worse, cheated on the filings. Remember, you will be liable for any tax obligations incurred during the marriage.

Bottom line: There’s a good chance that at least one party will be paying more taxes, which slashes take-home pay for everyone. And that further squeezes what is likely a tight financial situation.

Retirement — Your Future Now

“Even if you’re in your 30s or 40s, you must consider the impact that a divorce today will have on your retirement in decades to come,” says Walbert. In many cases, retirement funds amassed during a marriage are split 50-50 — no matter who earned the money. A spouse’s military retirement paycheck or corporate pension may also be considered part of the settlement. Likewise, when couples have been married at least 10 years, the poorer spouse is eligible for up to 50% of the ex-spouse’s Social Security benefits at age 62, if greater than his or her own.

That said, use an online calculator to figure out how far these divvied-up retirement assets will help each of you in retirement, and what earning potential you and your spouse have between now and then. Chances are both parties will have to save more and work longer than originally planned.

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.
USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. 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.

This post was inspired by the Feedback post in the February 2011 SmartMoney magazine. The post by “GenXer” states,

“The reality is, we GenXers trust the baby boomers less than they trusted the Greatest Generation—and with good reason. Baby boomer financial advisers have taken more and left less than any other generation throughout history. These advisers say we shouldn’t be conservative at our age, but I think our grandparents, the Greatest Generation, would disagree. We hear their message; we just don’t agree with them.”

Disclosure: I’m a Baby Boomer. I’m a Baby Boomer financial adviser. I have two daughters who just made it into the Gen X era. Based on the points I make in this blog, I think it’s safe to say, GenXer disagrees with me. And I’m okay with that.

However, I think GenXer may want to expand his/her breadth of knowledge before going down the path of the Greatest Generation.

Assuming the philosophy behind the Greatest Generation is one of conservative savings, this philosophy is full of risks and is based on emotion; the fear of failure. We know the Greatest Generation’s fear stems from the Great Depression. As I have stated before on these pages, being conservative can be more risky than investing in stocks and bonds. And making any decision based on emotions is asking for trouble.

Being conservative means you are purposely choosing to “save” money instead of “investing” it. Saving money specifically means, protecting its value. Investing money means building wealth through capital appreciation.

Saving money doesn’t build wealth because it doesn’t provide enough return to offset the taxes and inflation eating away at its return. Looked at the returns on money market, savings accounts, CDs, and bonds lately? Pathetic. Will their returns go up over time? Sure. I’ve lived through better times with returns on savings. But I also lived through the rising inflation and interest rates that caused the better returns on savings. Those eventual better returns on conservative savings will not keep up with the costs associated with taxes and inflation that will exist in that time.

Oh, and those who point to the great bond returns over the last few decades…  We lived through a unique environment of falling interest rates over that time.  That provided rich soil for bond holders to cultivate decent returns. Those days are over with current interest rates at rock bottom levels. The future is one of rising interest rates.  That is a killer for bond values. Best case scenario for bond holders is interest rates continuing to scrape the bottom which would mean bond values stay relatively stable with their low coupon rates. Not a future to bank on.

So if you follow the Greatest Generation down the path of conservative savings realize this; you are doomed to returns behind the power curve and a strategy that’s based in fear. Due to your lack of wealth building returns in a conservative account, you’ll have to compensate for your poor returns by pouring huge sums of your income into savings. Good luck with that. I’ve met plenty of folks who chose the conservative route who ultimately found they didn’t have enough savings to live the life they imagined in retirement—due to the fact, they didn’t save enough. Those that are satisfied with their savings either have no idea of how much they sacrificed in potential wealth or don’t care as they are willing to make do with less. Are you?

So where does that leave you? You have no choice but to be an investor. Only by being an investor can your money work hard enough to offset the taxes and inflation and build wealth. But, that’s where you disagree with me and you think investing is a time wasting, money losing proposition.

I’ll take a few wild guesses why you belief us baby boomers are wrong…

• You judge your success by your account value.
• You think account values and investments should produce fairly consistent positive returns year after year.
• Your account is up and down and generally going nowhere.
• The economy is rocky and unpredictable.
• People and the media talk about individuals losing their shirts, investment losses, and financial firms’ greed.
• The 99% protesters.
• The movies Wall Street and Margin Call.
• Mortgage companies stealing from people.
• Housing prices falling.
• Unemployment.
• The wealthy 1%.

For the most part, none of the items in the list matter concerning your ability to create wealth. I suggest the problem isn’t investing. The problems are:

1. personal beliefs based on incomplete knowledge, and
2. media/marketing efforts based on selling rather than providing a real public service.

To keep from writing a lengthy narrative to cover incomplete knowledge, you may want to check out these articles in this blog. They scratch the surface to explain why your beliefs are skewed at this point. They also explain how to manage investments to minimize risk. Believe it or not, “risk” is in all savings and investments. If you arm yourself with unbiased knowledge, you can manage and minimize risk using relatively simple investment techniques. As for the fear, fear is no match for knowledge.

• Chatting About Investments at Lunch
• Younger Worker-Investors Going Astray
• The Stock Market’s Not an Investment, it’s Gambling
• What’s a TSP/401k/IRA Investor To Do?

Now about that media/marketing issue. The news and financial media are only interested in getting you to watch, listen or read them. Big and splashy stories are best. Plus they only care about what’s going on today. We are so short-sighted people can’t even go to the gym for a workout without constantly checking their phones and Facebook pages for fear of missing some lame information. To quote a current mobile phone company ad, “That’s so 27 seconds ago…”, who cares!?

The media won’t educate the public on useful market/economic information because it’s boring and takes time to explain. They won’t waste their precious time on complex issues. They sell the sizzle not the steak. That’s because we live our lives as people with no attention spans. So we get what we allow; 30 second sound bites and tweets rather than in-depth reporting. And we remain ignorant about the investment knowledge demanded to be good investors.

The evening news reports the DOW is up or the DOW is down. The message is, if it’s up you made money and if it’s down you lost money. That couldn’t be more wrong and misleading for the working aged public (this is not about you retirees out there). A good example of media public disservice. Did you realize a down market is actually your friend and the only time average investors can capitalize on wealth creation? If you don’t understand why this is case, start studying.

Personal finance magazines are all about the latest trends and the products and services to “help” you manage the current situation. Following this advice is a recipe for failure. Successful investing isn’t about today. It’s about what happened in the past and what’s likely to happen in the future based on long-term historical trends—50-100 years ago. Believe it or not, nothing is really new. We’ve been there and done that many times over. The times may change but people don’t. “100 Top Mutual Funds You Must Own Now,” anyone? Don’t understand this, start studying.

Your friends, family and the man on the street are uninformed about financial issues because they only know what they read, listen to or watch in the media. I don’t mean that in a pejorative way. We are all intelligent people for the most part but our knowledge is sketchy outside our areas of expertise. Where we lack knowledge we are more susceptible to following trends, hearsay and the media hype at the moment.

Same with investment strategies and techniques and the media. You won’t be taught valid, practical ways to invest your money; ways that work and don’t take long to learn, implement, and manage for average people. These methods are boring and once you learn them, there won’t be anything else to amaze you with. Better to paint investing as a game of chance with “make or break” opportunities because that’s exciting and gets viewers, listeners and readers. Another media public disservice.

Remember this…as members of the great unwashed masses; we are the last to know of a real investment opportunity. By the time an investment is discussed in the media or by your uncle Joe, it’s too late to participate. The media wouldn’t be hyping it unless it had already become news worthy and this is after the opportunity for investment has passed. All the hucksters pitching the next get-rich-quick-scheme are feeding off the media and your need for greed; another emotion looking to do you in. Gold anyone? Oil and gas investments? Commodities?

Forget the media. You need to operate on real economic data not tainted by politics or media hype. Study the history of markets and economies over long periods of time; 100 years and more. You need to realize that situations and technology may change but market and economic cycles aren’t new and they are fairly predictable. To get a better understanding of your situation, know where you are in the country’s economic cycle and where the country is heading according to the history. There will always be “bubbles” and they will always pop. Recognize a bubble and plan accordingly or you’ll be joining those on the news claiming they are victims.

One last thing…no one has “…taken more and left less…” because building wealth and the economy are not zero-sum games as the media wrongly suggests. The idea of the top XX% owning XX% of the wealth in this country is just plain wrong and misleading. And the media talk of the income gap and the loss of the middle class is also misleading and dangerous. These current day stories imply a zero-sum game that is patently false.

No one with wealth today inhibits your ability to have wealth tomorrow. And other than an unscrupulous financial huckster, the tax burden is the real threat to your financial future. Only taxes literally take your hard earned income away from you denying you the opportunity to save and invest. Your after-tax income is used at your discretion—even when you give it to hucksters. Ever figured your total tax burden by adding all federal, state, county, property, school, local, gasoline, tolls, and sales taxes you pay in a year? Compare that total tax bill to your gross pay. Steamed yet?

Some have said I’m cruel for piling on the individual as the cause of their investment woes. It’s not my intent to be mean. It’s meant to get people to wake up. The fact is the common denominator in all these financial hardship stories is us…individual people. No one cares about us like we do. No government bureaucracy will ever protect you from your actions like the politicians want you to believe. People spend more time picking out their next mobile phone or e-book reader than investing in their financial knowledge and health. Whether you like it or not, you have no choice but to get involved in your financial future for your own sake.

Take time to educate yourself on the history of markets and economies. Learn the proven methods to invest your income and build wealth. Start with this blog. Then you will understand why listening to this baby boomer may be time well spent.

I’m sitting in a restaurant for lunch and two people at the table next to me start talking about investing and their 401ks. True story.

I’m not good with ages but they were 30ish give or take. Their firm just stopped the company match on their 401ks. Here’s the short version of their discussion:

• Company stopped the matching contributions.
• Their account values are down and they can’t get ahead.
• They are tired of the up and down turns in the markets.
• The economy is in the dumper.
• They would rather put their money somewhere with consistent growth.
• Maybe they should pull their money out of the 401k and use CDs.

As much as I was moved to say something to them, I didn’t. I have no problem minding my own business…really! Besides, to properly address all their issues would have taken the whole lunch time and more.

What eventually struck me was that for their age, they have only known the flat market we’ve been in since March 2000. Check out a stock chart using the DOW Index from Jan 2000 to now. Notice how we have hovered above and below the 11,000 level. No wonder their opinion of investing was sour. The younger investors of today need some perspective.

The flat market over the last dozen years is normal. Flat markets happen; now, 1966-1982, 1946-1950, 1905-1917 and so forth. The flat markets happen after periods of strong growth and they tend to last a while as you see. They provide an opportunity for the economy to cool off, retool and resynchronize as we, the country and world, prepare for the next round of growth. Unfortunately to someone who’s only investment experience is during a flat market, the investment world is flat. Have no fear younger investors, the world is not flat.

Our human brains focus best in today’s world. What’s going on today forms our opinions and how behave with our money. At the end of every day, we are told the DOW is up or down. The evening news talking heads always spin the down days as though we all lost our shirts. On the good days, we’re rich! Then we take action based on information from this very limited perspective–action doomed to fail.

Investors must use a long term strategy. In the short term, the markets are up and down and random. Only speculators try to make money in the volatility of the short term markets. True investors see a bigger picture. The stock market is up 72% of the time over the long haul. Looking at it this way, realize that down markets are temporary and must be exploited before the inevitable climb upward starts again.

I’ve written about annuities and posted USAA content about annuities on this site several times. Annuities are confusing financial products because they come in so many varieties and every insurance company puts their own features on their products. In this post, I’m limiting the topic to “income annuities” only.

An “income annuity” is the simplest of all annuities. You make a one-time, lump-sum deposit into the annuity and it provides you income. You can structure the income to meet your needs. A common income option is a monthly lifetime payment for you and your survivor.

There is a very good USAA video on this site that discusses income annuities in general but this post is specifically meant for you military retirees. It’s worth 6 minutes to watch the USAA video just to provide a foundation of knowledge on income annuities.

Income annuities have received a good deal of press lately because of the turbulent stock and bond markets and the lack of guaranteed interest-bearing accounts that pay decent rates of interest. The sales pitch is that an income annuity will guarantee you a stable income for life while your other stock and bond investments are not dependable.

Generally I believe a military retiree has no need for an income annuity. I would have to see a unique situation in a military retiree’s financial situation to recommend an income annuity.

A military retiree already has an income annuity; your military retirement check. In fact, you have two annuities when you add Social Security. Both of these income annuities offer cost-of-living increases to boot.

Why would you consider another source of steady income with an income annuity? Well…

• Maybe you want another source of steady, guaranteed income to help meet your fixed liability needs—bills, debts, mortgage, etc.
• If you didn’t enroll in the Survivor Benefit Program (SBP) to continue your military retirement pay, you may want another plan to compensate for the lack of SBP. You could purchase an income annuity now with a continuing survivor benefit. Or, your survivor could use life insurance proceeds to purchase an income annuity. Or, your survivor could use other investment assets to purchase an income annuity. Point being, survivors often prefer steady, guaranteed income instead of managing investments and dealing with the unknown nature of the economy and the markets.
• If you took Social Security early, you may want to compensate for the decrease in monthly or survivor’s Social Security income.
• You may get a better payout with an income annuity than with interest rates on CDs, bonds and money market accounts.

Shop carefully for an income annuity. The amount of income differs so shop around. Some offer cost of living adjustments or refunds of principal in case of early deaths but your income amount will suffer.

Medicare Open Enrollment – Making Informed Choices

Some MOAA members have been inundated recently with information from insurance companies regarding enrollment in Medicare Supplemental Insurance (Medigap plans) or Medicare Advantage plans. These can be confusing, so let’s review.

Bottom Line Up Front: If you’re happy with your health care situation, you don’t need to do anything. All the marketing materials can go directly to your recycling bin, and your current enrollment will continue into 2012. Don’t throw out your Medicare & You guide however; it contains a lot of information you’ll want to keep on hand throughout the year.

Original Medicare consists of Part A (Hospital Insurance) and Part B (Medical Insurance). Most retirees or their spouses paid Medicare taxes during their working years and don’t have to pay a monthly premium for Part A. Part B does require a monthly premium, which is means tested. To retain eligibility for Tricare beyond age 65, military retirees must be entitled to Part A and enrolled in Part B.

Medicare Supplements or Medigap plans help cover out of pocket expenses of Medicare beneficiaries. Tricare for Life acts as a Medigap plan for military retirees and spouses. You need no other supplements.

Part D is Prescription Drug Coverage. Most military retirees don’t need to join a Medicare Prescription Drug Plan. The drug plans are run by private companies approved by Medicare. Monthly fees vary by plan.

Sidebar: Surviving spouses who may lose their Tricare coverage due to remarriage, and anyone whose limited income qualifies them for Medicaid, should consider Medicare Part D coverage.

Medicare Advantage (MA) Plans, sometimes called “Part C”, combine Parts A and B, and usually Part D. Private insurance companies approved by Medicare offer these plans. The plans are run like a Health Maintenance Organization (HMO) or Preferred Provider Organization (PPO), and can have a yearly deductible, co-payments, additional monthly premiums above Part B premiums, and restrictions on referrals to out of plan providers, as well as yearly limits on out-of-pocket expenses. MA plans must include the coverage obtainable from Original Medicare, except hospice care (Original Medicare covers hospice care even if you’re enrolled in a MA plan). MA plans usually offer additional services such as vision, hearing, dental and/or wellness programs to make them more attractive to some retirees. The insurance companies providing these plans are heavily subsidized by the federal government, though those subsidies are being squeezed by tightening budgets and by changes in health care policy expected to go into effect in the next few years.

When a MOAA member contacts me regarding whether or not to enroll in a Medicare Advantage plan, I always ask first if Part D coverage is required to join that plan. If it is, I advise them to look for another plan, or choose Original Medicare. If a Medicare Advantage plan’s network pharmacy is also a Tricare network pharmacy, the plans may coordinate benefits. However, the potential savings or additional services obtainable from a MA plan rarely offset the added premiums required for Part D coverage (average $30/mo in 2011) and the potential hassle of coordinating drug benefits. If a plan does not require Part D enrollment, proceed with caution. Tricare for Life will back up either Original Medicare or a Medicare Advantage plan, but on the whole, MA plans should be considered as standalone plans.

Once the Part D requirement is determined, the member should carefully evaluate and compare the features of the MA plans under consideration. If the plan offers features that you will likely never need or use, or cover in another way, then it isn’t worth paying any additional money to belong to that plan.

Next, if you want to use your own health care providers, determine whether or not your provider is a member of that MA plan. The best way is simply to ask your doctor if he or she participates in any Medicare Advantage plans. Some MA plans require that you get all of your care from providers in their network (emergencies are usually exceptions). Some MA plans require referrals from a primary care doctor. Some plans allow greater choice of providers, but will charge you extra if you get care from someone outside the network.

Finally, Medicare Advantage plans are offered regionally, and can vary widely around the country of even your state. If you live in more than one place in retirement, a MA plan might not be good choice.

With all the different rules from plan to plan, many retirees decide to keep things simple and stay with Original Medicare. That’s not a bad choice. Tricare-eligible retirees can use Original Medicare and Tricare for Life to great advantage.

We’re nearing the end of Medicare’s Open Season, which closes December 7, 2011.  Whatever decision you make isn’t permanent; plans have open enrollment periods each year. You may be stuck with your decision for an entire year though, so choose carefully.

For more information, see Medicare’s Plan Finder tool at www.medicare.gov/find-a-plan

Source: Medicare & You, Centers for Medicare and Medicaid Services, 2011