Author: Pam Bergeson

Categories
Military Pay

PCS Season: Organize Your Financial Life

Stack of files and folders showing why you need to Organize Your Financial Life

PCS Season: Organize Your Financial Life

 

Whether you’re motivated by an upcoming PCS or it’s simply time for a little desk drawer cleaning, the occasional purge of unwanted household items can feel like a fresh start. When you’re done cleaning out the closets, remember that same sense of accomplishment can be had when it’s time to tidy up your financial documents.  

If you’re setting out to “Marie Kondo” the piles of financial paperwork in your file cabinet and all that snail mail stacking up on your kitchen counter, the classic KonMari question – “does this bring me joy?” — won’t necessarily apply to your financial and tax paperwork.  (Even as a financial planner, taxes never bring me joy.)  

Do I really need 10 years’ worth of utility bills? 

By following a few simple rules, you can tackle the piles of paper and send your financial documents off to the shredder with a little gratitude.

Keep forever. Important life documents, especially those that are difficult to replace, should be kept in a “forever” file, preferably in a fire safe box or similarly protected.  

  • Life documents: birth certificates, marriage certificates, death certificates, adoption papers, social security cards;
  • Military service documents:  DD 214, VA disability certifications, and overseas deployment orders; 
  • Education documents: diplomas, transcipts, certificates.

Keep “permanently.” Key financial and legal documents should be protected in a similar way to your forever documents, but these documents might need to be updated or replaced over time.  

  • Estate planning documents: wills, powers of attorney, medical directives;
  • Legal filings: trusts, inheritance, court orders, contracts, etc.
  • Financial documents: mortgage/loan pay off documentation, life insurance documentation, etc.
  • Investment documents: End of year statements serve as a historical record of all your contributions, distributions, and investment gains which could prove useful if you ever need to establish basis in an investment many years in the future.
  • IRA Tax Form 5498: Your IRA trustee publishes this important documentation of your contributions, conversions and account balances each May;  
  • Deeds & titles: deeds to property, titles of vehicles, certificates of authenticity, appraisals of artwork, antiques, jewelry, etc.
  • Medical documents: your medical records, including your vaccination record.

For estate planning reasons, it’s helpful to keep all the “forever” and “permanently” documents in a safe place like a fire safe box.  It is also important to be sure your family members and potential executor know where and how to access them if necessary.  

“What about my tax documents?”

Keep At Least 7 years. The IRS can audit tax returns going back either 3 or 7 years, depending on their reason for the audit.  That makes at least seven years the better safe than sorry choice for tax related documents. 

  • Tax returns including proof of your payment to the IRS and your state tax documents.
  • Important tax documents like your W2, 1099’s, 1098’s, etc.
  • Retirement contribution documents including your IRS Form 8606 if you have Traditional IRAs. 
  • Supporting documents related to expenses written off including confirmation letters from charities you donated to, donation related credit card statements and canceled checks. This includes health care receipts if deducted on your tax return.
  • Records for any business-related expenses including utilities, taxes, travel, purchases, etc.

Home ownership/rental properties: Documents related to the purchase, improvement or disposal of a home, property or business should be kept for at least seven years after the tax year during which you dispose of the property.  

This includes mortgage, title and tax documents, closing documents, loan pay off documents and any receipts for substantial improvements like additions or remodels that increase the value of the property.

Keep 1 year. Most monthly bills and bank/investment documents are accessible online, so there is little benefit to keeping them in paper form.  If you prefer to keep them in your physical file cabinet, you need only keep them for one year.  As mentioned earlier, end of year investment statements should be kept with your important documents.

Keep less than a year. Utility bills and credit card documents can be discarded once you’ve reviewed your bill for errors and paid the account.  You only need to keep these longer if you write them off as a business expense or otherwise take a tax deduction for them (see 7 years above). 

When in doubt, SHRED it!

Now that we know what to keep, let’s look at which documents need to be shredded instead of tossed in the garbage.  To protect your identity from the teams of fraudsters out there, you should shred any document with your social security number, account number, or any other combination of personally identifiable information including your name, address, date of birth or driver’s license details.  

Even “junk mail” contains an inordinate amount of PII; especially mail from banks and unsolicited credit card offers.  To help stem the flow of these annoying offers, the Federal Trade Commission provides several methods to “opt out” of specific types of junk mail and unsolicited offers.  

When in doubt, shred it.  You can either do this with a home shredder or take your pile of documents to a local commercial shredder.  Both the UPS Store and FedEx Store will shred your mountain of documents for a reasonable price, saving you the trouble of cleaning up the dusty mess yourself. You can also take advantage of free community and base wide shredding opportunities. 

An ounce of prevention … go paperless!

Now that you’ve tackled your collection of twenty-year-old canceled checks, it’s time to take this tidying up one step further – go paperless!  Your banks, lenders, and investment companies offer a wide variety of paperless record keeping options. Simply log into your account and subscribe to their paperless option.  At the end of the year, simply download copies of the important annual documents for your records.  Keeping important financial documents out of your mailbox is an important first step toward protecting your identity and simplifying your life. 

Happy sorting:)

Need help organizing your financial life.  The MFAA advisors can help and you can find them here.

Categories
Financial Planning

Top 6 Cybersecurity Steps for Military Families

cyber photo - top cybersecurity action steps for military families
Photo by Adi Goldstein on Unsplash

It seems like everywhere we turn, our news feed is filled with stories of credit card fraud, identity theft, and data breaches. This article outlines six cybersecurity steps for military families to create additional hurdles for cyber criminals who would try to access your personal information, bank accounts and credit history.  

At work, cyber professionals protect our emails and data; but protecting ourselves and our family from fraudsters and cyber threats can feel overwhelming. When it comes to our personal financial information, the best way to shield your data is to avoid being an easy target. 

While there are dozens of small actions you can take to protect yourself, it might feel a little less overwhelming to know that sometimes the best offense is a strong defense.  

Use a password manager  

With so much of our life, work, and finances dependent on online accounts and phone apps, keeping passwords at our fingertips often forces us to rely on memory shortcuts including simplicity, repetition, and password cheat sheets.  After all, we’re only human; we can’t remember 100’s of complicated passwords.  The trouble is all three of these password crutches make it easy for cyber criminals to access your accounts.  The most recent example played out at the DNA based ancestry company 23andMe, where hackers used usernames and passwords stolen from other websites to steal personal health and DNA information from the ancestry firm.  

To avoid reusing the same simple password across multiple accounts, most cyber experts advise using a password manager.  A password manager is a software application that can simplify your password life by giving you one master password to keep track of while replacing your easy to remember passwords with unique, cryptic passwords for each account, website and app in your cyber life.  A password manager can also keep would be fraudsters guessing by changing your passwords frequently and notifying you when a website that you rely on has been compromised.

Several companies offer free or nearly free password managers appropriate for individuals and families. This recent New York Times Wirecutter article reviews two of their favorite password managers, 1Password and Bitwarden.  

Enable 2 Factor authentication (2FA)

While you’re updating your passwords, take the extra step to set up 2 Factor Authentication (2FA) or Multifactor Authentication (MFA) on your accounts.   After your password, the best way to protect sensitive financial, health or personal information is to enable this added layer of security.  This second layer of authentication serves as a backstop to stollen or compromised passwords by requiring you to enter a unique numeric code sent to you via text or through an app on your phone.  In many cases, you can use biometric verification as a secondary authentication step.

Avoid Using Public WIFI Networks  

From airports to hotels and coffee shops to restaurants, everywhere we go, we’re offered the opportunity to access free WIFI networks as an alternative to using our cellular data; but the convenience of free access comes with unnecessary exposure and risk.  Because the network is intentionally designed for easy access, it’s also easy for anyone with nefarious intentions to access your personal and financial information while on these public networks.

One of the best ways to minimize your risk is to use a Virtual Personal Network (VPN) to encrypt your data as it is transmitted.  Several companies offer VPNs with family and multidevice solutions that you can add to your cell phone, laptop, and other devices to protect your data when you’re away from home. Check out Wirecutter’s Top VPN providers for 2024. 

Beyond just protecting your personal information, it’s also critical to secure your bank accounts, credit cards, and credit record.  You’ve worked hard to earn a strong credit history, here are a few steps to make it more difficult for someone to hijack your good name. 

Check Your Credit Report  

After our identity, one of the most important things we need to protect is our credit.  Get in the habit of checking your credit reports each year to ensure no one has opened credit in your name.  The best way to do this is to pull a free credit report from each of the three primary credit reporting bureaus at staggered dates throughout the year.  

You can download your credit reports for free via the Federal Trade Commission’s AnnualCreditReport.com website.  Review each report to ensure the data on your report is accurate, that there aren’t any administrative errors or suspicious activities like new credit cards or loans that you haven’t opened.  You also want to look for addresses that don’t belong to you or your family members.  

Freeze Your Credit  

Anyone who has access to your Social Security number could gain access to your credit.  Preventing this direct access to your credit requires taking your credit protection one step further by placing a freeze on new credit in your name.  Locking your credit prevents anyone from opening credit accounts or loans in your name.  

When you lock your credit, it is crucial to keep the unlock code the bureau provides in a secure, but accessible place. You’ll need this information to “unfreeze” your credit the next time you want to open a credit card or purchase a car with a loan.

To freeze your credit, contact each of the three primary credit bureaus through either their website or by phone: 

Equifax (800) 685-1111

Experian (888) 397-3742

Transunion (800) 916-8800

If you’re a parent, remember your child has a social security number, too; and because kids’ credit typically goes unmonitored, they’re easy targets for hackers and thieves.  To protect your child’s credit history, go ahead and lock your child’s credit, too. Again, keep that unlock code where you can locate it so you can unfreeze your kids’ accounts when they’re ready to take responsibility for their own credit.

Use a credit card with a chip  

One of the safest ways to protect your purchases from fraud is to use a credit card with the latest anti-fraud technology instead of your debit card.  The primary difference here is that if you’re the victim of fraudulent purchases with a credit card, it’s the credit card company’s money that is at risk.  If a fraudster uses your debit card for purchases, it’s your own checking account’s funds that are at risk.  Reserve the use of your debit card for the very rare instance that you need cash. 

Protecting yourself from would be identity thieves and financial criminals can feel like an impossible task, but mastering these six cybersecurity action steps steps for military families can go a long way toward establishing a solid defense.   

Because our digital world evolves daily, I encourage you to explore these additional resources:

FINRED’s Warning Signs of Identity Theft

The Federal Trade Commission’s Guide to Credit Freezes

The New York Time’s Simple Guide to Online Security.

 

Categories
Investing

Series I Bonds: Is it time for an exit strategy?

Picture of an array of I Bonds

Series I Bonds: Is it time for an exit strategy?

When it comes to inflation and our financial lives, inflation receding is a good thing.  Over the past 18 months, the Federal Reserve has aggressively raised interest rates in a focused effort to tap the breaks on post-pandemic inflation, and they’re beginning to see some results.  As of July, the US consumer price index, the primary measure of inflation, was down to just 3.2 percent.  This is good news for your high-yield savings accounts and certificates of deposit, but bad news for inflation-adjusted Series I savings bonds.  

What’s the Deal with Series I Bonds? 

Looking back to the fall 2021, just as we were turning the corner on COVID lockdowns, inflation soared to record highs which drove Series I Bond interest rates to 7.12% on November 1st, 2021.  Suddenly, for the first time in more than a decade, Series I Bonds sparked our curiosity, especially in comparison to our savings accounts which were paying a meager 0.01%.  Then on May 1st, 2022, the Treasury Department set the new Series I Bond inflation-based interest rate at 9.62% prompting even more of us to purchase our $10,000 per year allowance of these inflation-based bonds.  

Now that inflation is finally ticking down, Series I Bonds interest rates are suddenly less compelling.  Because Series I Bonds pay interest based on a fixed rate plus an inflation-adjusted rate, we find ourselves at a crossroads between lower interest rates on I Bonds and higher interest rates on other short-term savings vehicles.

The Fed’s actions to raise interest rates have dramatically increased mortgage and auto loan rates while having the secondary effect of increasing the rates that some banks pay on personal savings accounts.  This is especially true of some high-yield savings accounts, money market accounts, and certificates of deposit.   

Now that the balance has shifted to favor these short-term savings rates, it may be a good time to trade those Series I Bonds in favor of a high-yield savings (HYS) account, certificate of deposit (CD), or a money market account.  A quick check of today’s yields shows HYS accounts paying over 4% and 12-month CDs over 5%.  

Series I Bonds Rules of Engagement

As we consider a Series I Bonds exit strategy, it’s important to remember some of the basic “rules of engagement” associated with these bonds:

  1. The stated interest rate includes 2 rates: a fixed rate for the life of the bond and an inflation-based rate that adjusts every 6 months (May 1st and November 1st) based on current inflation.
  2. Your interest rate resets to the current interest rate every 6 months based on the date you purchased the bond.  
  3. There is a minimum term of 12 months with a holding period of 5 – 30 years.  If you sell a Series I Bond after 12 months but before meeting the 5-year holding period, you incur a 3-month interest rate penalty.
  4. Interest is credited to your account at the end of each month.
  5. The interest earned is tax deferred until the year you sell the Series I Bonds. 

Series I Bond Example

Here’s an example to help illustrate how your interest rate might adjust every six months:

On February 3rd, 2022, you purchased $10,000 in Series I Bonds when the current rate was 7.12%, your interest rate reset on the following dates:

2/3/2022 7.12%

8/3/2022 9.62%

2/3/2023 6.48%

8/3/2023 3.38%.

In this example, as of August 2023, you’ve met the absolute minimum holding period of 12 months and your interest rate recently reset to 3.38%.  Suddenly, your Series I Bond is earning a lower annual percentage rate than a high-yield savings account or the current CD Rate.  

With this shift between inflation and interest rates, it may be time to consider selling your Series I Bonds and moving the funds to a higher-yielding investment like a HYS account or CD.  

What About the 3 Month Interest Penalty?

In the example above, you have not met the 5-year holding period, meaning you’re subject to a 3-month interest rate penalty.   If you sold your Series I Bonds in August 2023, you would forfeit the interest earned in the three previous months which was credited at the 6.48% annual rate.  To avoid forfeiting interest earned at this higher rate, you want to wait until the beginning of the fourth month at the new lower rate. 

HUH?? I know, still confusing. If you’re going to pay an interest penalty, you want to pay it at a lower rate. Back to our example: if you wait until at least December 1st to sell the Series I Bonds, you forfeit your September, October, and November interest earned at 3.38% instead of the higher 6.48%.    

Because everyone’s purchase dates, timelines, tax rates, and motivations are different, it’s difficult to nail down the perfect strategy for everyone.  The best we can do is provide a general guideline for the earliest you might consider selling your Series I Bonds.  It is also important to remember that this strategy to optimize your short-term savings rate requires that you follow through and reinvest the cash from your Series I Bond in a higher interest-bearing savings option.  If you sell your Series I Bonds and then let the cash sit in your non-interest-bearing checking account, you’ll miss out on the additional interest you could earn in a CD, money market or high-yield savings account.  

Finally, this is a good opportunity to remember that selling your Series I Bonds is a taxable event; you will receive a Form 1099-INT from the IRS reflecting the interest earned over the holding period.  Earned interest is taxed at your regular income tax rate.  

The table below reflects the earliest date you should consider selling Series I Bonds purchased between November 2021 and October 2022.  Series I Bonds purchased beginning November 2022 carry a fixed interest rate of 0.4% and bonds purchased beginning May 2023 carry a fixed rate of 0.9% in addition to the fluctuating inflation rate.  This fixed rate provides an additional bonus on top of the inflation rate for the 30-year life of the bond making the decision of when to sell them even more complicated and beyond the scope of this discussion.

For now, let’s focus on the Series I Bonds you might consider selling as part of a strategy to achieve a higher rate of return. 

 

Month Purchased Earliest Date to Consider Selling
2021
November August 2023
December September 2023
2022
January October 2023
February November 2023
March December 2023
April January 2024
May August 2023
June September 2023
July October 2023
August November 2023
September December 2023
October January 2024

To learn more about Series I Bonds, visit Treasury Direct.gov.  

As always, personal finance is by definition – personal.  Your unique financial situation determines the appropriate financial decisions for your personal financial success.  This information is provided for educational purposes and is not intended to represent an individual investment recommendation.  If you’d like to talk to one of our military financial advisors, you can find them here.  

 

Categories
College

SECURE Act 2.0: Expanded College Savings & Roth IRA Opportunities for Military Families

Female student in cap and gown holding a diploma

SECURE Act 2.0: Expanded College Savings & Roth IRA Opportunities for Military Families

Leading into the New Year, Congress passed a $1.7 Billion spending package which included a bill known as the SECURE Act 2.0.  This bill includes more than 90 targeted changes to the tax code intended to encourage Americans to save more for retirement.  One of these small but powerful changes will allow parents to transfer excess funds from their child’s 529 college savings plan to a Roth IRA.

Beginning in 2024, parents who have excess college savings in their child’s 529 plan will be allowed to roll over up to $35,000 of those funds to a Roth IRA.  The intent is to encourage parents to contribute to 529 college savings accounts as their child grows up without the fear that they will be penalized if the funds are not needed for college expenses.  Generally, if a family takes 529 distributions outside the strict IRS definition of education expenses, they face additional taxes and penalties. 

Military families who transfer Post 9/11 GI Bill education benefits to their dependents often find they have leftover 529 savings when their child graduates from college, especially if their child attended a college that participated in the generous Yellow Ribbon Program.   Under the new rules, parents have an opportunity to repurpose these excess savings to fund their child’s Roth IRA or potentially their own Roth IRA.

The Requirements

To meet the new requirements, the 529 account must meet a few specific requirements:

  • The 529 account must have been open for at least 15 years;
  • The Roth IRA receiving the funds must be in the same name as the named beneficiary of the 529 account;
  • There is a lifetime limit of $35,000 than can be moved from each 529 account to a Roth IRA;
  • The annual IRS limit for IRA contributions will still apply (for example, 2023’s IRA limit is $6500);
  • Any contributions (and associated earnings) from the previous 5 years are ineligible to be moved to the Roth IRA.

An Example

Here’s an example of how military parents might use this new 529 to Roth IRA option:

Mary is a Veteran who saved diligently from birth through age 18 for her only daughter Susie’s college education using a 529 College Savings Plan.  Because Susie was able to use her mother’s Post 9/11 GI Bill Education Benefits to fund most of her college expenses, her 529 Plan account balance is $30,000 when she graduates in 2024.   Mary decides to use the leftover 529 Plan funds to jump-start Susie’s Roth IRA. 

In 2024, she transfers $6,500 from Susie’s 529 to her Roth IRA, staying within the IRS limit for IRA contributions that year.  From 2025 through 2029, she continues to transfer up to the IRS contribution limit each year until Susie’s 529 account is empty.  

In this example, Mary has successfully met all the IRS requirements to avoid any taxes or penalties on their transfer:

  • The beneficiary name on the 529 Plan and Roth IRA accounts match, they are both in Susie’s name
  • Susie’s 529 Plan has been open for more than 15 years
  • All their 529 contributions were made at least 5 years before the transfer
  • In total, they transfer less than $35,000
  • They contribute up to but not more than the annual IRS limit on IRA contributions each year.

Secure Act 2.0 – What We Don’t Know

One provision that will require additional guidance from the IRS is whether changing the 529 account’s named beneficiary would trigger a new 15-year waiting period.  We anticipate the IRS will provide additional guidance before January 1, 2024 when this new pathway to a Roth IRA becomes available.

Here’s where this strategy gets interesting.  As it currently stands, an owner of a 529 account can change the beneficiary to any number of family members at their discretion, including themselves or their spouse. If parents are permitted to transfer the named beneficiary to either their own name or their spouse’s, then they would be able to leverage the excess college savings funds to contribute to their own or their spouse’s Roth IRA. 

It will take the IRS months to detail how it intends to implement the changes introduced with Secure Act 2.0, and financial professionals even longer to unwind all the nuanced strategies to take advantage of them; but for now, this change provides a viable alternative for military parents saving for college in a 529 plan.

Financial planning for military families is unique.  The financial planner members of the Military Financial Advisor Association understand your life and can help you navigate your finances and optimize your opportunities.

 

Categories
Financial Planning Military Pay

10 Financial Opportunities and Challenges Dual Military Couples Experience

Dual Military Couples

When both members of a couple serve in the military, they share a greater understanding of the mission and life demands that come with putting service before self.  They also share the unique financial planning opportunities and challenges created by their double duty lives.

 

While dual military couples enjoy the financial advantage of two incomes and twofold benefits; they also to juggle the challenges that come with two military careers – two missions, two commanders, two demanding work schedules.   Add a couple of kids to the mix and you’ve got a recipe for financial challenges created by tag-team deployments, maintaining multiple households, and paying for sky-high childcare expenses.

 

Across the Department of Defense, seven percent of service members are in a dual military couple; or looked at another way, one in five military women are in a dual military couple.

 

If you’re a member of a dual military couple or a couple considering jumping into military service together, this article will help you understand the unique financial planning opportunities you may experience and the financial and career challenges you may face.

 

Let’s look at the top ten financial opportunities and challenges dual military couples experience.

 

#1: Two Incomes

 

No matter the rank, two incomes make life a little easier – easier to live within your means and easier to avoid debt. Two incomes allow dual military couples to save more aggressively for both short and long term goals, provided they’re able to establish a standard of living more closely aligned with one income, than two.

 

The key for dual military couples is to take advantage of this opportunity from the beginning of their careers.  Demographic data tells us that the number of dual military couples drops off dramatically as rank increases.  Among enlisted ranks, the number of dual military couples peaks at E-6; for officers, the peak is O-3. (DOD Demographic Report.)

 

This data suggests that dual military couples are wise to maximize their savings and investing opportunities in the first ten years of their careers in part to benefit from the power of compounding; but also, recognizing this two income opportunity may be fleeting.

 

#2 Two Housing Allowances

 

In many situations both members of a dual military couple receive a basic allowance for housing (BAH).  Let’s walk through a couple of scenarios –

 

First, if a dual military couple is assigned to the same location and live off base, both members of the couple receive BAH.  If they’re able to carefully manage their housing costs, this is a golden opportunity to ramp up their savings rate by applying their second housing allowance toward their Thrift Savings Plan (TSP) account or other savings accounts.

 

If this same couple lives on post in privatized housing, they both receive BAH, but their rent is based on one BAH at the with dependent rate.   This too can be a great opportunity to maximize their savings rate by applying the additional housing allowance toward savings.  By contrast, if this same dual military couple is assigned government provided housing, neither receives BAH.

 

If a dual military couple has a dependent child, one of the two members receives BAH at the dependent rate.  In the not so rare case that the couple is not assigned together and each of them has a dependent child living with them, then both members could receive BAH at the dependent rate.

 

Let’s walk through an example of this last scenario.   A dual military couple with two kids is stationed overseas when the husband receives a one-year stateside school assignment.   He relocates stateside with one of the couple’s children, while the wife extends her assignment overseas and keeps their other child with her.  Both receive a housing allowance at the with dependent rate.

 

This example of multiple households leads to our first challenge –

 

#3 Living Together or Not?

 

The services try to keep dual mil couples together when possible, the Air Force refers to these assignments as a “join spouse” assignment, while the Army calls it a “joint domicile” assignment.

 

Like everything in military life, the needs of the service always comes first. It isn’t always possible to perfectly align two military careers every step of the way, especially as both careers progress into leadership positions.

 

When it all works out, one roof with two BAHs, it’s an amazing opportunity to save, save, save.

 

When it doesn’t work out, when the couple needs to maintain two households because they aren’t stationed together, that’s when they’re really glad they decided to live within the value of one BAH at their previous assignment.

 

Technically a “joint domicile” assignment could assign the spouses to two separate installations within 50 miles from each other.  In this scenario, a dual military couple might decide to live somewhere in the middle and each commute to their duty station.  This scenario is common with dual military couples who are not in the same service.

 

#4 VA Loan Entitlements

 

With all this moving to and from installations, sometimes together, sometimes not; it’s important to understand that each member of a dual military couple earns their own VA Loan entitlement.

 

When they buy a home, they can either use one of the entitlements and save the other for a future home purchase, or they can split the entitlement, leaving each of them with a partial VA entitlement.

 

An important consideration is if one of the spouses is a member of the Reserve Component and has already established a VA disability rating; their VA loan entitlement allows them to avoid paying the VA funding fee, which could substantially reduce their upfront costs for purchasing their primary residence.

 

So far, we’ve looked at several financial opportunities that dual military couples experience which allow them to maximize their savings; but it’s important to consider a few of the common financial challenges.

 

#5 Military Childcare

 

Obviously, quality childcare is critical to all working parents, military or not.  Across corporate America, only 20% of employers provide any assistance or subsidy for their working parents’ childcare needs.  Fortunately, the DOD has invested substantially in installation Child Development Centers (CDCs) and Family Childcare programs.

 

The DOD’s childcare program is the largest employer sponsored childcare program in the US, providing care to over 200,000 military children at a cost of about $1B per year.

 

CDCs provide nationally accredited childcare to our military families at an affordable price, but dual military couples still face several childcare related challenges.

 

Availability.  There are more than 400,000 military kids under the age of 5, yet only half that many CDC slots across the DOD.  Unfortunately, waitlists are the norm at many installations.  Single military parents and dual military families have priority at their installation CDC, but even that advantage is not always enough to guarantee a slot when they need it.

 

Duty Hours.  The typical duty day rarely fits neatly within the CDC’s hours of operation, leaving parents with extended duty days or shift work scrambling for alternatives.  Training exercises and temporary duty assignments stretch dual military parents even further beyond the CDC’s hours.

 

Cost.  To say that childcare is expensive is an understatement, even on two incomes.  Nationwide, parents spend on average more than ten percent of their income on childcare; in high cost of living locations like Washington DC, couples can spend over $2000 a month on a single child’s care.

 

For dual military couples who can’t fit their duty day within the CDC’s workday, they often turn to nannies to provide in home care including early morning and late evening care, or overnight care when necessary.  On average, nanny’s charge $700-800 a week or over $30,000 a year.

 

Subsidized Fees.  In order to keep CDCs affordable, the military subsidizes the program and charges parents on a sliding scale based on their total family income.  These fees can range from just under $300 to almost $800 per month per child; both well below the national average.

 

Fee Assistance.  Additionally, the services now offer financial support to families who cannot find care for their children on the installation, either because of a lack of availability or the distance between the duty station and the CDC.  The Fee Assistance Program is meant to partially cover the difference in cost between what the servicemember would be expected to pay at the CDC and what they are required to pay at an off base childcare facility.

 

# 6 Tag Team Deployments

 

Let’s look at another financial challenge for dual military couples – potential Tag Team Deployments.  When spouses are in separate units, that can mean separate deployment schedules.

 

In some cases, dual military couples with kids intentionally alternate their deployments so that one parent is always home with the kids.  While this is an amazing sacrifice, it can be a strain on their relationship and their wallet.

 

This constant churn of one parent always being deployed can increase childcare expenses, travel costs, and spending on household help to balance the demands on the family.  Fortunately, when the demands of duty keep these couples apart, they may be eligible for the Family Separation Allowance (FSA).

 

The one positive of these dual deployments is that it provides ample opportunity to push up their tax-free Thrift Savings Plan Roth contributions while in a combat zone.  They may also contribute up to $10,000 to the Savings Deposit Program earning 10% interest during their deployment.

 

#7 Estate Planning

 

You can’t talk about dual military couples’ deployments without addressing the importance of proper estate planning.  Because both members could and often do deploy, their estate planning preparedness is even more critical to their overall financial plan.

 

If they have minor children, they have the added requirement to complete their services’ Family Care Plan, which requires among other things, naming short-term and long-term guardians for their children should they need to deploy on short notice.

 

Dual military families frequently list this as their biggest pain point.  Each time they PCS, they find themselves in a new community, a long way from family, asking brand new neighbors they barely know to take responsibility for their kids on a moment’s notice.

 

#8 Two GI Bills

 

One of the most amazing financial benefits dual military families earn is two GI Bill education benefits.  All that money they spent on childcare–they finally get a benefit that can work for them!  For dual military couples, this provides the ultimate education funding flexibility.

 

From a planning point of view, each member of the couple should transfer their benefit to other spouse as soon as they’re eligible, this starts their service commitment clock.  If they have children, they should both transfer at least one month of GI Bill benefit to each child.  This sets them up to take full advantage of this amazing education benefit when their kids are college bound.

 

#9 Two Careers

 

It can’t be overstated how difficult maintaining a marriage and raising a family can be when there are two military careers involved – two separate but important missions to achieve, two commanders to serve, and two deployment schedules to meet.   It’s a lot.

 

Dual military couples face a constant challenge to live together while meeting the needs of their services.  Every career milestone is fraught with possibilities and tradeoffs between the two careers.  Every assignment cycle brings another “should I stay or should I go” conversation.  Whose career will take priority? Will we be able to live together? Where will we find childcare?

 

What frustrates many dual military couples is that they have little or no control over these life changing decisions.  This lack of flexibility leads many dual military couples to decide that one member will step off active duty and into the reserve component to gain more control of their lives.

 

From a financial planning point of view, it’s important to recognize that the competing demands of two careers and raising a family may put achieving two active duty retirements out of reach.

 

 By optimizing your savings opportunities in your early career, you can ensure you’re financially prepared to make decisions when career challenges arise later in your career.

 

#10 – Two Pensions

 

Finally, if a dual military couple survives all the deployments and meets all the competing mission demands, in the end, they earn the best financial opportunity of all, two military pensions.

 

For many dual military couples, if they’ve saved and invested properly all along, this can mean a “BIG R” retirement.

 

They may not need to take on a second career.   They may be able to hop in the RV and travel the county or more likely, chose work that is rewarding rather than focusing on earning power.

 

Looked at from investment portfolio point of view – two military pensions mean double the income floor provided by their inflation protected government pension; which could allow them to carry a higher equity to bond ratio in their portfolio than would be typical for their age or retirement timeline.

 

Also important is that they will have two Survivor Benefit Plan (SBP) decisions to make.  If both members of the couple had careers of equal length and rank, if they don’t have any dependents at home and have saved aggressively, growing a large investment portfolio on which to rely, their SBP decision could be simple.

 

On the other hand, if they have significant career differences, maybe one left as soon as they reached 20 years, while the other continued to get promoted and retired at 30 years; then their SBP decision is a little more complicated.

 

Another factor to consider is that because of the competing work/life demands, dual military couples frequently wait to have children until later in their careers.  This means their kids are younger when they retire from the military and have a longer time horizon until they become financially independent adults.  This can create a scenario where it is important for dual military couples to extend SBP coverage to their children.

 

Follow these links for more insight on the Survivor Benefit Plan and Reserve Component SBP.

 

A Financial Strategy for Dual Military Couples

 

If you’re a member of a dual military couple, what is important to understand is that you will experience opportunities and challenges along the way.  If you’re able to maximize your savings and minimize your debt when your dual military careers align, you’ll be prepared for the inevitable financial and career challenges when your careers don’t align.

 

As a dual military couple, you don’t need to get every financial decision correct, nor do you need to perfectly align your career aspirations at every turn.  If you’re able to maximize your savings opportunities, you’ll have the financial freedom to make decisions that best support your combined professional goals and your family’s priorities.

Every military family’s situation is unique and presents its own challenges and opportunities.  We recommend working with a financial planner who understands your military benefits from first-hand experience and specializes in serving military and veteran families.  The advisor members of MFAA understand your life, your challenges and your benefits because they’ve walked in your shoes.

The information provided in this blog is simply that, information.  It is not intended to serve as an individual recommendation and should not be relied on as investment or tax advice.

Categories
Reserve Component

Understanding the Reserve Component SBP Decision

Understanding your Reserve Component SBP Decision

Understanding the Reserve Component SBP Decision

 

In a previous post, I detailed the importance of an active duty servicemember’s Survivor Benefit Plan (SBP) decision.  For members of the Guard and Reserve, the Reserve Component Survivor Benefit Plan (RCSBP) decision is also one of the most important decisions you’ll make, but what differs is the timing of your decision and the options available for you to choose.

 

This blog dives into the key differences between the active duty SBP and the reserve component SBP, as well as the important similarities.   We’ll start with a quick refresher on the basics of SBP.

 

What is the Survivor’s Benefit Plan? 

 

The most important fact to know about the amazing military pension you’ve earned during your 20+ years of service is that it ends at your death.  The only way to ensure your spouse and/or your dependents continue to receive a portion of your retired pay is to sign up for the Survivor Benefit Plan.

 

In the event you pass away before your spouse or your dependent children, SBP continues to pay an inflation adjusted monthly benefit, known as an annuity payment, to your survivors.

 

If you’re married and/or have dependent children, chances are they rely on your military pay or pension for a portion of their monthly living expenses.   As difficult as it is to imagine, you need to ask yourself if your family had to live without you, and without your military pension and your civilian income, would they be able to cover their essential expenses?  Would your spouse have sufficient income to cover their living expenses well into retirement and old age?

 

If your family depends on your income, then your Reserve Component SPB decision is critical to your financial plan.  

 

What is the Reserve Component Survivor Benefit Plan?

 

The Reserve Component SPB is similar to the active duty SPB in that it pays an inflation adjusted annuity to your surviving beneficiaries if you have earned a military pension.  Because a reserve member could qualify for a military pension at an age substantially earlier than they would be entitled to receive their reserve military pension, the RCSBP is adjusted to account for this gap in pay typical of a reserve component servicemember, sometimes referred to as a Gray Area Retiree.

 

Gray Area Retiree.  The Department of Defense defines a Gray Area Retiree as a Guard or Reserve member who has qualified for retired pay and completed their military service, but are not yet at the age where they can begin receiving their retired pay.

 

 

 

 

The key differences between the Reserve Component and Active Duty SBP center around this Gray Area gap.  The RCSBP decision includes three related decisions: when you need to make your RCSBP election, which coverage options are available to choose from, and how much it costs to provide this protection for your dependents.

 

When is the Reserve Component SBP Decision Made?

 

The first important difference between the active duty and reserve component SPB is when you make your decision.  Active duty members make their SBP declaration in the last 90 days before their retirement and the start of their military pension payments known as retired pay.

 

Because reserve component members might complete their military service years or even decades before they begin receiving their military pension, they are required to make their RCSBP election when they first become eligible for military retirement, without regard for potential continued reserve service or the years before they would be eligible to receive retired pay.

 

The 20-Year Letter.  When a reserve member reaches twenty years of qualified service and becomes eligible to retire, they received an official Notification of Eligibility (NOE), often referred to as the “20-year letter.”  The window of opportunity to make an RCSBP decision begins upon receipt of the NOE and lasts for 90 days.  Failure to make an election within this 90-day timeframe results in a default election of an immediate annuity (Option C below) based on your full retirement pay.  In other words, the default option is the maximum benefit, which is the only option available without spousal consent.

 

Irrevocable Decision.  It is important to remember that your RCSBP decision is an irrevocable election, making this one of the most important decisions you’ll make in your career.  If you’re married and decide to decline RCSBP or accept less than the full RCSBP benefit, your spouse will need to sign off on that decision.  The rationale behind requiring your spouse’s concurrence is he or she has the most to lose if you decline the RCSBP benefit.

 

Exit Only. While the decision to decline RCSBP is irrevocable, if you elect to accept RCSBP, you will have an opportunity to discontinue the benefit between your second and third year anniversaries of receiving retired pay.  To be extra clear – this window of opportunity to change your mind in your third year of receiving retired pay is a one-way decision – exit only.  You can only choose to discontinue RCSBP, you cannot regain access to RCSBP.

 

When you make your RCSBP election, you are required to make three specific decisions:

  • When or if to begin the RCSBP annuity?
  • Who will benefit from your RCSBP annuity?
  • How much of your retired pay to base the annuity payment on?

 

What are the Three RCSBP Benefit Options?

 

Because a reserve member’s retirement from the military and the date they begin receiving their military pension could be decades apart, the RCSBP decision offers three different options for when or if your dependent(s) would begin to receive the annuity in the event of your death.  These options use your 60th birthday as a foundational date because the typical reserve retiree must wait until age 60 to begin receiving their military pension.

 

Reduced Retired Pay Age.  Since 2008, reserve members have been permitted to reduce their retired pay age from 60 to as early as age 50 when they have completed sufficient qualifying service on active duty orders in support of contingency operations.  Each 90 days of qualifying active duty service reduces their retired pay age by 90 days.

 

This earlier retired pay start date is known as a Reduced Retired Pay Age (RRPA).  For the purposes of the RCSBP, a member’s retirement pay age is either age 60 or their RRPA stated in 90-day increments.  As an example, if a reserve member completed two qualifying 365 day active duty activations in support of contingency operations and was able to validate this active duty service with their service, they could reduce their retired pay age by eight 90 day increments.  This could reduce their retired pay age from 60 to 58.

 

There are rare instances where a reserve member might continue to serve beyond their 60th birthday.  In these cases, the retired pay age is delayed until they complete their service.

 

What are the Election Options?

 

When a reserve member makes their RCSBP decision, they must first decide if or when to provide their beneficiary an annuity.

 

Option A: Decline 

 

With Option A, a reserve member declines to make an election until reaching age 60 or their reduced retired pay age.  In this case, the reserve member declines to accept the Reserve Component portion of SBP and delays their final SBP decision until they apply to begin receiving their military retired pay.  Because they have declined the RCSBP, if they die before reaching their retired pay age, their beneficiaries do not receive an annuity.

 

When they apply to begin their retired pay, they can elect to cover their spouse and/or dependents with the SBP annuity or decline to cover their dependents.

 

Option B: Defer

 

With Option B, a reserve member elects to defer the annuity until at least age 60 or their RRPA.  In this option, if the member dies before reaching their retired pay age, their beneficiaries will begin receiving the annuity at what would have been their member’s 60th birthday or their RRPA.  In this case, the dependents are protected by an annuity, but there is a delay in the start of the payments until the member’s retired pay age.

 

For example, if a reserve member (who did not reduce their retirement age) dies at age 51, their dependents would begin receiving the annuity when this member would have become eligible for retired pay at age 60.

 

Option C: Immediate

 

With Option C, the member elects to begin RCSBP coverage immediately, even if they die before reaching age 60 or their RRPA.  In this case, if a reserve member makes this election at age 43 and dies at age 45, their beneficiaries begin receiving the annuity payment immediately without waiting until age 60.

 

Spousal Concurrence.   If a married reserve member selects Option A or Option B, their spouse is required to sign off on their decision prior to the end of the 90 day election window.  Spousal consent is also required if the reserve member selects a base amount of less than the full retired pay.  In both cases, the DD Form 2656-5, RCSBP Election Certificate, must be signed by the spouse and notarized.

 

Who Can Be a Beneficiary?

 

The next decision required during your RCSBP election is to select who will benefit from your military pension annuity.  The potential beneficiaries include the following:

 

Spouse Only: To be eligible, your spouse must be married to you when you receive your 20-year letter, and the date of your death.

 

Child(ren) Only: Coverage for your children includes unmarried children under the age of 18, or under age 22 if in school pursuing a full-time course of study.  This coverage extends coverage beyond these ages if the child is incapable of self-support due to a mental or physical incapacity, provided that incapacity began before reaching age 18 or 22 as described above.

 

Special Needs: If your RCSBP annuity will support a dependent with special needs you may want to designate a special needs trust to receive your RCSBP benefit instead of directly benefiting the special needs child, so as not to negatively impact their access to other government benefits.  If this situation applies to you, you would be well served to work with an attorney who specializes in special needs trusts in advance of making your RCSBP election.

 

Spouse and Children: This combination of the two previous beneficiary categories benefits the spouse first, then the child(ren) if the spouse becomes ineligible for the annuity due to marriage before age 55 or death.

 

Former Spouse / Former Spouse and Child(ren): You can elect to provide the annuity to your former spouse or your former spouse and the children of that marriage.  If you elect for your former spouse receive the annuity, any current spouse and children from your current marriage are excluded.  In other words, you can only cover one spouse and one set of children.

 

It is possible your former spouse may have a legal claim to a portion of your pension and therefore a court order could require you to obtain SBP coverage.

 

If your covered spouse or former spouse remarries before age 55, their annuity ends.  If they remarry after age 55, the annuity continues.

 

Insurable Interest: If you are not married and have no dependent children when you receive your 20-year letter, you have the option to make an insurable interest the beneficiary of your RCSBP annuity.  This must be a natural person, not a business or other entity, and could be a family member, for example your sibling, a parent, or a cousin.  You could potentially designate a business partner or another person who benefits financially from your continued life.

 

The costs associated with making an insurable interest your beneficiary can be substantial, including the additional requirement to elect your full retired pay as your base amount.  For this reason, electing an insured interest beneficiary requires careful consideration.

 

Beneficiary Changes After Your Initial RCSBP Decision

 

Life happens and there are a variety of situations where your potential beneficiaries might change after you’ve already made your RCSBP decision.  The rules associated with these life changes are complicated and require specific individual counsel from your service.

 

As a rule, you have one year from the date of your life changing event to change your RCSBP decision.  Here are a few of the most common instances where you would be able to change your decision:

 

If you were unmarried when you made your RCSBP election and you subsequently marry, you have up to one year from the date of the marriage to change your RCSBP election.

 

If you had no dependents at the time of your RCSBP decision and later add a child to your family, you have one year from the child’s date of birth or date of adoption to change your RCSBP election.

 

Equally important to understand is that if you were married when you elected to not cover your spouse with RCSBP and you subsequently divorce, then remarry; you cannot change your RCSBP election to cover your new spouse.

 

The primary instance where the one-year rule is shortened is the case where your insurable interest dies; here you have only 180 days to elect a new insurable interest.

 

How Much Does the Annuity Pay?

 

Your election to provide a RCSBP benefit to your dependent(s) ensures they receive an inflation adjusted annuity based on your retired pay.  This annuity is calculated as 55% of your elected base amount, which can be as little as $300 up to a maximum of your full retired pay.  If you elect a base amount less than your full retired pay, your spouse must consent to the reduced annuity.

 

How Much Does RCSBP Cost?

 

Each of the three RCSBP options come with different costs paid in the form of monthly premiums.  These premiums start when you begin to draw retired pay, they are not collected during the Gray Area period.  The RCSBP premium includes two components, 1) the basic premium associated with the survivor benefit plan and 2) the Reserve Component (RC) add on premium associated with the elected coverage option.

 

SPB Premium. The basic SBP premium is calculated using the base amount of the retiree’s pay that would be paid to the beneficiary. This is the same premium that a similar active duty retiree would pay for the same benefit. The maximum annuity benefit is 55% of a retiree’s full retired pay.

 

RC Add-On Premium.  The additional RC premium is based on the coverage option selected. When a reserve member elects either Option B (Deferred) or Option C (Immediate), they have secured RCSBP coverage for their dependents before beginning their retired pay and before the payment of any RCSBP premiums.

 

The coverage provided in this Gray Area period is not subsidized by the Government.  To account for this additional coverage before premiums are collected, an additional RC cost is added to the basic SBP premium, this is known as the RC add on premium.

 

Premiums begin when your retired pay starts, not during the Gray Area Retiree period.  The premiums are deducted from your retired pay each month; however, if you die and your beneficiary is a spouse or dependent children, the premiums end.  They are not deducted from the monthly annuity paid to your beneficiary.  If you selected an insurable interest as your beneficiary, the premiums continue to be deducted from the monthly annuity that your insured interest beneficiary receives.

 

Pre-tax Premium.  It is important to understand that your RCSBP premium is paid before your taxes are calculated, meaning the amount you pay for the premium is lower than stated.  The higher your tax bracket, the less your premium costs after taxes.

 

A Few Examples.  Each of the three coverage options has a separate calculation.  Let’s look at a couple of examples to help compare the different benefits and the potential premiums associated with them.

 

In these examples, we’ll assume the following details:

  • Reserve member is age 43 when they receive their 20-year letter
  • Spouse is age 41
  • Retired pay age is 60
  • Retired pay is $2500/month

 

Option A (Decline): The reserve member declines to make a decision at their 20-year point and waits to make an election when they begin to receive their retired pay at age 60.   Option A does not have additional RC premium costs associated with it because there is no coverage during the Gray Area period.  If at age 60 or the RRPA the reserve member elects to accept the RCSPB, they pay only the SBP premium associated with the level of benefit they’ve selected, generally 6.5% of the elected base amount.

 

Example: The reserve member and their spouse elect Option A, to decline to make an RCSBP decision until age 60 when the reserve member qualifies for retired pay.  When the member reaches age 60, they elect to cover their spouse at the full value of their retired pay.

 

If the member’s military pension is $2500/month and they elect full coverage for their spouse, their SBP premium would be $162.50/month (pre-tax) for an annuity of $1375/month.

 

Option B (Defer): The reserve member elects to take RCSBP but defers the start of the annuity until their military retired pay age of 60.  With option B, the reserve member pays the basic SBP premium plus a Reserve Component (RC) premium to cover the cost of having covered their beneficiary during the Gray Area period, before premiums could be collected.

 

The RC add on premium is calculated based on the difference in age between the member and the spouse and/or the age of the youngest child, and the number of years until the reserve member qualifies to begin their retired pay.

 

Example: The same reserve member and spouse described above elect Option B, a deferred annuity, based on the full retired pay of $2500.  Based on the same facts, their SBP portion of the premium is $162.50 plus a RC add on premium of $39.50, for a total premium of $202/month (pre-tax) for the same annuity value of $1375/month.

 

Option C (Immediate): The reserve member elects to have an immediate annuity paid to their beneficiaries, regardless of their age at death.  With Option C, the members pays the basic SBP premium plus a RC premium to cover the additional expense associated with having this coverage during the Gray Area period between completing their military service and receiving their military pension.

 

Example: The same reserve member and spouse elect Option C, an immediate annuity.  The SBP portion of the premium remains $162.50 with a RC add on of $55.75 for a total premium of $218.25/month for an annuity value of $1375/month.

 

Option C (Immediate) to a Child(ren) Only: The reserve member is a single parent with two children when they make their RCSBP election and they elect to cover their dependent children with Option C, an immediate annuity.  Here the RC add on premium is calculate based on the reserve member’s age, their youngest child’s age, and the years until they would qualify for their retired pay.

 

Example: The reserve member elects Option C for their two children based on their full retired pay of $2500.  In this example, the reserve member has qualified to reduce their retired pay age to 55.  The SBP portion of the premium is $8.50 with a RC add on of $11.50 for a total premium of $20 for an annuity value of $1375/month.

 

Insurable Interest: If a reserve member elects to name an insurable interest as their beneficiary, the premiums are calculated differently.  The basic SBP premium can be substantially higher and selecting an insurable interest always requires the annuity to be taken at the full monthly retired pay level.  The premium starts at 10% of the full monthly retired pay and adds an additional 5% for each five-year age difference when the beneficiary is younger than the retiree. The total cost cannot exceed 40% of the monthly retired pay.

 

Example: If the same reserve member was unmarried and had no dependent children when they made their RCSBP election. They elect Option C, an immediate annuity for their 10 year younger sibling.

 

In this case, the SBP premium would be $500 plus a RC add on premium of $66.25 for a total premium of $566.25/month.

 

In the case of insurable interest beneficiaries, by law a portion of the SBP premium is deducted from the annuity payments for the lifetime of the payments to the insured interest.  In this case, the annuity would be reduced to $1100/month.

 

Some Unique RCSBP Situations

 

Active Duty Retirement.  If a reserve member eventually achieves a full active duty retirement after making their RCSBP decision, the RCSBP decision is invalidated.  The member then qualifies under the active duty SBP rules and must make a new declaration when they retire from active duty. This is true whether the reserve member qualified for active duty retirement due to their length of service or for a medical disability.

 

Active Duty Death. If a reserve member dies while serving in an active duty status, their RCSBP election defaults to the same SBP annuity that an active duty member would receive in this situation.  Their dependents would receive an immediate annuity for the full 55% of their retired pay.

 

Concluding Thoughts on RCSBP

 

The decision to accept or decline RCSBP is unique to each reserve member and their family.  The potentially long and uncertain gap between when they receive their 20 year letter and when they reach their retired pay age complicates the RCSBP decision.  Further complicating the decision are the multiple options available to either decline, defer or establish an immediate annuity.

 

The RCSBP decision requires careful consideration of many important variables and potential unknowns.  Because the election is largely irrevocable, it is critical to consider all the facts and make an informed decision that best supports your family.

 

You have to ask yourself – “Which decision helps me sleep at night knowing my family is protected?”

 

The right answer is unique to each military family.   Working with a financial planner who understands your military benefits from firsthand experience can help you frame your decision within the context of your family’s financial plan.

 

The financial planners at the Military Financial Advisor Association can help you work through the various RCSBP scenarios so you can make the decision that best meets your family’s needs.

 

 

Categories
Financial Planning Goals Insurance Military Pay Military Retirement Savings Taxes

Military Retirement: Should You Take SBP?

Military Retirement - Should you take SBP

Military Retirement and the Big SBP Decision

This article was jointly written by Adrienne Ross, CFP ®, AFC ®, and Pam Bergeson, CRPC

As you’re working your way through your pre-retirement checklist, you may have discovered a couple of decisions that you need to make before you out process one last time from the military.  Of all these decisions, none is more important or more permanent than your decision to accept or decline the military’s Survivor Benefit Plan (SBP).

This blog dives into some of the most common questions about SBP and shares a few examples of when the SBP can be most useful.  It also addresses some of the common myths surrounding the military’s SBP.

What is the Survivor’s Benefit Plan (SBP)? 

The most important fact to know about the amazing military pension you’ve earned during your 20+ years of service is that it ends at your death.  The only way to ensure your spouse and/or your dependents continue to receive a portion of your retired pay is to sign up for the Survivor Benefit Plan.

In the event you pass away before your spouse or your dependent children, SBP continues to pay an inflation adjusted monthly benefit, known as an annuity, to your survivors.  In the case of your spouse, the annuity continues until their death or remarriage in some instances.

What may surprise you is that while you’re on active duty, you’re already covered by SBP at no cost.  If an active duty service member dies of a service connected cause, their survivors are covered by the Survivor Benefit Plan.

Of all the decisions you’ll make at retirement, the SBP election is the most critical because it is largely irrevocable.

Why is your SBP decision so critical?

The exact decision comes in the form of either accepting or declining SBP in the weeks before your final out processing.  If you’re married and decide to decline SBP or accept less than the full SBP benefit, your spouse will need to sign off on that decision during your out processing. The rationale behind requiring your spouse’s concurrence is he or she has the most to lose if you decline SBP.

If you decline SBP, it is very unlikely that you’ll ever have a chance to regain it, your decision is final.   On the other hand, if you elect to accept SBP, you will have an opportunity to discontinue it during the period between 25-36 months after your retirement.  To be extra clear – this window of opportunity to change your mind in your third year of retirement is a one-way decision – exit only.  You can only choose to discontinue SBP, you cannot regain access to SBP.

The only other opportunities to change your SBP decision occur when you have a qualifying major life event that changes the status of your dependents.  The death of your spouse, marriage to a new spouse, or the birth/adoption of a child are examples of potential events that could trigger a short window to change your SBP decision.  The rules surrounding these life events and which ones do or don’t trigger an opportunity to add SBP coverage are complicated and require detailed information to understand fully.

The decision to accept or decline SBP is unique to each service member and their family.  Because there are so many important variables to consider, it is vital to make your own decision with your family’s specifics in mind rather than simply following the decisions of your peers.

Your SBP decision requires careful consideration of your family’s make-up including your ages, age differences, health status and each spouses’ earning potential along with your children’s ages, health, and educational goals, and finally your spouse’s financial interests.  We take a closer look at many of these variables in the next few paragraphs.

Why do you need SBP?

If your family depends on your income, then your decision on SPB is critical to your financial plan.  

If you’re married or have dependent children, chances are they rely on your military pension for a portion of their monthly living expenses.  If your family depends on both your post retirement civilian income and your military retirement income to cover their living expenses, the impact of your passing would be even more devastating.

If your spouse’s lifetime earnings have been hindered by multiple military moves over the course of your military career, they most likely have accumulated fewer retirement assets of their own.  In this case, the SBP annuity may prove even more important in providing long term security to your family.

As difficult as it is to imagine, you must ask yourself if your family had to live without you, and without your civilian income and your military pension, could they pay the mortgage or rent, would your family be able to afford college tuition, and would your spouse have sufficient income to cover their living expenses well into retirement and old age?

What’s so special about SBP?

In today’s retirement savings environment, pensions are rare; a pension with a cost of living adjustment is like finding a unicorn.

Inflation protected.  Your military pension and its survivor benefit are that rare unicorn.  Your military pension adjusts each year to keep up with inflation and your SBP will continue to do so as well.  SBP ensures your survivors continue to benefit from your decades of dedicated service through continued payments from your inflation-adjusted pension.

As the cost of living increases, so does the SBP payment to your survivors.  For example, if your spouse lives twenty years longer than you, the value of their SBP annuity will keep pace with inflation over those two decades.  A payment of $1000 in 2021 could more than double over the course of your spouse’s lifetime.

SBP eliminates two of the most significant risks a widow or widower faces – longevity risk and inflation risk.  

Risk management. Longevity risk is the risk that your surviving spouse will outlive the money you’ve saved for retirement.  With SBP, you don’t have to worry how long your surviving spouse will live, the payments continue as long as he/she is alive, or in some cases, until he/she remarries.

Inflation risk is the risk that the value of the money you’ve saved for retirement won’t keep up with the cost of living over the decades after you retire.  The SBP payments increase each year commensurate with the national inflation rate.  This increase ensures the payment your spouse receives can still cover key expenses as their costs increase.

A third type of risk avoided with SBP is default risk. Default risk is the risk that your life insurance or annuity provider will run out of money or go out of business before paying all the payments they’ve promised you.  Because the SBP is backed by the US Government, the risk of default is nearly zero.

Pre-tax premium.  Beyond eliminating risk in your long-term retirement plan, your SBP premium is paid before your taxes are calculated, meaning the amount you pay is lower than it appears.  For example, if your SBP premium is $300 per month and you’re in the 15% tax bracket; your pre-tax SBP payment is only $255.  For more senior retirees the benefit of SBP’s pre-tax premium is even greater.  A $800 SBP premium for someone in the 28% tax bracket only costs the retiree $576.

Are there situations when I don’t need SBP?  

There are certainly a few examples of situations where you might not need SBP.  First, if you don’t have anyone depending on your income, no spouse or dependent children, you likely don’t need SBP.

If you’re a dual military couple without dependents who’ve earned very similar military retirement benefits, you may not need SPB, or you may be able to take less than the full SBP rate and still cover your future expenses.

This isn’t true of all dual military couples.  When a dual military couple has substantially different career lengths and where there is a significant difference in rank at retirement between the two service members, the SBP decision is less straightforward.

The same comparison is true if your spouse has their own pension through their civilian employer.  Or if the non-military spouse has higher life-time earnings and retirement savings that set them up for a self-sufficient retirement.

What are some special considerations with SBP?

Special needs. If your retirement income will support a dependent with special needs you may want to designate a special needs trust to receive your SBP benefits instead of passing directly to the special needs child, so as not to negatively impact their access to other government benefits.  If this situation applies to you, you’re advised to work closely with an attorney who specializes in special needs trusts in advance of making your SBP election.

Divorce.  If you’re divorced, your former spouse may have a legal claim to a portion of your pension and therefore a court order could require you to obtain SBP coverage.  Learn more about these requirements at this link. https://militarypay.defense.gov/Benefits/Survivor-Benefit-Program/Costs

Reserve Component. The rules for Guard and Reserve retirees differ slightly in terms of when you make your SBP election and the cost of your SBP premium.  We’ll cover the specifics of the Reserve Component Survivor Benefit Plan (RCSBP) in a future post.

If you’re still wondering why you need SBP, let’s explore some of the myths about the costs and benefits of the program. 

Data from 2018 suggests that retirees from each service have different outlooks on the benefits of SBP.  On average, the participation rates of Army and Air Force retirees exceed 60 percent, while Navy and Marine retirees participation remains below 50 percent.  These differences between services may reflect variations in understanding and potentially misunderstanding of the benefits of SBP.  Let’s explore some of the myths surrounding SBP that may impact your decision on SBP.

Some myths about SBP

Myth #1: I can buy term life insurance a lot cheaper than SBP.

Fact: Depending on your age and health, term insurance may in fact be less expensive than your SBP premium.  What is important to consider is that term life insurance is a temporary solution to a long-term challenge.   Term insurance by its very nature is for a specific term or period of time.  The premium you pay is based on your age and your health; as you age, your premiums will increase dramatically.  Have a history of high blood pressure, smoking or asthma?  These and other health conditions will dramatically increase your premiums. Love to scuba dive or pilot airplanes, you may not be insurable.

Fact: The second part of the “buy term” equation is that you need to “invest the difference” in order to cover your family’s loss of your military pension when your access to inexpensive term life insurance ends.  Because it is difficult to secure affordable term life insurance beyond age 60-65, you will need to use the time between your military retirement and reaching your sixth decade to build up a substantial investment portfolio to offset your lack of life insurance.  The savings you reap between the cost of SBP and the cost of term life insurance needs to be invested in order to earn sufficient gains to cover your family’s expenses and to stay ahead of inflation.  This requires not only persistent discipline to save, but also the willingness to take on investment and market risk to generate long term gains.

Myth #2: I’ve done the math; I’ll save money by not selecting SBP.

Fact: There is way more to your SPB decision than just a math problem.  For that math problem to work in your favor, you need to accurately predict how markets and inflation will behave and then you must accurately predict how you and your beneficiaries will behave.

Inflation & Markets: To adequately replace SBP with term life insurance requires you to accurately estimate several very important unknowns, including inflation over the next four to five decades, investment returns over the same 40-50 years, your life expectancy and your spouse’s life expectancy.  These are some important variables, all of which you have no control over.

In the case of future inflation and investment returns, even economists won’t venture to estimate these factors forty years into the future.   If you’re able to create a scenario where the math works in favor of term life insurance, all you need is a steady increase in inflation or a couple of stock market declines to turn your carefully crafted mathematical solution upside down.

Human Nature: There are also several key behavioral predictions necessary to make this math problem work out.  First is the one mentioned above, you need to follow through with the disciplined investment of the “save the difference” if you buy term life instead of taking SBP.  Then you need to have the aptitude and willingness to take on the necessary market and investment risk to grow your investment in order to come out ahead of inflation.

Next, your spouse will need the aptitude to safely manage the life insurance windfall.  She/he will need to continue to manage these investments, balance risk factors and make decisions about taxes in order to generate sufficient income to pay the bills for the rest of their lives.

Myth #3: Life Insurance proceeds are tax-free, SBP payments are taxable.

Fact: Life insurance proceeds are income tax-free, but once those proceeds are deposited in your spouse’s checking account, she/he will need to invest them in order to generate sufficient income and capital gains to keep up with inflation and replace the loss of your military pension for the remaining decades of their life.   Guess what? Investment earnings are taxed as either income or long-term capital gains, depending on the type and duration of the investment.

Conversely, SBP premiums are paid before tax and life insurance premiums are paid post tax.  This means you can discount the cost of your SBP premium by a factor equal to your tax bracket.  Once you calculate the tax advantaged cost of SBP, there may be very little difference from your post tax term life premiums.

Concluding thoughts on SBP

Unfortunately, myths and misinformation surround SBP.  What’s key to remember is that your SBP decision is the single most important decision you’ll make when you retire from the military because your decision to accept or decline SBP will impact your family when you’re no longer there to support them.

It’s critical to consider all the facts and make an informed decision that best supports your family.  Because this decision can have impacts well beyond a carefully crafted math equation, it is important to consider the lasting impacts on your family and your financial plan.

Sometimes it comes down to one simple consideration: which decision helps you sleep at night knowing your family is protected.  

Because the right answer is unique to each military family, we recommend working with a financial planner who understands your military benefits from firsthand experience. As financial planners who help military families every day, we know from experience that each military family’s SBP decision is unique and depends not just on their present-day budget, but on all the elements that go into a great financial life plan.

The financial planners at the Military Financial Advisor Association can help you work through the various SBP scenarios so you can make the decision that best meets your family’s needs.  Reach out to one of us today!

 

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Goals Military Pay Savings

Small Goals, Big Impact

small impact, big goals

Goal Setting in 2021

Like many of you, I started the new year with a list of personal goals to make the most of 2021.  Some of my loftier “bucket list” goals have been on hold during COVID and will likely remain on pause for now – the reality is, I won’t be running any distance races or setting off for a new continent this year.  Maybe 2021 is a perfect year to focus on goals a little closer to home.  I’ve decided this is the year to set small but impactful goals to establish healthy habits so I’m ready for those big adventures when the opportunity arrives.

As a financial planner, I find many similarities between fitness and financial wellness.  I can’t set out to run a marathon tomorrow in the same way I can’t save for retirement in a single day.  Both require consistent small efforts over an extended period of time.   Three or four miles a day all year long sets me up for long-term success in the same way $300-$400 per month for a few decades builds my retirement nest egg.  Slow and steady wins the race.

Financial Wellness

When you’re thinking about financial wellness in 2021, start with three simple financial goals that will help you fine-tune your finances and set you up for success over the long term.

Consider setting financial goals in these three areas: your income, your savings and your spending rates.  These goals can be bite-sized and achievable, involving small, specific activities each month that help you build good habits and make meaningful progress throughout the year.

Income:  If you’re a salaried employee or servicemember, increasing your income may seem impossible, but there are ways to increase how much of your hard-earned income you keep by making smart tax decisions and optimizing your employee benefits.  Are you earning your employer’s maximum 401(k) / TSP match with BRS or taking full advantage of pre-tax set-asides in your Health Savings Account or Flexible Spending Account for this without Tricare?  Does your employer cover cell phone or home internet expenses or offer wellness benefits like discounted gym memberships?

For those outside of AD, the first place to look is at your employee benefit package.  Most companies describe the details of their plan on an employee benefit website or in a detailed brochure.  Identify your company’s 401(k) retirement plan match and determine how much you need to contribute to earn the maximum match from your employer.  Not contributing enough to earn the match is like leaving money on the table.

Savings: Establishing a regular habit of saving each month is the most efficient way to achieve your long-term financial goals, whether that is saving for retirement, your children’s college education, or other goals like a down payment or vacation.  If you earned a raise this year, can you increase your monthly savings by a commensurate amount? Can you bump your savings rate up just 1% this year? Even a small increase can have a huge impact over time.

For example, let’s say you’ve set a goal to save for retirement in an Individual Retirement Account, but you’re not sure where you’ll come up with $6000 to maximize your 2021 IRA contribution.  Much like the marathon example, you need not come up with $6000 all at once – try setting aside $250 per paycheck or $500 per month over the course of the year to ensure you maximize the savings opportunity.  If you’re over 50 years old, you can step it up a little more: $7000 per year, or $583 per month, $291 per paycheck.  The simple step of putting your IRA savings on autopilot with an automatic monthly contribution can set you up for long-term success.

Spending: I’m not a big advocate of budgets that require you to keep track of every penny you spend.  Most of us don’t have time for that level of detail, and generally, it isn’t necessary.  These days, one of the easiest ways to check your spending is to pull open your monthly credit card statement or your bank’s built-in budgeting tool.  A quick review of your statement will help you identify where your money is going.  Your bank’s phone app likely has a budget tool, one click and it shows you a graphic of how you spend your money – housing, groceries, entertainment, etc.

The goal here is simply awareness, not shame.  Are there charges for services you’re no longer using?  Are you paying for five entertainment streaming services when you really only watch two of them?  Most importantly, are you spending money on what is most important to you?  Small fine-tuning steps here free up cash to spend on what is most important to you.

Small Inputs can Drive Big Outcomes

Identifying small, achievable financial goals that lead to progress each month will help you establish strong financial habits and reap meaningful benefits over time.

Taking positive steps in each of these areas – earning more, saving more and spending less is a great way to start the new year and set yourself up for long term success.

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to setting goals and using your money to help accomplish them. We would love to be of help and have a free consultation!

Find an advisor here!