What Military Members Need to Know About the Future of Social Security

If you’ve read the headlines, you’ve probably heard that Social Security is in financial trouble. In fact, Social Security posts a disclaimer on your statement, saying that  “by 2035, the payroll taxes collected … will be enough to pay only about 80% of currently scheduled benefits.” In other words, if Congress does nothing by 2035, 20-25% of all Americans will experience a permanent reduction in their payments.

If you, for example, expected to earn $3,000 a month in benefits, you may only receive $2,400 a month instead. But don’t panic yet. Let’s look at how Social Security works and what might be done to fix the problem.

Understanding Social Security

Social Security works by taxing the paychecks of those who are currently working. These taxes are your contributions that pay benefits to those who are eligible (retirees, widows, disabled, etc.). You can think of Social Security as a wealth transfer between generations, generally from younger workers to older retirees, but also to beneficiaries (mostly widows and children) .

In contrast, your own contributions to your TSP and the ultimate benefits of your military pension (assuming you vested by minimum service requirements) are legally owned by you the contributor. You own that money, even if your employer goes bankrupt or out of business. That’s not how Social Security works.

The Social Security Administration (SSA) takes 12.4% a year out of your wages. You pay 6.2%, and your employer pays 6.2%. You, as an employee, pay half (6.2%), and your employer (the DoD) pays the other half. One common exception is for the self-employed. In that case, you are your own employer, and you pay the entire 12.4%.

Payroll taxes account for over 90% of the money that goes into SS, called “program receipts.”

Program receipts go to a type of savings account called the Old Age, Survivor, and Disability Insurance (OASDI). OASDI is a trust fund managed by the US Treasury that immediately pays benefits to those who are eligible. When program receipts (what goes in) exceed immediate benefit payments (what goes out), excess funds are invested in US Treasury bonds and held in reserve for future periods. When program receipts are insufficient to cover immediate benefit payments, bonds in the trust fund (if available) are redeemed to cover the shortfall.

Nearly all program expenditures go to paying benefits, with less than 1% spent on administration. Eligible beneficiaries include retirees and their families, surviving spouses and dependents, and those who are disabled and their families.

How Social Security Calculates Your Benefits

The program calculates how much benefit you will get using a formula based on your average monthly work earnings over 35 years. The formula averages your highest-paying working years and adjusts the amount for inflation. The result is called your Average Indexed Monthly Earnings (AIME). Your AIME is then used to calculate your potential SS benefit. This is called your Primary Insurance Amount (PIA).

How to Calculate AIME

The formula for your AIME is as follows: 1) take how much you earned in every year, up to the maximum contribution or benefit base for that specific year; 2) for years prior to the year in which you turned 60, inflate those amounts using the national average wage index; 3) rank your pre-60 indexed earnings along with your 60+ unindexed earnings from highest to lowest; 4) add up the highest 35 yearly figures; 5) divide the total by 420 months to get your AIME. Note that to qualify for retirement benefits, you must have 10+ years of earnings on which you paid Social Security payroll taxes. And, if you paid into Social Security for <35 years, all non-contributing years are considered zeroes in the AIME formula.

The formula for your PIA is the sum of three separate percentages of portions of your AIME. The percentages of the PIA formula are fixed by law at 90%, 32% and 15%, respectively. Since the percentages are declining for each portion of your AIME, the PIA formula is progressive. The dollar amounts in the formula (called “bend points”), which govern the portions of the AIME, change annually with changes in the national average wage index. For 2023, if your AIME is greater than $6,721, your PIA = 90% x ($1,115) + 32% x ($6,721 – $1,115) + 15% x (AIME – $6,721). For example, if your AIME is $8,000 your PIA in 2023 would be $2,989.

The PIA formula is progressive, meaning Social Security provides proportionally higher monthly benefits to lower-income workers. For example, retirement benefits may replace about 45% of a middle-income worker’s AIME vs. about 27% for a high-income worker. This is good news for most lower income people. Social Security can replace a greater share of their income needed in retirement.

How much retirement benefit you receive depends on your age when you apply or “file.”

Will Social Security Have Enough to Pay Your Benefit?

For almost four decades, Social Security has been cash-flow positive (more was paid in than paid out). In 2021, however, program benefits paid out were more than taxes paid in for the first time since 1982 (more was paid out than was being paid in). By 2020, the trust fund held about $2.91 trillion, enough to fully cover 2.6 years of program expenditures (everyone collecting benefits).

Given the magnitude of the benefits to be paid out (over $1 trillion a year) and the nation’s aging population, the program must rapidly use up its reserves to meet its obligations.

For every 65-year-old potential retiree in 1985, there were 5 workers aged 20 to 64 potentially paying into the SS system. In 2020, there were only 3.5 workers. Those in charge of the trust fund predict that, by 2035, there only will be 2.7 workers for every retiree and just 2.3 by 2080. In other words, fewer and fewer taxpayers will be supporting each eligible beneficiary, or alternatively, each taxpayer will be supporting more and more beneficiaries

The Board of Trustees of the OASDI trust fund (“Trustees”) predict the trust fund will be depleted by 2035, at which point program receipts (payroll taxes) will be enough to pay about 80% of promised benefits. In short, the trust fund will run out, but all the Social Security benefits will not.

What Can Fix Social Security?

Experts propose a few solutions to the problem. One is to increase how much Social Security takes out of a worker’s paycheck by a few percentage points (pay higher taxes). Another solution is to reduce the size of benefits. The longer Congress delays, however, the bigger the problem becomes and the more drastic the solutions.

To understand what it will take to fix Social Security, the Trustees analyze the program’s cash flows over the next 75 years and beyond. To start, the Trustees sum up the present value of future program receipts, add them to the current balance of the trust fund and subtract the present value of future expenditures. What’s left is an estimate of the program’s financial shortfall over that period. For example, the Trustees estimate the program needs $20.4 trillion of additional assets today to pay all promised benefits over the next 75 years (that’s 1.1% of GDP over that time).

The Trustees estimate that to close the $20.4 trillion shortfall, and pay all promised benefits over the next 75 years, requires an immediate and permanent increase in payroll taxes of 3.24 percentage points, a reduction in benefits of 20.3%, or some combination of the two. Unfortunately, if Congress delays until the trust fund is depleted in 2035, the required changes will be larger—e.g., a 4.07 percentage point increase in payroll taxes, a 24.9% reduction in benefits, or some combination.

Planning in Light of Uncertainty

Does this mean you should be planning on a future without Social Security? I don’t think so. Although the program clearly requires reform, as it did in the 1980s, it is far from bankrupt. It just needs modifications.

Sadly, Congressional action around Social Security tends to arrive at the last minute. Legislators will likely need to shore up the program’s 75-year shortfall using a combination of tax increases and benefit cuts.

For planning purposes, you may need to update your financial plan. For example, in 2023, we could see a 2.035 percentage point increase in payroll taxes (half paid by the employer and half by the employee) and a 12.45% decrease in benefits for all beneficiaries beginning in 2035.

All things equal, this means your financial plan may require more saving and support less spending, especially if you’re younger. That said, no matter the changes, Social Security will likely remain the best longevity insurance most Americans could ever hope for, so take the “doom and gloom” news you hear with a grain of salt. For military retirees with a pension on top of Social Security, they should be even less concerned than the general population.

Social Security and retirement planning are just a few of the thing the MFAA advisors are great a helping their clients figure out.  If you’ve got financial questions, consider scheduling a call with one of our advisors.

 

Purchasing Life Insurance While Stationed or Living Overseas: A Guide for U.S. Military Veterans

As a U.S. military veteran living overseas, you’ve already navigated uncharted territory, braved unfamiliar landscapes, and adapted to new cultures. Now, as you consider purchasing life insurance from abroad, you might once again find yourself facing an unfamiliar and potentially daunting task.

American insurance companies, including USAA, often do not offer insurance policies to individuals residing outside the United States1. And yes, that includes active-duty servicemembers stationed overseas. It doesn’t make much sense, but it is what it is. If you have already run into these dead-ends, you may be feeling unsure about how to protect your loved ones financially in the event of your passing. However, despite this challenge, there are viable options available to you.

This blog post will help you understand the obstacles you might face, explore potential solutions, and ultimately secure your financial future – no matter where in the world you call home. 

A Note About Military Provided Life Insurance

This article essentially ignores SGLI, FSGLI, and VGLI. While those insurance policies are valid options for servicemembers and Veterans, their policy limits ($500,000 for SGLI/VGLI and $100,000 for FSGLI) are insufficient in many cases and their costs do increase over time. 

Understanding the Challenges

Firstly, it’s important to understand the hurdles you may encounter when trying to purchase life insurance overseas:

1. Limited Options: As a U.S. citizen living abroad or with split residency, your choices for buying life insurance with U.S. companies are limited1. Many American insurers restrict their coverage to U.S. residents due to regulatory constraints and perceived (even if not real) risks associated with insuring expatriates2.
2. Validity Issues: Some insurance policies sold by international insurance companies are only valid for the country in which they are bought3. This means that if you return to the U.S. or move to another country, your policy may become void.
3. Payout Concerns: While life insurance generally provides a payout if the policyholder dies overseas, certain exceptions could apply4. For instance, if you pass away in a country that’s under U.S. sanctions, your beneficiaries might not receive the death benefit.
4. Medical Exams: Most insurance companies offering term-life or whole-life policies require some sort of medical exam to verify the health of applicants. Depending on the reason you are overseas, it may be more difficult to access a provider that can complete the exam requirements.

Your Path to Coverage: Three Viable Options

Despite the challenges, you still have options to secure life insurance coverage. Here are three possibilities:

1. Employer-Based Coverage: If you’re currently employed overseas, your employer may offer a group life insurance plan. These plans often provide worldwide coverage, regardless of your location or medical history. They can be a convenient and cost-effective way to secure some level of life insurance protection. However, the amount of coverage may be limited. A common upper limit is 10 times annual base salary5. The critical weakness here is that coverage is tied to employment. If you are terminated, the life insurance coverage often ends immediately. This situation occurs more than you might think. 
2. AAFMAA (Armed Forces Benefit Association): AAFMAA offers life insurance policies to members of the American armed forces and Veterans, including those living overseas6. This can be a particularly good fit for military veterans. AAFMAA will sometimes accept a recent military PHA in lieu of a medical exam. The cost of these term policies and the upper limit of coverage will fit the needs of Veterans in many situations.
3. Local Insurance Companies: Another option is to purchase a policy from a local insurer in your country of residence. For example, I had a client who was working in Qatar and found a suitable policy with Doha Bank. Local insurers understand the country’s regulations and can offer policies tailored to expats. However, you’ll need to navigate language barriers and unfamiliar insurance norms. Plus, the policy may not remain valid if you later decide to move back to the U.S. or to another country.

The Importance of Professional Guidance

Given the complexity of securing life insurance while living overseas, professional guidance can be invaluable. A financial planner with experience in cross-border insurance matters can help you understand your options, compare policies, and make an informed decision. They can also help you navigate the application process, which may involve additional paperwork and medical examinations due to your overseas status7.

Furthermore, working with a financial planner can help identify the amount of life insurance you actually need. Rules of thumb are helpful, but specific details about your finances and objectives may create a need for more life insurance than the rules of thumb suggest. Or, perhaps, you have little need for life insurance at all!

Final Thoughts

Purchasing life insurance while living overseas can seem complicated, but it’s far from impossible. With careful research, consultation, and planning, you can secure the financial future of your loved ones no matter where you live.

Your service and work overseas should not limit your access to life insurance. It’s about finding the right policy and right source that fit your unique situation. Remember, the road to securing life insurance as an expat may have a few more twists and turns, but with persistence and the right guidance, you can navigate this path successfully.

If you’d like to talk to one of the MFAA members about life insurance or another financial challenge, you can find them here.

 

Footnotes

1. Policy Genius
2. Expatica
3. Unisure Group
4. Experian
5. Investopedia
6. AAFMAA
7. International Citizens Insurance

 

Decoding Your Civilian Employee Benefits:
Understanding and Utilizing Your Perks

Active duty and retired military families are fortunate to have access to good medical and dental coverage options. However, these options often come with limitations and lack flexibility (looking at you Tricare Prime). As financial planners, we frequently discuss healthcare options and the financial consequences with our clients. Perhaps you are transitioning out of the military and are currently facing these choices. Maybe your spouse got a new job (or they have an open enrollment coming up) and you have access to options that weren’t available to your family before. This post will concentrate on highlighting the employee benefits that are typically not accessible through the military and discussing how individuals could benefit from enrolling in them.

Healthcare Flexible Spending  Accounts (FSA)

A Healthcare Flexible Spending Account (FSA) is a use-it-or-lose-it account that allows you to set aside a portion of your pre-tax salary to pay for eligible healthcare expenses. The expenses include any number of things not covered by your insurance (copayments, deductibles, prescription medications, to name a few). While a Healthcare FSA might not cover a trip to Disneyland or help you beef up your Lego collection, it does cover some cool real-world expenses. Check these out:

• Heating Pad Teddy Bear (adorable, yes?)
• First Aid Kits
• Allergy Related Items (think anything that can help with sniffles, like antihistamines or nasal spray)
• Maternity Items (prenatal vitamins, breastfeeding supplies, back support, etc.)
• Humidifiers or Diffusers
• Baby Essentials – Nose wipes, diaper rash cream, pain relievers, baby lotion, etc.
• Fitness Equipment – items prescribed by a medical provider that could be eligible for FSA reimbursement include exercise balls, stationary bikes, etc.

Dependent Care Flexible Spending Accounts 

A Dependent Care FSA is similar to a Healthcare FSA in that it allows you to set aside pre-tax dollars to pay for eligible dependent care expenses. You can’t use it to send an adult to Lego camp (no matter how many times your/my spouse asks). The qualifying dependent must be under the age of 13 to qualify (with a few exceptions).

Examples of qualifying expenses are daycare, preschool, before/after school care and summer day camps. There are contribution limits for a Dependent Care FSA, which vary annually and are per household ($5,000 for 2023).

Note: DoD civilians, regular (active) component service members, and Active Guard Reserve members on Title 10 orders who have dependents with eligible expenses will be eligible to enroll in Dependent Care FSAs starting in 2023 (for calendar year 2024). See the Federal Flexible Spending Account Program website for more information.

Healthcare Savings Accounts

Healthcare Savings Accounts (HSAs) are like tax ninjas. They offer triple tax advantages: your contributions are made pre-tax, the earnings you receive are tax-deferred, and the distributions are also tax free if you use them for qualified medical expenses. 

Note: There are very specific rules on who can contribute to an HSA. Make sure you qualify to contribute to an HSA before you start those contributions. Here are some of the HSA eligibility rules (check out all of the IRS’s rules here):

• You must be enrolled in a high-deductible healthcare plan
• You must not be covered by another medical plan. For instance, if you’re covered by Tricare Prime through your spouse’s employer and you get a new job with an employer’s high-deductible healthcare plan, you can enroll in both plans, but you can’t contribute to an HSA while covered by Tricare Prime.
• Some employers will contribute to your HSA on your behalf. A good rule of thumb: if you aren’t eligible to contribute, then your employer cannot contribute on your behalf. 

The best thing about HSAs is that they are not use-it-or-lose-it so you can contribute to these plans and save those funds for medical expenses in retirement. Yes, you can always use them before retirement, but I encourage clients to think of them as another retirement account and pay for current medical expenses out-of-pocket whenever possible. As a bonus of winning the health lottery, if you make it to age 65 healthy and strong, and you don’t need your HSA funds, you can use your HSA to pay for anything – there’s your Lego camp money! Keep in mind, you’ll need to pay state and federal tax on the distributions, but the penalty tax (20%) will be waived.

Life Insurance

One of the great advantages of getting life insurance through a non-military employer is the opportunity to get cost-effective coverage for a family member who might not be eligible elsewhere. The coverage is generally similar to the type of group life insurance coverage available while you’re on active duty (Servicemembers’ Group Life Insurance (SGLI)) and this often does not require individual medical underwriting or a medical exam, especially for new hires.

Weird but Fun Benefits Available Through Some Employers

Legal Plans 

Your definition of fun might not include a legal plan but hear me out. Base legal has wonderful free options for drafting your estate planning documents, but there are certain documents you can’t access using our very talented JAGs (see Amy King’s post here for more information on what is available). That’s where a legal plan could potentially help you fill in that gap by offering access to an estate planning lawyer for a reasonable amount. FSAs get all the love but I’m all about a good legal plan.

Gym Memberships, Wellness Reimbursements and Workout Classes

These types of benefits can include on-site gyms, fitness classes, mindfulness sessions, or access to nutritionists and wellness coaches. 

Hidden within the depths of your benefits manual’s fine print section, you may stumble upon a treasure trove of additional perks and rewards, waiting to be discovered. Some of these lesser-known benefits include:

• Education Reimbursement 
• Pet Insurance
• Discounts on Auto or Homeowners Insurance
• Student Loan Assistance
• Identity Theft Protection
• Donation Matching
• Paid Time Off for Volunteering

Final Note

When choosing your employee benefits, consider your specific coverage needs, review your plan options, evaluate the costs and your budget, and check the network of providers for healthcare benefits. It’s important that the decisions that you make align with your family’s needs and financial situation. Need Help? Reach out to one of our financial planners who will be happy to discuss the advantages and disadvantages of your available choices.

Credit Reports and Scores are more important than ever! 

In July, the Federal Reserve raised interest rates one more time to reach a 20 year high. Higher rates have meant savers are finally seeing their cash grow. Higher rates also mean that borrowing costs are the highest they have been in decades. Your credit score, which is driven by the data in your credit report, plays the largest role in determining the interest rate that lenders will offer you.

Consider this, auto loans for a new car through USAA start at 5.54% and 8.89% for a used car. When starting rates are over 5%, your credit report matters more than ever. Nothing illustrates this more than the cost of a Toyota Tacoma in 2003 vs 2023.  In 2003, you would have been paying 5.54% on a $12,610 loan. In 2023, you would pay 5.54% on a $30,415 loan for a new Toyota Tacoma, if you have the best credit report and score. Deliberately building your credit history saves you money and opens many more opportunities.

Credit Reports vs Credit Scores

One misconception that I see a lot is an outsized emphasis on credit scores without understanding the underlying credit report. This makes sense as credit scores get all the media attention. Credit scores are a quick summary of the complex financial data that is your financial life. Your credit report is a detailed compilation of your financial history. Lenders use that data to evaluate the risk of issuing a loan to a borrower. Lenders assess that risk by assessing the three Cs of credit reports: Character, Capacity, and Collateral. That assessment translates into your credit score. Build and manage your financial history and raising or maintaining your score will naturally follow.

High-Interest Rates

When rates rise, borrowing costs increase. You don’t need me to tell you about what you experience directly as a consumer. Rising rates also drive an increased risk of default. That rising default risk affects how lenders assess the three Cs. Default risk skews toward borrowers whose underlying financial data, captured in the credit report, reflect challenges to character, capacity, and capital. Those borrowers, whose increased risk of default is represented by a lower credit score, are the first to face the highest borrowing cost. They are also the first to lose access (get denied) to new credit as lending tightens. 

For borrowers with higher credit scores, those with positive character, capacity, and capital reflected in their credit report, also experience increased borrowing costs. However, lenders reserve the best rates for borrowers with more positive credit reports (and therefore higher credit scores). Borrowers with the best credit reports and scores typically maintain access to credit, even when lending tightens.

Building and managing your credit history is always important. Rising interest rates and tightening credit markets amplify the impact of negative credit reports on borrowers. 

Build a Better Credit Report- Your Score Will Follow

When it comes to building or rebuilding your credit report there are no quick fixes. This is because your credit report is your history of managing your financial life. Don’t get scammed by a pop-up ad promising to fix your credit history for a one-time payment. You already have the power to fix incorrect information, add statements to your file, and take steps to build positive history.

Start by checking your credit report

You can access your credit report for free at www.annualcreditreport.com. During the pandemic consumers were allowed to access free credit reports through Transunion, Experian, and Equifax weekly. This was a big change from the free credit report offered annually in the past. Annualcreditreport.com  continues to offer free credit reports weekly. So, check your credit report. Check your report even if you have good credit.

Review your credit report for inaccurate information

Read through all the pages of your credit report and make note of any inaccurate information, including things that you don’t remember. Use the dispute process offered by the credit reporting agency that manages the report to dispute incorrect information. These may be things like addresses you never lived at, phone numbers that aren’t yours, birthdates that are incorrect, aliases that aren’t yours, or credit items that you did not open. Review the inquiries on your credit report. If you have a lot of soft inquiries, or credit inquiries that were initiated by companies wanting to offer you credit, put yourself on the opt out list. Visit OptOutPrescreen.com and put yourself on the list to opt out of these offers. 

This is especially important for active duty military who move frequently. Imagine all those pre-screened offers for credit cards being sent to your old address and whoever lives there now. 

Review negative information

Your payment history is one way lenders assess your character, by reviewing your history of making payments on time. Reviewing your credit report can be emotionally difficult. Missed payments and defaults usually coincide with difficult times in peoples’ lives—a deployment, a really bad PCS, a spouse’s lost job, a divorce, a loss in the family. Reviewing your credit report can be a painful reminder of those times. If you have negative information on your credit report, look for a professional who understands credit and your situation as a military family. Accredited Financial Counselors (AFC®) and some Certified Financial Planner™ Professionals (CFP®) offer these services. Depending on your location, you may have access to a Personal Financial Counselor assigned to your base. If not, Military OneSource may be able to connect you to someone in your area or online.

Negative and accurate information can remain on your credit report for up to 7 years. Agencies treat negative medical payment information differently from other types of collections. If you find negative inaccurate information, file a dispute. If you find outdated information, negative payment history that is more than 7 years old, file a dispute and request removal. 

Mind your capacity

Your capacity reflects your ability to repay a loan. When you are reviewing your credit report, consider the total amount of debt that you have relative to your income. This is often referred to as your debt-to-income ratio. Look at each of your credit items to ensure that the details are correct. If you have a high debt to income ratio, paying down debt will result in an improved credit score. As your debt is paid down, your capacity to repay remaining debts increases.

Track your collateral

Having assets that can be used to repay a loan if you are no longer able to make monthly payments decreases the risk to the lender. Collateral can be short term savings, long term investments, equity in real estate, the market value of car or other items of value that you borrow against. While you may not use your savings to secure a loan, having cash savings in combination with a good payment history and a low debt to income ration can help you get the best rates when borrowing.

Military service members know that credit reports are used for more than just lending. Credit reports are used for security clearance reviews, by landlords, by insurance companies, and even by mobile phone carriers. Lenders routinely review credit reports on existing revolving credit to determine rates and eligibility.  As interest rates rise, building and maintaining your credit report will be important, even if you do not intend to apply for a new loan. Credit reports will continue to shape what you pay for cell phones and insurance. A positive credit report may be the key for future employment. 

Additional Resources

Consumer Finance tool for military

FDIC Consumer Resources

Service Member’s Civil Relief Act

Disputing Military Debt

Do you need help understanding your credit report or building a solid financial plan?  The MFAA advisors can help.  Consider setting up a call with one today.  You can see all our advisors here.

What is MQFP®, and Why Do We Need It?

Since late 2021, some colleagues and I have been developing a certification for financial professionals who focus on serving military and veteran families. It is called Military Qualified Financial Planner – MQFP®, and it is time we started telling the rest of the world about it.

What is a Financial Professional Certification?

Like any professional certification, it is a label to let other people know that you have met certain professional standards. Certified public accountants use “CPA” after their name to let people know they have met the highest standards in their field of accounting. AFC® and CFP® Professionals use their marks to let others know they have met high standards in financial counseling and planning. The letters MQFP® will likewise be used to let others know the financial professional using those marks has met certain high standards.

What are those MQFP® standards?

To hold the MQFP® marks, a financial professional must meet ALL the following requirements:

1. Compensation methods must meet the National Association of Personal Financial Advisors (NAPFA) definition of “fee-only”.
2. Must provide a fiduciary level of client care to all clients and must sign a fiduciary oath.
3. Must have at least one of the following credentials: AFC®, ChFC®, CFP®, CFA®, CPA, or be licensed to practice law by a state bar association.
4. Must pass the MQFP® Exam and remain in good standing as an MQFP.
5. Must have current or prior service in the armed forces of the United States, their Reserve or Guard components, or be the spouse (or prior spouse) of a current or prior service member.
6. Must focus your effort as a financial professional on serving military and veteran families.

Financial professionals who bear the MQFP® marks will be letting the world know they have met and maintain those standards.

Why the Trademark, and Who Owns It?

Military Qualified Financial Planner MQFP® is a certification trademark registered with the US Patent and Trademark Office. The trademark is owned by The Military Financial Readiness Objective (TMFRO), a 501.c.3 charity registered with the Internal Revenue Service and incorporated in the Commonwealth of Virginia. By law, only TMFRO can make money from the use of the MQFP® marks. By law, TMFRO must use that money to further the financial readiness of military and veteran families.

The team developing the MQFP® marks did not seek a trademark so that we could make money from this project. Nor do we seek to prevent other organizations from working to improve the financial wellness of military and veteran families. We acquired a trademark so that no one can prevent our work in this space. We have secured our rights, and now we intend to exercise them.

Do We Really Need Another Financial Certification?

I hear you. I have my fair share of ‘credential fatigue’. There are so many now that it diminishes their meaning. I am going to tell you why I think we need the MQFP® credential. You may agree with me or not. To explain my reasoning, I am going to tell you a short version of a much longer story.

Turn back the clock to October of 2018. Sean Gillespie and I had just formed our financial planning firm a few months earlier. We were sitting around the office hoping the phone would ring because we really needed some more clients. The phone didn’t ring, but the door opened. That’s unusual because it’s not the kind of business you walk into without an appointment. I walked out to our waiting room to see what was happening. That is where I first met a man I am going to call “Jimmy”.

Jimmy was 75 years old. He had served in Marine Reconnaissance in Vietnam. He was carrying a folder nearly 3 inches thick with paperwork. He had a problem with the IRS. “I don’t know why they keep hassling me,” he said over and over again. He had sent them all this paperwork (gestures to folder) and they just keep hassling me.

Back in my office I discovered the folder contained his medical records, and his medical records contained a diagnosis for dementia. He had, in fact, sent his medical records to the IRS.

Fast forward: we took care of Jimmy, and his wife Jane. They actually got money back from the IRS. We continue to prepare their tax returns every year. I have not seen Jimmy since he had a stroke in 2020. He is partially paralyzed and does not get out of the house much. As his primary caregiver, I don’t think Jane gets out of the house much, either. She comes to the office twice a year to drop off and pick up. Always dressed like it’s Easter Sunday. Simply splendid. You can see why a young marine would have fallen for her 50 years ago. Why did women ever stop wearing hats?

I am telling you this story because the first thing Jimmy ever asked me is one of the most wonderful things I’ve ever heard. In 2018, I came into the waiting room to see Jimmy standing there with his folder and he said, “You guys are veterans, aren’t you? I saw it on your website.”

Think about it.

Jimmy had a financial problem, a tax problem. Jimmy was confused. He felt like he was being attacked, they keep hassling me. He didn’t know how to solve his problem.  So, what did he do? He didn’t ask if we had training on tax issues. He didn’t ask if we had experience fixing these sorts of problems. He asked if we were veterans. He wanted to find somebody who would have his back.

And we did. And we do.

There are hundreds of thousands of Jimmys and Janes out there. Military and veteran families with financial problems. They are confused. They do not know how to solve the problem themselves, and they just want to find someone who will have their back. Where are the financial professionals who will have their backs?

I saw more than 100 of them at MilMoneyCon in Nashville last April. They are out there, and their numbers are growing.

How are Jimmy and Jane going to find those financial professionals? The ones who know what it means to serve?

We have built a label – a professional certification. We are going to make it available to a select group of financial professionals serving military and veteran families. We are going to pin it on them and then tell the world what it means:

• Fee-only
• Fiduciary
• Trained as a financial professional
• Educated in military and veteran specific financial issues
• A member of the military tribe
• Continuing to serve that military tribe

We are going to make it easier for military and veteran families to find the right financial professionals for them.

I do not disparage knowledge, or knowledge-only credentials. Knowledge is an essential component of every financial professional’s skillset. As a financial professional, I am constantly seeking more knowledge. Financial plans and recommendations are built from knowledge. But the foundation supporting those plans and recommendations is trust. Without trust the plans and recommendations never get built. I think the time has come for a professional financial certification that military and veteran families can trust. Military Qualified Financial Planner MQFP® has been developed by trusted members of the military tribe, for the military tribe. I believe it is needed.

Thank you for reading and if you want to know more about MQFP®, check out this link: https://mqfp.org/

 

One of your most valuable (but rarely discussed!) military benefits is access to free legal assistance from your local Legal Assistance Office. The Legal Assistance Office can provide an array of services. One of the most valuable services is estate planning advice and documents preparation.

What is Estate Planning and Why Should You Care?

Estate planning is the process of leaving directions for the disposition of your assets and obligations upon your death.  It can also include naming someone you trust to act on your behalf in the event you are not available or not able to make decisions for yourself.

There are countless stories of Service Members who did not update their estate documents after a marriage (or divorce). As a result, the Service Member’s family must deal with the additional stress and confusion of sorting out the Service Member’s legal affairs.

Even if everything you own fits in a standard issue footlocker, you owe it to your loved ones to reduce their burden in the event something happens to you.

How do you set up an Estate Plan?

Estate planning is not a “one size fits all” process.  Seeking legal advice from a competent estate planning attorney is the first crucial step in setting up your estate plan.  The Legal Assistance Office can help.

Find your local Legal Assistance Office

(https://legalassistance.law.af.mil/) and schedule an appointment. The Legal Assistance Office will provide a questionnaire to prepare ahead of time.  The questionnaire will help you think through all of the details they will need to prepare your estate plan documents.

With your completed questionnaire and a discussion with you, the Legal Assistance Office will usually prepare the following documents:

• Last Will and Testament (Will) –
  • Names your executor (the person responsible for implementing your wishes)
  • Directs how you would like your assets distributed
  • Appoints a guardian for your minor children (or pets!)
• Power of Attorney – a document that grants either General (broad) or specific authority to an individual to act on your behalf (this can include the ability to make healthcare decisions for you; speak with your attorney for more details)
• Advance Directive – communicates your wishes for medical care in the event you are not able to communicate with your medical care team. (Also called a living will)

In some cases, you may choose to use a Trust in your estate plan.  A Trust is a legal vehicle which allows you to transfer ownership of an asset while retaining some level of control over the asset. There are many different kinds of Trusts, and they all serve a unique purpose. Speak with an attorney to determine whether a Trust could be beneficial to your estate plan.

Who Can Access the Legal Assistance Benefit

In general, the following Service Members and dependents have access to free legal assistance:

• Active Duty Service Members, their Families and Survivors
• Retired Service Members receiving retirement pay, their Families and Survivors (this includes retired National Guard and Reserve Service Members)

The following Service Members generally have limited access to free legal assistance:

• National Guard and Reserve Service Members serving on active duty (does NOT include their Families). Access is available while on Title 10 or Title 32 active duty orders.
• National Guard and Reserve Service Members serving during periods of inactive duty training periods to prepare documents in the event of a call to active duty (does NOT include their Families)

National Guard Service Members serving on state active duty must refer to their state rules.

(Ref: https://myarmybenefits.us.army.mil/Benefit-Library/Federal-Benefits/Legal-Assistance-Services)

Beyond the Legal Assistance Office

Having an estate plan in place is no less important if you/ your family are not able to access free legal advice through the Legal Assistance Office. Find an attorney who is familiar with the estate planning nuances of your state (estate issues are governed at the State-level).

Even if you are able to begin your estate planning process at the Legal Assistance Office, certain situations may require more complex estate planning strategies or documents. You MAY need outside estate planning advice if you:

• Own property in more than one state
• Own a business or part of a business
• Have a special needs child who will require care for most/ all of their life
• Have a beneficiary who is not able to handle an inheritance or you want to control how a beneficiary may access the assets you plan to leave to them
• Want to keep your estate settlement affairs private. A Will almost always involves the probate process which is a matter of public record.
• Want to provide for pets that may outlive you
• Other unique situations

Your local Legal Assistance Office can advise whether you may need an outside estate planning attorney. There are many websites available to help you compile a list of estate planning attorneys to research and then interview:

• Your State Bar Association Member Directory
• Estate Planning Attorney trade associations
• Your favorite MFAA Financial Advisor: https://militaryfinancialadvisors.org/start-here/

Estate planning with a private attorney can be expensive. You should select at least three attorneys to compare services and costs.  Be sure you clearly understand their recommendations and the impact of implementing or not implementing their recommendations. From there you can decide how to proceed.

When to Update Your Estate Plan

Just as estate planning is not a “one size fits all” situation, it’s also not a once and done situation. After your initial documents are in place, you should review/ update your documents:

• At least every 1 to 2 years to ensure you are still happy with the plan
• When you have a change in marital status
• When you have a child
• When you change state residency
• Before you leave the military
• When you have a substantial change in your financial situation
• If one of your beneficiaries passes away

Keep in Mind

Estate planning is not a “one size fits all” situation. You may be incredibly well served by the free services offered at the Legal Assistance Office.  Or, you may need the advice of a private estate planning attorney who has experience with situations similar to yours. Start with the free legal advice at your local Legal Assistance Office and go from there.

The most important thing is to START.  Your loved ones are counting on you to protect them from the financial and legal challenges that may result from not implementing a suitable estate plan.

 

Side Hustle or Contractor – You have options!  Retirement savings options, that is.

Technology and post-Covid acceptance of remote work has created more opportunity than ever for military spouses to be gainfully employed.  PCS’ing to Germany?  Keep your job, work modified hours, and collect a tax-advantaged US-based salary.

Others are staying in the same industry, becoming 1099 contractors, and taking their skills and career with them when they move.  In other cases, we see transitioning service members and spouses opt for side gigs instead of traditional employment because of the flexibility it offers.  Often these “self-employed” opportunities generate very respectable income.  The additional income can fatten (early) retirement coffers, but can also leave folks hit by a surprise self-employment tax bill.

So what to do?

There are always pre-tax Traditional IRAs, but the contribution limits are so…limiting.  At certain income levels, you won’t even be able to deduct those contributions.

Enter the Individual 401k, SEP-IRA, or SIMPLE-IRA as retirement savings options.

Most know about the TSP and employer 401k tax advantages to reduce taxable income.  Contribute $22,500 ($30,000 if over 50)  and that same amount comes off your taxable income for the year.  For a two-income household, this could save $10,000+ at tax filing time.  However, if you have self-employed income, you need to know about these other plans.

What is an Independent 401k or SEP-IRA or SIMPLE-IRA?

Anyone with self-employment income (1099 contract work counts) who has no W-2 employees is eligible to open an Individual 401k.  The contribution limits for you as the employee are the same for anyone else contributing to a 401k:  100% of your earned income up to $22,500 if you are under 50, and an additional catch-up of $7,500 for a total of $30,000 if you are over 50.

Then things get interesting. As the employer, you may also contribute an additional 25% of your earned income (S Corp or LLC), or 20% of adjusted income if you are a sole proprietor. The combined total cannot exceed $66,000 if under 50 or $73,500 if over 50. You can make Roth contributions, too, if you are willing to pay the tax bill now. You can see how contributions as both the employee and the employer can add up fast.

The SEP-IRA (Self-employed Individual Retirement Account) is an alternative solution if you have W-2 employees, but it is limited to only employer contributions (see some exceptions) that must be made in equal percentages of salary for yourself and all employees.  Thanks to the Secure Act 2.0 in 2023, SEP-IRA plans will allow Roth contributions starting in 2024.  Both Individual 401k and SEP-IRA contributions can be made until your tax filing deadline.

If you own a business and have W-2 employees, you also have the option of a SIMPLE-IRA.  The rules are a little more specific for these plans.  See the link in the SIMPLE column below.

What’s the difference between the two?

The table below illustrates the major differences between the three plans mentioned above.

	Individual401k	SEP-IRA	SIMPLE-IRA
Max employee contributions	100% of income, up to $22,500* 100% of income, up to $30,000**	None, with some exceptions	100% of income, up to$15,500* 100% of income, up to $19,000**
Max employer contributions	As much as 25% of net income up to annual additions limit	The lesser of 25% of income  or $66,000	3% matching, or 2% non-elective
Max annual total contributions (employer and employee)	$66,000* $73,500**	$66,000* $73,500**	See link above
ROTH contributions allowed	YES	Starting in 2024	Starting in 2024
Employees allowed	No (exception = spouse)	Yes	Yes, up to 100
Deadline for opening account	Dec 31 of tax filing year	Tax filing deadline for your business	Oct 1 of tax filing year

*under 50 years of age
**50 years of age or older

This calculator is also handy for seeing the differences in which plan to choose based on maximizing retirement contributions for your specific situation.

Retirement Savings Options Examples

Example 1 — Self-employed with no other employer-sponsored plan:

Sue is a 1099 contractor working from home for a big insurance company.  As a “sole proprietor”, she made $80,000 in 2022 and had only $2,000 in deductible expenses.  She is required to pay $11,934 in FICA payroll taxes (15.3% for SS and Medicare).

She contacts her MFAA financial planner about saving for retirement to save on taxes.  Her advisor helps her open an Individual 401k to which she contributes $22,500 (Sue is age 38) as her employee contributions, plus another $14,498 as employer contributions for a total of $36,998 in retirement savings for 2023.

She and her spouse are in the 22% federal marginal tax rate; Sue’s state tax rate is 3.5%.  The household will save $9,434 on its 2023 tax bill.

Example 2 — Having an employer-sponsored plan AND an Individual401k:

Sue’s spouse John decides to join her in the contract work after retiring from the military.  John can make contributions to the Individual401k under the same business tax ID number.  John makes $40,000 after retiring in July.  Self-employment taxes are $6,120; there are no additional deductible business expenses.

John had contributed $12,000 to his TSP account before retirement, and he is under 50 years old.  He can contribute another $10,500 to his Individual401k as the employee and approximately $7,000 as the employer.

Example 3 — Hiring employees who are 1099 contractors

Sue & John have more contract work than they want to handle after military retirement.  They hire two military spouses to work part-time virtually with them.  The two new hires are 1099 contractors for Sue & John.  Sue & John can continue to use their Individual401k.  They encourage both of their contractors to save for retirement in their own Individual401k.

Example 4 — Hiring employees who become W-2 employees

Business continues to boom.  Sue & John decide to make everyone a full-time W-2 employee.  The business now pays half the payroll taxes for both Sue & John and the two employees.  Because of this change of having W-2 employees, Sue & John can no longer contribute to their Individual401k.  They can either switch to a SEP-IRA or a SIMPLE-IRA.  Item of note:  you can offer and contribute to both a SEP-IRA and 401(k) in the same tax year, but the same is not true for a SIMPLE and another plan.  More details can be found on the IRS website.

How Do I Decide? What’s Next?

If the self-employment income is just you, or you and your spouse, the Individual401k will give you the most capacity to save for retirement.  If you need a plan for you and your employees, consider the SEP-IRA or SIMPLE-IRA.  Consult your tax professional for definitive advice for your situation.  Need more help understanding your retirement savings options and deciding which is right for you?  Reach out and connect with an advisor at the Military Financial Advisors Association!