Kiplinger Magazine’s Social Security Strategies

Jul 29 2015

For those of you closing in on your eligibility for Social Security benefits, I found this article very helpful for determining your application strategy.

Best Strategies to Boost Your Social Security Benefits

I hope you find it helpful also.

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11 Lessons That Distinguish Successful Investors

Jul 27 2015

I don’t think the media do us any favors in the investment arena. More often than not, what I read, watch or hear does us more harm than good.

It’s not just what’s said. It’s the subliminal misguided perceptions about investing planted in our minds when faced with the following situations.

  • The constant reporting of how the investment markets did at the end of every workday. The DOW is up; the DOW is down and how it implies a winner or a loser.
  • Viewing the business news channels that follow the markets throughout the day and report on specific companies’ stock values.
  • Viewing the shows with stock pickers telling you to buy or dump various stocks based on their predictions.
  • The ratings of top mutual funds, stocks, bonds, etc, etc., in magazines and newspapers.
  • All the articles touting “…you must own these investments…” to be wealthy or retire comfortably.
  • The reports connecting negative national and world events to the markets and our investments.
  • Do this one month and do this the next month. And all the conflicting advice.

Too many of us are left with the impression that being a successful investor requires:

  • Daily or regular involvement.
  • Constant change.
  • Playing the stock market by timing the markets and your investment selections.
  • Moving your investments around among the funds in your 401k/TSP/IRAs.
  • Picking funds based on those with the best reported returns.
  • Specialized education or training.
  • A get-rich-quick scheme.
  • Listening to Uncle Joe for investment advice.
  • Too much effort.

Some believe the deck is stacked against us so why try.

We know average investors aren’t successful because data collected from investment accounts indicate individuals tend to have average annual returns well below the free-flowing markets.

According to the data collection and analysis firm DALBAR from a 2014 report, look how the average investor did against the free-flowing S&P 500 stock index.


What does this mean in dollars? Starting with $10,000, over the 30 year period, the S&P 500 index would have grown to $235,190 while the average investor compiled $29,740.

At this rate, people won’t have enough wealth to retire and more people will rely on the government for retirement security at a time when the government is broke. Congress is already talking about whether the government should take over our retirement investments since we can’t be trusted to do the right thing for ourselves.

How did the average investor fall so far behind? Partly because we are never taught how to be successful investors and, if we try to learn, look at the information we get from the media—“Buy These Funds NOW!” And in the financial service arena, you can’t tell the sales people from the honest advisers who work for your benefit.

So where do we go from here? First realize that successful investing is boring and that’s why we don’t get realistic, quality information from media. If the media explained the real story, it wouldn’t catch our attention, it wouldn’t sell media and there wouldn’t be anything else to write about.

We shouldn’t look for excitement or expect to read about success in 140 characters. Being a successful investor requires a little time to understand a few key concepts but none of the concepts are cosmic. Anyone can be successful with a little knowledge and a lot of discipline. If you are doing it right, your days should be calm and your nights restful. Remember, it’s boring.

So here are the lessons successful investors live by.

1) Learn to appreciate saving and investing more than spending. Spending is a short-term high. Assets from savings and investments are a deep and lasting satisfaction.

2) Realize wealth is about what you’re worth not what you earn. Wealth provides freedom. Otherwise you’ll be a slave to a paycheck your whole life.

“Man! If I made $150,000 a year, I’d be rich!” Wrong. There are plenty of people who make lots of money but have low-net-worth. Ask any low-net-worth professional athlete what happened when the paychecks stopped. There are high-net-worth people who earn average incomes. 80% of millionaires in the U.S. are average citizens who budgeted and invested well over their careers (“The Millionaire Next Door” by Thomas J. Stanley).

3) Know the difference between an asset and a liability. Assets increase in value over time and you own them. Liabilities decrease in value and don’t last. To build wealth, increase your assets and decrease your liabilities.

4) Learn the difference between good credit and bad credit. Good credit, like a mortgage or an education loan, can help you build assets. Bad credit, like consumer credit, makes buying disposable or short-lived products more expensive. You end up with nothing to show for your money. However, all debt can be bad if not maintained at reasonable levels for your income. The ideal is to have minimal debt to no debt.

5) You don’t have to take high risks or have a get-rich-quick scheme. In fact, stay away from these. Don’t listen to any marketing or sales pitches. These only make the sellers rich. Most times, if a person approaches me about playing with penny stocks or stock options or the lottery or gambling or sweepstakes or multi-level-marketing programs, the person is usually the last person on the earth who should be messing with these programs. It seems there is a correlation between not having any assets and the need to find a get-rich-quick scheme. Sales people know this and take advantage of this investor psychology. So…

6) Slow and steady wins the race. It’s a marathon; not a sprint. It’s like building a home. Start with a solid foundation; emergency savings, a good budget, spending less than you make. Build solidly planned investments in real asset building funds within your 401k/TSP/IRAs. When you’ve built your home (so to speak) and can afford to throw money away, then you can play with the stuff in point 5 above. I have no idea why you would want to though.

7) Get rid of emotional investing. If emotion drives your investment strategy, you lose every time. Emotional investments are based on pushing your greed or fear button. Gold is an investment that is routinely sold by appealing to your greed or fear. Listen carefully to ads and sales pitches to determine which button they are pushing on you.

8) Carve out a portion of your paycheck off the top to invest in your 401k/TSP/IRA every pay period. Live off the remainder of your pay. Credit isn’t a source of living income. If you wait to invest after you’ve paid bills and lived, you’ll never have investments/assets. “A part of all you earn is yours to keep.” (from The Richest Man in Babylon)

9) Wealth is about ownership. Why are wealthy people wealthy? They have lots of ownership in companies, properties, or their own businesses–assets not liabilities. The stock funds in your 401k/TSP/IRAs and other investment accounts represent ownership in companies world-wide. It’s the number of shares (ownership) in your account that determines your wealth. The account value will rise over time as a by-product of your ownership level. Focus on the collection of shares. The person who retires with the most shares wins. Search “averaging down” on this site to learn more about building ownership in your accounts.

10) As your income rises, so should your contributions to your investments. Not just the raw number increases but the percentage of your income going into assets should increase over time. Besides your money investments, invest in your career-self to increase your career value and marketability. Your lifetime income is part of your worth. Make more income to increase your net-worth; not to have more worthless toys. The new car smell wears off however increased wealth provides you options like earlier retirement or the ability to work because you want to and not because you have to.

11) Learn how to build a portfolio allocation to meet long-range objectives and to get out of self-defeating activities like market-timing and churning your individual investments. This Financial Frontlines site is full of lessons on building appropriate portfolio allocations (search “portfolio allocation”). The investment pros can’t regularly beat the free-flowing markets with all their staff, research and trading strategies. What makes us think we can? NOTE: we don’t need to beat the markets. We don’t have to beat the markets to do well. See the table above. Just understand portfolio allocations.

I know people who followed these lessons early in their careers and are now 50-year-old millionaires. Ordinary, average wage earning people. Be patient. The key to success is learning to not listen to news, media, sales people and friends/family. Building wealth doesn’t “trend.” It’s not a fad, new technique or a hot tip. Wealth is the result of proven timeless concepts and strategies implemented over your career.

If you want to read something that can help, read “The Richest Man in Babylon” by George S. Clason. This old book has timeless lessons that will serve you well.

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Explaining the Strickland Decision; VA Retro-Compensation and Amended Tax Returns

Jul 24 2015

I’ve written about the Strickland Decision here before. If you missed that article, you can read it here . But, what I haven’t talked about is how the IRS statute of limitations rules affect your ability to claim refunds on the taxes that you paid that shouldn’t have been paid under Strickland. That’s the objective for today. Let’s start with a review though…

The Strickland Decision

The Strickland Decision and Internal Revenue Ruling 78-161 give a retired service member the ability/right to adjust military retirement income reported on Form 1099-R. Generally speaking, significant tax benefits will only apply to those who are rated less than 50% disabled or those who receive Combat Related Special Compensation (CRSC). For those rated 50% or more disabled and receiving Concurrent Retirement and Disability Payments (CRDP) the tax benefit is minimal or non-existent due to the phase in of CRDP over the last 7 years.

This results from the reality that it will take a long time to fully develop a claim for Veteran’s Disability and during that time you accrue retro-active benefits. For those rated less than 50% disabled the benefits, in essence, change some of your taxable Retired Pay into tax-free Veterans’ Benefits. Unfortunately DFAS won’t retroactively update/correct your 1099-R and you have to do it yourself.

So…bottom line is if you are less than 50% disabled you can reduce your taxable income in the year of award and if your claim spanned more than one tax year you can file an amended return to claim a larger refund or reduce the amount you paid in.

IRS Statute of Limitations

At the 50,000 foot level, you can amend a tax return for a refund or credit for up to 3 years after the date you file the return. More specifically, the taxpayer must file an amended return within the later of:

  • Three years (including extensions) after the date the taxpayer filed the original return (if the return is filed early, use the due date); or
  • Two years after the date the taxpayer paid the tax

These rules apply to all taxpayers. But, Congress realized that it is likely that a Disabled Veteran could be in “negotiations” with the VA and go beyond the 3 year limit, so there is a special rule for amended returns filed by Disabled Veterans.

Section 6511(d)(8)

Section 6511(d)(8) of the IRS Code, Special rules when uniformed services retired pay is reduced as a result of award of disability compensation, specifically states the following:

(A) Period of limitation on filing claim

If the claim for credit or refund relates to an overpayment of tax imposed by subtitle A on account of

    (i) the reduction of uniformed services retired pay computed under section 1406 or 1407 of title 10 United States Code, or

   (ii) the waiver of such pay under section 5304 of title 38 of such Code

as a result of an award of compensation under title 38 of such Code pursuant to a determination by the Secretary of Veterans Affairs, the 3-year period of limitation prescribed in subsection (a) shall be extended, for purposes of permitting a credit or refund based upon the amount of such reduction of waiver, until the end of the 1-year period beginning on the date of such determination.

(B) Subparagraph (A) shall not apply with respect to any taxable year which began more than 5 years before the date of such determination.

OK…sorry for quoting the law, but I wanted to get it down on paper for you. What does it mean? There are two parts. First is the amount of time that you have to file the amended return. Second, is how far back you can go. So…

Once you receive the letter from the VA, you have one year to file the amended returns. Now…the law doesn’t say it specifically but I don’t think Congress intended to shorten the amount of time you have to file your “recent” returns (i.e. under the normal 3-year statute of limitation). With that said, I can’t guarantee that and the prudent retiree might want to consider filing all returns within one-year of the date of the letter.

Since I seriously doubt you would get a letter from the VA dated 1 Jan and since most of us file based on a calendar year, 99% of us will be able to file amended returns for the 4 years prior to the year the letter is dated.

Here is an example from the US Court of Federal Claims (Jonathan L Haas, Plaintiff, v The United States, Defendant).

  • VA rating decision on plaintiff (Haas) was issued on 1 Dec 09
  • Plaintiff’s statute of limitations for filing his refund claims was extended for one year from that date, or until 1 Dec 10
  • The five-year maximum limits the extended statute of limitation to the five tax years preceding the date of the determination.
  • Five years before the date of determination is 1 Dec 04
  • Because the 2004 tax year began on 1 Jan 04, the 2005 tax year is the earliest year for which plaintiff may receive the benefit of the extended stature of limitations.
  • Plaintiff’s refund claims for 2001-2004 are not subject to that extension (Haas retired in 2001)

To summarize, you’ve got one year to file (from the date of the letter) and at least the top-level you’ll only be able to file amended returns for 4 tax years prior to year of the date of determination.

The bottom line on all of this is that things are not always as simple as they seem. The more I work with, study and research the Tax Code the more I realize there is a whole lot of gray and very little black and white when it comes to taxes.

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Beware The Coming Stock Market Correction—Whatever…

Jul 10 2015

It’s easy to find financial journalists and analysts predicting a stock market correction (AKA a significant drop) sometime in the future. At the same time, other journalists and analysts are saying there are no indicators of a correction. What are we to believe?

As I post this on 10 July, we might already be at the beginning of the correction as the stock market is down about 4% since 19 May…we’ll see. (Never mind, as of 17 July, we’re back up to normal. Oops never mind again, as of 30 July the trend is still going down. What difference does it make?)

The ones predicting a correction tend to point to the fact the stock market has been on a rip since March 2009, the historic average timeline states we are due, and their data indicates the stock market is overvalued–too expensive.

The ones predicting no stock correction state the stock market is not overvalued according to their data and the sluggish economic data mitigates the stock market’s continued rise.

I’m not predicting anything. Nor did I make predictions for my past clients. Instead I’ll provide another spin for your consideration.

Rather than get wrapped up in market predictions, I generally prefer a planning process that manages to the risk while working towards your long range objectives; whatever the risk may be in meeting your objectives. Not short-term risks. We can’t know what will happen in the short-term but long-term that’s another matter. If we assume your portfolio risk is due to the stock market (now or in the future), that’s what we manage to.

Ask yourself, if the stock market takes a 50% hit tomorrow, how will that impact you? Will you care? Many will think, “Of course I’ll care!” However, this should depend on where you are in life.

If you are working, making regular contributions to your 401k/TSP/IRA and still years from full retirement, a down stock market is actually a good thing for you. Only in a down market can you increase your future wealth by purchasing greater amounts of ownership. There are several articles on this site that explain the details of this concept. Please read them if you do not understand the concept of a down market increasing your wealth. A good place to start is a 3-part article “Practicing What I Preach” at

Now on the other hand, if a stock market decline causes you trouble, you need to re-evaluate your financial plans/strategies and portfolios now to account for a decline before it occurs. Hope you’re not too late. By “…causes you trouble…” I mean a stock market decline will cause you immediate financial pain as you will sacrifice a current retirement income source or you risk running out of assets before the end of your or your survivor’s life.

Proper financial planning based on your objectives should mean a stock market decline is never a concern; you shouldn’t have to be concerned in the first place. Your financial plan should have already accounted for that prospect. If your financial plan requires constant oversight and adjustments to your portfolios based on current conditions and predictions…well good luck with that. You’ll have a lot of sleepless nights.

Let’s look at some ideas for meeting your objectives while managing to the risk.

Please consult a practicing financial professional for assistance. MOAA does not practice financial planning from our staff. We provide general education and counseling not personal financial recommendations or advice.

Separate blocks. Have separate portfolios based on segmenting your future into three blocks of time.

The first block is an income source for the immediate future, 3 years out. This portfolio is cash and readily available for living expenses. It doesn’t matter what the stock or bond markets do because this money isn’t going anywhere other than your pocket as you deplete the account.

The second block of time is 4 to 6 years out. This block has enough assets to re-supply your first block income someday. This allows more time for money to grow by seeking appropriate higher-return instruments. Maybe you buy intermediate-maturity bonds, CDs, deferred fixed annuities, balanced mutual funds, inflation-adjusted instruments, floating-rate funds. Sophisticated investors may sell options, or purchase preferred stocks or convertible bonds. Point is the appropriate instruments here are minimally affected by market variations.

The third block is money meant for the longer term, 7 years out and more. This block will probably consist of most of your assets. A portion of it will become the second block as the second block is shifted to the first block. This is money that can withstand a near term stock market drop because it has time to recover. This money can be adjusted more easily without sacrificing future income because you have the time to adjust. Investments here should provide a greater potential for long-term growth. This means primarily stocks but the aggressiveness/volatility of the portfolio can be managed to achieve the appropriate growth pattern you desire.

Diversified portfolio. Manage your portfolio with a variety of investments that react to various market conditions in their own ways. This way when the stock market declines, other investments don’t react to the stock market in the same ways—they counteract the stock market so to speak. A diversified portfolio won’t catch all the stock market’s highs and it won’t catch all the stock market’s lows. You plan to drive a smoother path down the middle of stock market highs and lows.

Buy a pension. Use some assets to purchase an immediate annuity. This is like buying a pension. Drop a lump sum into an immediate annuity and receive life-time guaranteed income for you and a survivor if you wish.

Bond ladders or other bond strategies. If you have enough assets, you may not need to be in the stock market at all. Buying individual bonds and holding them until maturity eliminates stock market and interest rate increase concerns. By varying the maturity lengths and types of bonds, you may be able to generate enough income to live on without tapping your principal.

An income portfolio. An income portfolio will be affected by stock market volatility but you don’t care. With this strategy, your focus is on the interest, dividends and capital gains an investment pays on a monthly, quarterly, semi-annual or annual basis. The share price (and your portfolio value) of the investment will rise and fall with the markets but the payments are what matter. You live off the income generated by the portfolio; not your principal. So as long as you are not selling ownership shares, their value doesn’t matter. Income investors are into dividend paying stocks, higher-interest rate bonds, preferred stocks, closed-end funds, real estate investment trusts (REITs), mortgage-backed securities, selling covered options, partnership arrangements, etc.

Income properties. If you are a property owner, you know that there are two ways to view your ownership. You either plan to sell one day and market values matter to you or you focus on their income potential and market values don’t matter as much. You probably read “Rich Dad, Poor Dad.” If you don’t own properties, but like the idea as long as you don’t have to own the properties, check out real estate investment trusts (REITs) as a possible investment option.

Insurance options. There are insurance and annuity policies with income riders that could meet some of the objectives of this article. I’m generally for keeping insurance and investments separate but check them out with your adviser to complete your education. Knowledge is power and knowing all your options makes you a better consumer and investor.

Hope these ideas provide you some worthy options for your consideration. Remember, consult a financial professional to discuss your personal situation and develop your portfolios.

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Drilling Down Into Your Portfolio Allocation-Part 2

Jun 18 2015

Part 1 was about mutual funds that invest in stocks. Now we switch to bonds.

The most familiar styles of Bond funds are short, medium and long. Similar to stock funds being small, medium and large-size companies, the standard bond fund strategy is to build a portfolio based on the length of the bonds maturity dates; short-term, mid-term and long-term maturities.

The maturity date is when a bond matures and pays you back its face value. Between the time you buy the bond and it matures, the bond typically pays an interest rate. I just described individual bonds but you are buying a bond mutual fund which will have thousands of individual bonds. Generally a short-term bond fund buys bonds with maturities 5 years or less. Mid-term is 5 to 10 years. Long-term is more than 10 years.

The maturity time matters because usually the longer the maturity the higher the interest rate. Well then you ask, “Why have short-term bonds?” Glad you asked…

Let’s say you buy an individual bond for $1000 and it pays 5% interest per year. As long as the country’s interest rates stay the same you have a bond valued at $1000 paying 5% a year. But suppose the nation’s interest rates change to 6%. Who would want your 5% bond if I can buy a new 6% bond? If you wanted to sell your 5% bond before maturity, to make it appealing to a buyer, you would have to decrease the price of your bond. The opposite is also true. If interest rates slipped to 4%, your 5% bond would be worth more if you wanted to sell.

The longer the maturities on your bonds, the more interest rate changes impact the bonds’ prices. Basically because you’re holding a bond longer with a positive or negative value. So managing the maturities on your bond funds can help control the impact of changing bond prices.

If you are looking for account value stability, a shorter term bond fund might be best. If bond fund value fluctuation isn’t a problem for you, you might choose to go with longer maturities for higher interest rate payments.

Another critical aspect of a bond’s value is its quality. Within the short-, mid-, long-terms is whether the bond is of high quality or low quality. Quality is determined by the organization that issues the bond. If the financial fundamentals of the organization are good, the bond’s quality is high. Financially unstable organizations issue lower quality bonds. The lower the quality, the higher the bond’s interest rate. This is because as the buyer you assume more risk. The risk being that you could lose your money if the organization defaults on its financial obligations.

The common terms to indicate quality are “investment grade” and “high-yield” or “junk” bonds. Another quality indicator is the bond’s quality rating. “AAA” is the highest quality and it goes down: AA, A, BBB, BB, B, CCC, you get it. BBB and up is considered investment grade.

There are also “insured” bonds which mean the organization insured the bonds to guarantee their safety and quality. Insured bonds are rated as high quality.

The type of organization that issues the bonds is another style category. Bonds are issued by corporations, governments at all levels, mortgage companies, and investment firms. Bonds issued by state, county and local governments can provide tax-free interest income.

There are special bonds issued by the federal government that offer protection against inflation.

And of course you can buy foreign bonds.

Put them all together and what do you have? You can buy a corporate, intermediate, investment grade bond fund. Or an insured short-term municipal bond from a specific state.

Each investment you own whether bonds or stocks is built and managed to meet a specific objective. You cannot choose any mutual fund until you have defined your objective. Here are some considerations to help define your objectives:

  • Long-term investment horizon
  • Short-term savings horizon
  • Liquidity
  • Safety
  • Interest payments
  • Capital gain and appreciation
  • Regular deposits
  • No regular deposits
  • Emergency funds
  • Retirement
  • Saving for a home, car, furniture, etc.
  • Consistent returns
  • Best long-term returns

What are you shooting for? You see by defining your objectives it helps you decide which investment is best suited to meet the objective. Never make your investment selections based on media, marketing, family-friends, or because you have a feeling about it.

As the saying goes, “People don’t plan to fail; they just fail to plan.” Define your objectives, develop a strategy to achieve the objectives, select the proper investments to complete the strategy and achieve the objectives.

Learn more about these processes from these MOAA articles:

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