Financial Frontlines ™

MOAA has just released in interactive e-book entitled “5 Simple Secrets to Maximizing Your Post 9-11 GI Bill Benefits.  Please feel free to forward this publication to anyone who might find it useful or link to it on your website or blog.

You can download your free copy here:

Post 9-11 GI Bill E-Book

In addition, MOAA will be conducting a 1-hour webinar the “ins and outs” of the Post 9-11 GI Bill on Tuesday, August 25th starting at 1200 hrs EST.  This webinar is free of charge, but you must register and space is limited.  The webinar will include approximately 50 minutes of prepared material and a 10-minute Q & A session.  All you need to participate in the webinar is a computer and a phone line.

Register for the Post 9-11 GI Bill webinar here:

Post 9-11 GI Bill Webinar on 8/25 at 1200 EST

We hope to see you on the webinar!

I saw a movie the other night that I highly recommend to you readers.  This is an unusual topic for a financial blog since the movie has nothing to do with finances.  The movie is called “Taking Chance.”  It is the true story of a Marine Corps officer who volunteers to act as the escort officer for the body of a young Marine killed in combat.  It is a  HBO movie if you have cable with pay-for-view.  It may be available on DVD.  It is very powerful and it will make you both sad and proud at the same time.  Thanks…Shane

Back when I was in 6^th grade my teacher, Mr. Rast, asked me a question about money.  He asked me if I would rather have $100,000 or a penny doubled every day for a month ($.01, .02, .04, .08, .16, .32, etc…).  Well I was no dummy and I knew $100,000 was a whole lot of money.  So of course, I went for the $100,000.  Boy, was I wrong.  The penny doubled for 30 days would have yielded $5,368,709.12.  That’s $5 million plus.  Of course, you made $2.5 million in the last day.  Mr. Rast showed me a very important lesson about compounded interest.  But, he neglected another very important factor…taxes.

If I had to pay taxes on the gain at the end of the 30 days, I would only have $4,026,531.84, over $1 million in taxes (assuming a 25% tax bracket).  But here is the kicker, if I was required to pay 25% in taxes each day on the gain of doubling (result: .01, .0175, .0363, 0.05359, etc…) after 30 days I would only have $111,712.922 or forgone profits of $3.9 million.  Let me say that again, almost $4 million in lost gains (the government didn’t get that much, it was never earned).  So what to do?

To begin with, never make a decision on an investment merely to save taxes.  However, with that said, tax efficiency (the idea of arranging you assets to minimize taxes) is worth considering. 

You can keep the whole $5 million, in our example above, through tax free investments.  You can do this by shielding the investment in a Roth IRA or Roth 401K (though to be honest, you would have needed $.0125 to start the program since you’d be investing after tax dollars).  You’ll never pay taxes on those gains.  You can also use tax free investments like municipal bonds.

You can put yourself in the $4 million after-tax example by using tax deferred investment accounts such as traditional IRAs, qualified retirement plans, 401Ks, TSP, and other quasi-qualified plans (SEPs, SIMPLE plans) as well as with annuities.  You won’t pay any taxes along the way and just owe the taxes when you take the money out.

Finally, you can avoid the $111,000 scenario by considering tax efficiency as you allocate you investments.  If you invest in deferred or Roth accounts and taxable accounts, look at where you put each investment.  Securities that generate little to no taxable income should be held outside your tax deferred/Roth accounts.  Some examples that are good fits for taxable accounts (in order of tax efficiency) are municipal bonds, growth stocks, Exchange Traded Funds (ETF), and index mutual funds.  Candidates for sheltering in tax deferred and Roth accounts are corporate bonds, income stocks (those that pay high dividends) and actively managed mutual funds.  By arranging your investments with tax efficiency in mind you can minimize the taxes along the way.

Again, it is important to remember that taxes rarely should be your primary consideration when selecting investments.  But, it makes a lot of sense to look at how you hold your assets to minimize the tax bit.

I have been out of the office with pneumonia this week and I have had time to listen, read, and watch plenty of news on this credit crisis issue.  As I put together the pieces of the puzzle, I’m struck by how worthless credit has become in society and how misguided, no spoiled, we as citizens have become when it comes to credit.

We all knew it.  We talked about it around the kitchen table with our friends and family.  You talked about how easy it was to get credit and some company was throwing credit at you.  You might as well use it to buy that new furniture or electronics gear or that extra house.  How many people tried to become little Donald Trumps?  So we kept using credit to purchase what we wanted.  The problem is that we were living in a box of free credit and we lost relativity and reality of things outside the box like the real financial world.

In today’s situation credit in and of itself is worthless.  It has no value.  It’s an empty promise without proof of assets backing it up.  Someone finally noticed and called us on the fact the emperor has no clothes.

Now that credit is getting tight we are offended that we can’t get credit.  There are countless stories of people and businesses in the papers crying because they can’t get the credit they have become accustomed to keep their lives and businesses going.  Truth is that you can still get credit.  It’s just that the credit rules are going back to what they used to be; something of value.

What we are seeing now is called reverting to the norm.  Happy days are over and it is time to get back to reality.  Credit has to have assets backing it up to be worth something.  Credit is not owed to us as if it is some kind of right.  It’s not a right, it’s a privilege and nothing is owed to us so it’s time to buck up.

When I was a teenager, it was a big deal to start your credit record and that meant you applied for a Sears or Montgomery Wards or gas company credit card.  These companies weren’t giving credit away back then.  It was not a sure thing.  You had to supply proof that you were good for the credit—a good credit risk so to speak.  It was a big deal to find out you were approved and then you were careful not to abuse the power.  With power comes responsibility.  Then credit was backed up by proven assets and the ability to pay.  Credit had substance, value.

Now what do we have?  We have credit card companies pushing credit cards to kids with no assets.  I know.  My girls received credit card apps in the mail when they were in high school and college when they had no assets.  Shame on those companies.  You deserve your default rates.  And for you people who accepted the offers, hope things worked out and if not, oh well.  People have to be smart enough to know their financial situations and whether they can afford the responsibility to have a card—or credit in general.

You would think we should know better since we’ve been down this road before.  A big reason for the Great Depression was people buying stocks on margin (credit) with no assets (collateral) backing up the margin.  Back then you could purchase a substantial amount of stocks with no assets backing up your credit line.  The values of stocks were based on worthless credit.  The bubble had to burst when people figured out the stock market value was based on nothing.  Now we have rules for minimizing the amount of margin and the required collateral a person must have before buying investments.  But here we are again only this time it is houses instead of stocks.

The housing market and financial world realized mortgages are based on nothing—worthless credit.  The housing market was ballooning as more and more people bought houses with no collateral.  Now why would a company risk their own financial security and future by making mortgage loans to people who can’t afford to pay the loan?  That type of business transaction makes no sense and in fact would be financial suicide.  Well to do that type of business you would have to know someone else would take the risk off you.  Take a look at a New York Times article of 30 Sep 1999 by Steven A. Holmes.  Just pull up the New York Times and search under September 30, 1999.  The article will pop up in the search.  It seems our government decided responsible tax payers would be willing to bare the load for people who couldn’t afford homes to buy a home.  I guess someone decided home ownership should be a right.  Wonder what the motivation for something like this decision would be?

Right now, I’m not feeling much sympathy for companies or people.  Maybe it’s my illness talking.  Bailout?  I think not.  Let the market get the worthless credit out of its system and get back to the norm.  In the 1930s it was a stock market based on worthless credit.  In the 2000s it’s the houses based on worthless credit.  How long will it be before the credit card companies follow suit?  If financial companies called in all your debts right now, how much of your credit is based on thin air?  I have to think there are loads of senior citizens out there with a little smile on their faces thinking “I told you so.”

Yes, there it is on the back of your card, in the Medical block, under “EXP DATE.” Before Tricare for Life, the expiration date indicated when you dropped off the Tricare Prime or Standard rolls upon turning age 65. But now we have Tricare For Life for folks 65 and over and the expiration date still exists.

The processes used for issuing military ID cards do not allow for an “indefinite” or blank input in the expiration block. The costs for changing the systems are prohibitive. So a date will continue to be printed for the foreseeable future as the DOD hashes out the options.

The DOD Tricare Management Activity is aware of the issue and has passed the word to all contracted health providers and military treatment facilities. These agencies have been told to not pay as much attention to the ID card as to their on-line DEERS eligibility systems. DEERS has your most current eligibility information.

Of course being a very large organization, the health service community, someone will not get the word and occasionally deny a military retiree service based on the expired ID card date. If this should happen to you, ask the service provider to perform an interactive DEERS query rather than rely on the ID card information. Have your Medicare Part A and B card at the ready.