Category: Financial Planning

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Financial Planning

Why I Serve Veterans and Federal Employees

Why I Serve Veterans and Federal Employees

Just as you wouldn’t want a plumber wiring the electricity in your new home, you don’t want just anybody guiding you in your financial life. With something as important as your finances, you want to experience the peace of mind that comes from entrusting your money to someone who has knowledge and experience that relates to your unique situation.

Our goal at Red Clover Financial Planning is to build strong, trusted relationships with our clients, tailoring our services to fit their needs so they can experience fulfillment now and throughout their lives. We focus our services and attention on two specific groups of clients—veterans and federal employees. Here’s why.

A Personal Link

My choice to cater to military families and government employees is deeply personal. How personal? My husband served in the Army and, after his transition out of the military in 2016, he became a government contractor. My experience as the spouse of a veteran has given me an up-close and personal perspective of the challenges and opportunities military families face. That experience, coupled with many years of serving government employees, gives me not only an understanding of your lifestyle, but also the knowledge and expertise to help you navigate your unique life.

Honoring The Sacrifice

The time, energy, and sacrifice our veterans and government employees give to serve our country cannot be put into words. Regardless of your role or position, you are doing work for a higher purpose and serving your fellow Americans. My desire is to give you a place where you can work with an advisor to secure your future without being sold a product or required to move your investments. I want to serve you with my skills and dedication as you have served me with yours, providing you with financial advice and guidance so that you can experience financial confidence and the future you dream about.

Support & Advocacy

Military life is hard to describe to those not in it. Government employees generally earn less than civilians and need to be prudent in terms of how and where they save and spend their money. Military families don’t have much control over their lives, like where they will live, how often they will uproot, and when deployments will happen. Despite the challenges, they also have benefits they can take advantage of, such as pensions and continuing health coverage that, when optimized, can help them achieve financial independence or retire early.

Whether you have questions about the Thrift Savings Plan, GI Bill education benefits, supplementing your pension with personal savings, insurance options, or survivor benefits, you need someone who has not only walked in your shoes but helped others in the same circumstances. My focus for all my clients is to help you live your best life, and for military and government employees wanting to make the transition into civilian life, I want to come alongside you so you can make this an opportunity to pursue the life you’ve always wanted.

Let Us Help You

Because of your different obstacles and benefits, lifestyle, values, and decisions, you need the specialized touch of someone who understands you and can innately grasp what you face, both practically and financially.

I encourage you to find a financial advisor who specializes in serving veteran and government clients. Take advantage of the Military Financial Advisors Association or search for fee-only advisors based on their area of expertise through the XY Planning Network. To learn what it’s like to work with Red Clover Financial Planning and how we can help you, I invite you to schedule a no-obligation, introductory zoom meeting or reach out to me at 703-677-4587 with your questions.

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Financial Planning

Helping Your Parents Transition To Long-Term Care

Multi-generational family in a park highlighting long-term care plan necessity

In the fall of 2022, my mother had a mini-stroke.  It was a wake-up call for my siblings and me when we realized she couldn’t communicate with us.  I thought we had done a good job creating a long-term care plan for the time when my mother would move to a continuing care community.  We had all the proper paperwork, including her medical directives and healthcare power of attorney (POA). My mom even has a comprehensive coverage long-term care policy. The problem was even though we had been working with my mom on her long-term care plans, we were not ready when it looked like she would need care.  Here are three lessons learned from my experience.

Frequent Communication

One of our biggest concerns was not knowing where my mother would want to live if she required continued long-term care after the stroke.  I have worked with my mother on her long-term care plan since we moved my father into a nursing home 16 years ago.  My mom has spent the last 13 years splitting her time between a 55 and older community in Massachusetts and a second home in Florida.  As she has aged, she decided that she would eventually like to live in a continuing-care retirement community.  She began looking into these communities in 2018 but a health issue followed by the COVID pandemic, put her search on hold.

We are very fortunate that my mother recovered quickly after her stroke and did not need long-term care.  We have now made it a point to have regular conversations about what she wants for the next phase of her life, and she is beginning to explore the various options around her.  Our current goal is to help her decide where she wants to live once she requires more assistance.  If I had to do it over again, I would have encouraged my mom to start exploring these communities when she was 70 with her making a decision about where she would want to go by 75.  That would not only have given us peace of mind knowing where she wanted to go but given her more time to get over the mental hurdles you go through when preparing to move to one of these communities.

Making The Transition Is Difficult

It takes time to both physically and mentally prepare for the big move into a long-term care community.  There are several hurdles your parents will have to get over before they permit themselves to make a move. Here are the three main hurdles I have found so far.

  1. Even in independent living, your parents will most likely end up downsizing their living space.  This can create a lot of stress around letting go of personal effects they have accumulated over their lifetime.  A whole new business industry exists to help you figure out what to keep, sell, donate, or throw away.  But it will still take patient encouragement from you to help your parents get to a point where they are ready to go through this process.
  2. Moving into a new community means relocating to a place where your parents might not know anyone.  Fortunately, many of these communities allow you to spend the night in one of the models to experience what living there is like.  A kind of try “before you buy,” if you will.  This gives your parents a chance to discover some of the daily social activities and what it would be like to live there. These places understand the importance of socialization and make it easy for their members to make new friends within the community.
  3. You may find that your parents think moving somewhere else isn’t worth the money.  And yes, moving into a community like this is expensive, but will it improve the quality of life in their later years?  If the answer is yes, you have to assume it will be worth the cost.  All we want is for our parents to live their best lives up until the end.  We’ve been reminding our mother about how living in one of these communities could improve her quality of life whenever she brings up an obstacle that she is dealing with living on her own.  Last week she told me that her friend’s 85th birthday party would be after 5 pm.  My mom can’t drive at night anymore.  My brother-in-law will drive her to the party, but I mentioned that one of the communities we looked at offers free car service within a 5-mile radius of the community.  That would be a perfect ongoing solution for her.

Searching For A Community Is Easier Than You Think

https://www.aplaceformom.com is a wonderful resource.  I was able to fill out a form online and was contacted by the company within the hour.  They asked detailed questions about the location my mom would want to live in, the kind of support/services she would want, what type of place she would prefer, and what hobbies and activities she would like to have available.  They sent a list of four great communities to check out within minutes.

The next step was asking my mother to think about what elements would be important for the community to have. This helped us define the type of living space she would want, such as one or two bedrooms, a full kitchen or kitchenette, etc.  It also helped us define the types of social engagements she would want access to like; book club, trips to museums and the symphony, painting classes, scrabble club, author visits, etc.  Armed with this information, My sister and I toured the different communities to narrow down the options before bringing our mom along to visit the top two choices.

If you find yourself in a similar situation, now or in the future, I hope this information can provide some insight and guidance on how to build a long-term care plan. The most important thing is always to have an open line of communication with your parents about what comes next. They want to maintain as much independence for as long as they can. And you want peace of mind knowing they are always living their best life. A retirement community might be the place to ensure that both your goals are reached.

Do you or your parents have long-term care plan questions?  Contact a an MFAA planner to discuss your specific situation.

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Financial Planning Taxes

End-Of-Year Planning Checklist

End-Of-Year Planning Checklist Pg 1

If you’re like me, you’re probably thinking how can it be December?  Where did 2022 go?  Before we turn the page to 2023, there could be some actions you could take to improve your financial situation.  The major categories are assets and debts, tax considerations, cash flow and timing, insurance, and estate planning.  I’ll walk through the common things that could apply.  I’ll also encourage you to download the PDF of this 2-page End-Of-Year Planning Checklist to run through the whole thing.

Assets & Debt Issues

  1. Unrealized investment losses in your taxable accounts – Let’s face it…2023 has been a brutal year for investors. Tax loss harvesting is the selling of investments that are now below what you paid for them. This can be used to offset other taxable investment gain.  You can also write off up to $3,000 per year against your income if losses are larger than gains.  This can be a great strategy in down markets.  [There specific rules regarding selling and buying the same or very similar securities called the wash-sale rules.  Make sure you understand this or talk to a financial professional]
  2. RMDs – Ensure you are taking any required RMDs. This could be for your own account if you’re 72 or older or you have an inherited IRA.  The IRS recently proposed new rules for inherited IRA distributions based on the 10-year rule in the SECURE act.  This has created some confusion because they aren’t official at this point (11/2022).  Again, consult a financial professional if you’re in this situation.

Tax Planning

  1. Income Changes – Are you approaching military retirement? Are you planning to work after?  If so you’re income and tax bracket may increase significantly.  If so, it may make sense to contribute to a Roth IRA or Roth TSP while your income is lower.Are you approaching your ultimate retirement?  Will your income drop in the future?  If so, that can be a great time to defer taxes by using a Tradition IRA or retirement account.  This can be especially powerful if you’ll have lower income years where you can convert from a Traditional account to a Roth.
  2. Charitably inclined? – The standard deduction has increased significantly.  This limits your ability to itemize taxes.  You could consider charitable contribution stacking or bunching.  I posted this example on LinkedIn you could check out if interested.

Cash Flow

  1. Increasing savings – The maximum salary deferral to an employer plan is 20,500 plus the over 50 catchup of $6,500 for 2022.  You’ve got limited time to make changes for this year, but next year this increases to $22,500 and the catch up goes to $7,500 so if you’re maxing out your contributions know you’ll have to increase your withholdings next year.
  2. 529 Accounts – You can use your annual gift exclusion to contribute up to $16,000 to a beneficiary’s account tax free.  This can be a great option for grandparents who want to help out their grandchildren.

Insurance Planning

  1. FSA – Make sure you spend any FSA funds or see what your employer has for options.  This might include a partial rollover of funds to next year.
  2. Health Insurance Deductible – If you’re over your deductible, consider whether incurring other medical expenses this year makes sense before your deductible resets.

Estate Planning

  1. Annual gift exclusion – Gifts up to the annual exclusion amount of $16,000 (per donor, per year, per donor) are tax free.  A couple could gift $32,000 to a child tax free.

College Planning

  1. Financial Aid and Taxes – Do you have a high schooler?  It’s important to know what year your tax return will be used for filing the FAFSA.  This can get confusing because school years don’t line up with tax years.  The FAFSA uses taxes filings from the year the student starts their junior year.  Since that’s September, the tax year starts in January of the sophomore year.

The end-of-year planning checklist has other considerations tax bracket thresholds, significant windfalls from stock-based compensation, business expenses, FSAs, etc. that might apply to your specific situation.  Some of these things are complex and nuanced.  This isn’t tax or legal advice so make sure you consult with your tax professional.

If you need help building a plan around any of these items the advisors at MFAA are available to help.  Check out their profiles here and schedule a meeting to make 2023 your best year ever.

Categories
Estate Planning Financial Planning

5 Estate Plan Documents Everyone Needs

Estate planning document - Last Will and Testament

Five Estate Plan Documents Everyone Needs 

As a financial advisor, I often talk with clients about their need for an estate plan. Far too often, clients reach out for advice because a family member has become seriously ill or passed away without any documents in place.  Caring.com ran a survey this year and found that only 33% of Americans have a will or living trust. In 2019 the US had 54.1 million people over the age of 65. That means that about 36.3 million people over the age of 65 don’t have a will, powers of attorney, or trusts. And that means many of our parents and grandparents don’t have their documents in place.

The problem is many people don’t think of themselves as wealthy. They don’t think of themselves as having an estate. As a financial planner, I have found many people underestimate the monetary value of their lives. I can’t tell you how many times I have heard the following sentence:

“I don’t have anything. I don’t need a will.”

But you do. We all do.

The Need For An Estate Plan

It’s hard to truly understand what estate planning is about until we lose someone close to us. And even then, we may find ourselves on the sidelines, with information filtered through extended family members and rarely responsible for making decisions. Complex tax law, health care law, and state probate laws, combined with family dynamics leave estate planning shrouded in mystery.  Talking about estate planning also plays into our natural aversion to talking about life, end of life, and death. The technical jargon and legalese make it that much harder to have tough conversations with loved ones. And they are tough conversations. Estate planning covers everything from how much money we have, to how we engage or don’t engage with various family members. Like most areas of personal finance, it is about so much more than money.

We typically talk about this highly emotional topic in non-specific ways using complicated and specialized language. It’s no wonder that so many people don’t have any legal documents in place. Below is a list of the five primary documents that make up your “estate plan.” There are some documents that help you while you are alive and some documents that help your family after you pass away. This is not a comprehensive list. Your unique situation may require additional documents. It is best to consult with an attorney to get help drafting your documents. If you are active-duty military or a Veteran, you may be able to get help through the base Legal Office. Many law schools will also provide estate planning clinics where members of the public can get their documents drafted for free.

Four Documents That Protect You While You Are Alive

Think about all the things you manage over the course of a month. For example, I run a business.  I pay personal and business bills. I purchase groceries and I make sure all the little things that keep our life running happen. Now imagine, I walk outside and because it is Spokane in the winter, I slip and fall and hit my head. I can’t make any decisions. Who can make all the necessary things happen? Who can manage the money and make financial decisions for me?

If you are like my husband and me, somewhere during your active-duty years, there was a deployment. You may have gathered with all the other military families getting deployed and drafted, signed, and notarized powers of attorney for each other.

You’re good to go. Right?

Maybe.

Depending on your state, and depending on the power of attorney, maybe those documents had you covered and maybe they didn’t. However, most financial power of attorney documents are only in effect  while you can make decisions for yourself. In the example above, since I just slipped on the ice, I can’t. In Washington, that general power attorney doesn’t help my husband one bit. We needed a durable power of attorney. A durable power of attorney will be in effect when you can’t make decisions for yourself. A durable power of attorney will allow your personal representative to make decisions for you when you aren’t able to make decisions for yourself. When it comes to being unable to care for yourself or passing away, you need someone who can legally manage your financial life.

Document #1: Durable Power of Attorney

I will keep using my fall on the ice as an example. Who do I want to make decisions for my health care? In my case, I want my husband. The last thing I want is to add additional stress and worry to his burden at that moment. I don’t want him to have to fight with the hospital or anyone about my care. I want him to have everything he needs to help me.  The health care power of attorney allows him to make decisions for me without having to argue, fight, or justify why he can. We also have kids over the age of 18. They are adults. No more parental rights. Young adult children need to have a health care power of attorney as well. Imagine fighting to be able to help your kids in an emergency. The thought of it makes my heart race.

Document #2: A Healthcare Power of Attorney

Do you have strong feelings about how you would want to be cared for in a medical emergency? You need a way to communicate and document those feelings and preferences for your care. A living will, sometimes called an advance directive, tells your personal representative how you want to be cared for in certain circumstances. The Healthcare Power of Attorney grants your trusted person the power to make decisions for you. The living will tell your trusted person and the world what you want. Having this document ensures that your trusted person and your health care providers know your wishes. Living wills help family members make difficult decisions with greater peace of mind knowing they are choosing what you wanted.

Document #3: A living will

HIPAA authorizations complete the list of documents that help you while you are still alive. With the Healthcare Power of Attorney, you picked a trusted person to make decisions for you. With the living will, you told them your wishes. HIPAA authorizations grant your trusted person access to all the information they need to help you and make health care decisions for you.

Document #4: HIPAA authorizations

As military families, we often live in multiple states throughout our lives. Spouses may have different states of residency. We may own homes in multiple states. I cannot stress the importance of understanding the probate, estate, and inheritance laws in your state of residency. State laws vary tremendously. If you own property in multiple states work with an attorney who is licensed to practice in your state of residency. It is wise to consult with a CPA who can help you understand how your state of residency may tax the property you own in other states.

Documents that help your loved ones after you pass away

Everyone needs a will. If you don’t have a will, your state has a plan for you. You don’t want it. Your will does more than just direct your assets to your beneficiaries. Your will helps your beneficiaries save time, money, and frustration after you pass away. Wills are often paired with various trust documents. Even when you have a trust, you still need a will. A will communicates your wishes after you pass away. A will is a gift that you give to your loved ones.

Document #5: Last Will and Testament

These 5 documents make up your “estate planning” documents. Think of them as your legal planning documents for life and death. Having these documents helps you and your beneficiaries. Estate planning works across generations. For most adults, we will end up talking to our parents and our kids about estate planning, wills, and powers of attorney. Having these documents in order helps you and it helps them.

Losing someone you love hurts. Engaging with the medical system, insurance companies, hospice, and the funeral home can be difficult. It’s harder when you don’t have any legal authority. It’s harder in countless unforeseen ways when you must navigate it all without a complete estate plan and the five key documents.  MFAA advisors are knowledgeable about estate planning and can help you establish your plan and required documents.  Check out their profiles here.

 

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
Financial Planning Goals Investing Savings

I Learned Everything I Needed to Know about Investing in Kindergarten

Investing lessons learned from kindergarten

Investing Lessons from Childhood

I had one of those “Aha!” moments recently. You know – the ones where you figure something out after a really long time. The thing I figured out was that if I had believed the parables and fables I had been taught when I was a child, I might have achieved success earlier as an adult. I was thinking about investing at the time, so in my Aha! moment I was making the connection to investing.

The two children’s stories I was thinking about were The Tortoise and The Hare, and The Little Engine That Could. They are both very simple stories that you probably know. They both also contain very valuable lessons about investing if you are ready to believe them.

In The Tortoise and The Hare, the hare is very fast and challenges the slower tortoise to a race. The tortoise accepts. On race day the hare takes such a commanding lead he decides to take a nap. The diligent tortoise is able to overtake him and win the race.

In The Little Engine That Could, there is a train of toys that needs to get to the girls and boys on the other side of the mountain. There are a freight locomotive and a passenger train locomotive available. Both are large and strong enough for the task, but they are too proud and self-important to carry a meer train of toys over the mountain. Instead, a small switcher train, not built to haul cargo over mountains, steps up and agrees to try. With faith, persistence, and the infamous, “I think I can, I think I can,” cadence, the Little Engine gets that train of toys over the mountain.

Understand the Lesson

The moral of each story is obvious; be persistent, diligent, faithful, and believe in yourself. If you do, you can accomplish great things. I understood these lessons as a child. I understood them, but I did not feel them. I didn’t want to be the tortoise, winning the race with my slow and steady pace. I wanted to be a less foolish hare. I wanted to have tons of natural ability and some common sense, too. I wanted to win the race and then go back and cheer the tortoise on to keep trying as hard as he could!

I didn’t want to be the little engine that could, grinding away to achieve relatively modest goals. I wanted to be a less proud freight locomotive. I wanted to be big and strong, effortlessly moving the heavy loads without breaking a sweat. Working hard was for people who lacked natural ability. They had to try harder. That was OK for them, but it wasn’t who I wanted to be.

Fast forward about two decades. I was on active duty in the military and someone showed me a compound interest table. I was intrigued. I busted out my calculator and ran some numbers. With a very reasonable 8% rate of return and a little discipline every month, I could dollar cost average my way to a million-dollar portfolio before I was 50. Given where I was at the time, that seemed like all the money in the world.

Unfortunately, it also seemed like all the time in the world. I didn’t want to get rich slowly. That was fine for other people, but I was the less foolish hare. I was the less proud locomotive. If I could beat the market returns – and how hard can that be? – then I could get richer faster. Who wouldn’t want that?

My wife was less enthusiastic. She was willing to let me try my hand at investing with some of our money, but not all of it. I didn’t argue. I was confident in a few years she would be persuaded by my talent. It was only a matter of time before she would be begging me to personally manage the entire portfolio.

Picking Stocks Didn’t Work Out

I tried picking my own stocks for a while, but the markets are rigged against the individual investor, everybody knows that. (I fervently believed this for a while.) Then I decided to find the gurus who were beating the markets consistently and do what they were doing. Why reinvent the wheel? Just find the smartest wheelwright and ride on his wagon. They weren’t hard to find, self-proclaimed experts have been littering the internet with their drivel since the internet was born. I followed a few systems that worked right up until they didn’t. When they were working I was a genius, and I told everyone who would listen. When they weren’t I could always find an excuse, which I usually kept to myself.

About ten years into my grand plan I noticed something. That portion of our portfolio that I wasn’t actively managing was growing nicely. That part I was actively managing was lagging badly. That was a bitter pill to swallow, but facts are facts. I was about to go on deployment (back when we didn’t have the internet on deployments), so I dumped the active portion of the portfolio in with the passive portion. That was about 2 decades ago, and I’ve never really looked back.

Bringing it All Back Together

I didn’t make the connection between investing and the children’s stories until recently. There are some additional lessons in there I may have missed. The hare didn’t know he was foolish. The freight locomotive didn’t know he was too proud. We are not always skilled at assessing our strengths and weaknesses. What we want and what we need are not always aligned. Quick riches are a nice dream, but they are not a substitute for a financial plan that involves sensibly investing with patience, diligence, and faith in the plan.

I still have those compound interest tables from 30 years ago. They remain quite accurate today. They didn’t require any updating. That was all on me. I needed updating. Happily, I continue to grow and learn. I no longer want to be the fastest or the biggest or the strongest. I want to be the one with faith and persistence. I want to be the hardest worker. I want to have the discipline required to achieve any goal, be it modest or grand. I feel that now. I feel it and I understand.

 

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!

 

Categories
Financial Planning Military Pay Taxes TSP

How Much is Your Military Compensation Actually Worth?

Understanding Your Entire Military Compensation

For any servicemembers who are transitioning out of the military or perhaps daydreaming about what that might look like someday, many of them have never considered the full impact that transition will have on their finances and total compensation.  Most of the servicemembers that I talk to are surprised after they separate and don’t have the same salary, benefits, or total compensation as they did in the military.  So what can you do about this if you’re set to separate or are thinking about it?

Every year, usually in early April, DFAS publishes the Personal Statement of Military Compensation (PSMC) with the intent to help make servicemembers’ full compensation more readily visible.  While DFAS states that this may be helpful in applying for credit or loans, the true benefit lies in understanding what your equivalent compensation would need to be outside of the military to maintain your same standard of living.

So what is compensation? 

In this context, compensation refers to the entire sum of salary, benefits, and other financial support that servicemembers receive.  The majority is “direct compensation” — money paid directly to you — while the rest is called “indirect compensation” — things that financially benefit you but aren’t a direct payment.  Indirect compensation can either be financial compensation or non-financial.

One example of indirect financial compensation is healthcare.  When an employer helps pay for your healthcare coverage, that’s indirect financial compensation since you otherwise would have to pay that amount.  Indirect compensation can also be non-financial like leave.

Direct compensation is readily apparent because these are clearly listed on your LES while indirect compensation might not be as immediately clear.  The goal of this post is to help you understand the full picture of all of your compensation.

It’s important to take a look at each detail of the PSMC since each analysis can differ based on personal circumstances.  You can access your PSMC through myPay right underneath where you can view your LES.  This article will probably be most helpful if you have your own PSMC to go through.    We will look at an example PSMC for this post and show you how to analyze your own.

Navy members should note they will have to visit the PSMC website calculator directly at:
https://militarypay.defense.gov/Calculators/RMC-Calculator/

Direct Compensation

DFAS pre-fills in your basic pay, special pay and bonuses, expense allowances (OHA, COLA, etc.), as well as an estimate of the added value of indirect compensation which is usually based on the federal tax advantage of BAH and BAS.  This provides the starting point for you to add in some personal analysis about all the indirect compensation and add your estimate back in at the end to get your total compensation figure.

To help illustrate some of these concepts more concretely, we will look at an example of a hypothetical O-3 compensation.

  • Basic Military Compensation: $85,047.96
  • Special Pay and Bonuses: $2,472
  • Total Direct Compensation: $87,519.96
  • Added value of Service-estimated indirect compensation: $3,275.21

Estimating Your Indirect Compensation

As you estimate the various forms of indirect compensation, don’t stress getting each figure down to the exact dollar amount.  The goal is to gain a more complete understanding of what that benefit might cost you if you had to pay for it yourself so estimating is OK.  It’s also usually best practice to estimate conservatively on these figures so you don’t have a highly inflated final compensation figure to compare against equivalent civilian compensation.

If you aren’t sure what a benefit is worth, ask friends or family for help especially if they aren’t in the military and they could give you a more realistic picture of what benefits are worth outside of the military.  Below is an explanation of how you can go about calculating each of the indirect compensation categories on the PSMC.

Military Taxes

In the PSMC example above, DFAS has estimated that based on the current BAH and BAS, this person is saving $3,275.21 a year by not paying federal income tax on those two allowances.

Another thing to consider here is combat zone tax exclusion (CZTE).  The PSMC doesn’t list this as part of the analysis, and it could easily be argued that this is a direct benefit to help offset some of the challenges of deployments.  For many servicemembers however, a deployment might mean going down one tax bracket from 22% to 12%, but more senior servicemembers or dual-military could really reap benefits here if they own more significant taxable investments and drop from the 24% tax bracket to the 12% and its equivalent 0% tax rate on long-term capital gains and qualified dividends.

Junior servicemembers could also drop below the income threshold to be eligible for the Earned Income Tax Credit (EITC) which could mean quite a bit of extra money at tax time.  For this example, we won’t consider CZTE in my calculation, but others might choose to do so, especially if you deploy on a more regular schedule.

  • Formula: (Projected) State Income Tax x Current Basic Pay = State Income Tax Benefit
  • CZTE Formula: # of Months Deployed x Monthly Federal Tax Deduction = Benefit

Military Medical Care

Tricare is undoubtedly the biggest indirect financial compensation for most servicemembers and their families.  For servicemembers who haven’t had a full-time job outside the military, most are insulated from what almost everyone else in the country has been going through over the last several years.  Medical insurance can be incredibly costly for many Americans so this area of compensation is critically important to understand.

As a financial planner who helps people find and evaluate health insurance on their own through the federal and state exchanges, I just cannot stress how amazing this level of medical coverage is!

How much is Tricare worth to you?

One way to measure this is to see how much it would cost you to buy Tricare Standard coverage without the military paying for any of it.  This option exists as the Continued Health Care Benefit Program (CHCBP)  provided by Humana.  Similar to COBRA, this plan can give you temporary health coverage for 18-36 months when you lose eligibility for Tricare.  Basically, it means that you pay 102% of the total insurance premiums which in this case were previously all paid for by the military.

In FY20, CHCBP premiums would be $1,599 per quarter for individual coverage and $3,605 per quarter for family coverage.  In addition to these premiums, there will be yearly deductibles and cost-shares similar to Tricare Standard.  That comes out to a minimum of $6.396 (individual) or $14,420 (family) respectively a year.  Plus, consider that is also a tax-free benefit while on AD so it’s worth even more than just an equivalent cash payout.

Another way to compare the value of Tricare is to see what health insurance coverage would cost you on the healthcare.gov exchanges.  This gives you a very good example of how much you could otherwise be spending given your specific family circumstances as healthy, young individuals can acquire more minimal coverage much cheaper than CHCBP while families might see some major sticker shock.

Many of my military clients who get out and suddenly have to pay the full costs of tens of thousands of dollars a year towards healthcare they purchased on the exchange experience DRAMATIC sticker shock. Even employer-provided health insurance will almost always be far more expensive than anything they paid on AD.

Practice expectations management prior to separating and don’t expect your health insurance to offer as much for as little as Tricare costs.  The bottom line is this: don’t undervalue your Tricare coverage!

Pro tip: consider switching from AD to the Reserve Component to still have access to subsidized medical insurance through Tricare Reserve Select at still a low personal cost.

  • Formula: Expected Civilian Annual Health Insurance Cost – What You Currently Pay Annually for Tricare Prime/Standard = Your Benefit

Military Pension + BRS Match

The legacy military retirement benefits only consist of the High-3 system as an all-or-nothing pension that requires vesting at 20 years of service. As such, it’s a little harder to directly value compared to the Blended Retirement System (BRS) direct matches which are more straightforward.

For the BRS contributions and match, just add those percentage amounts based on the basic pay rate right into your calculation. The BRS matching rate is comparable to many civilian employers’ 401(k) matching.

One of the good friends of MFAA, Doug Nordman, has done a great job giving some estimates of what that military pension is worth. The trick of course is that the pension is still worth “nothing” until you actually vest in it so there’s no real way to say you’ve earned half of the pension’s value just because you have served 10 years.  To quote Doug, “Stay in the military if you’re challenged and fulfilled, but don’t join just to stick it out for a pension.  If the pension is your only motivation then you won’t last past the first obligation.  When the fun stops then you should leave active duty for the Reserves or National Guard instead of grimly clenching your jaw and gutting it out for 20.”

Still, it is critical to understand just how incredibly valuable an active duty military pension can be as an E-7 pension can be worth around $1.4 million at the time of retirement and an O-5 pension could be worth as much as $2 million!

This part of the PSMC analysis doesn’t produce a number to add into your overall compensation, but it does help you think through the calculus of staying in or getting out.  The more years of service that each servicemember has should also weigh heavily in this consideration as it’s easier to make the decision to get out after only 4 years vs. 15 years.

Thrift Savings Plan (TSP)

The TSP offers incredible cost savings as it is dramatically cheaper than the average expense ratio of traditional mutual funds or many employer-sponsored 401k plans.  In 2021, the TSP had a net expense ratio of only about 0.05% while the average expense ratio of the civilian TSP equivalent of a 401(k) and average mutual funds are much more expensive!

That means that if your TSP balance is $1,000, you are only paying about $0.50 a year in fees while that same $1,000 in an average 401(k) would cost you $5 – 10 (per $1K) a year based on plan administration or investment expense ratios.  Over time, that fee differential becomes a huge drag on investment returns — to the tune of tens of thousands or even hundreds of thousands of dollars — which you can see for yourself using this Vanguard tool.

  • Formula: (Amount Currently in TSP x 0.01) – (Amount Currently in TSP x 0.0005) = Benefit

Life Insurance (SGLI), Dependency and Indemnity Compensation (DIC), and Survivor Benefit Plan (SBP)

Let’s analyze SGLI, DIC, and SBP in the context of the actively serving member to apply this to the PSMC, but understand that these concepts also apply to retirees albeit with some differences.  Many companies offer some type of group life insurance that is tied directly to employment and SGLI functions just like this.  Although individual servicemembers pay for SGLI, this guaranteed insurance is still pretty low-cost, but most importantly helps ensure servicemembers can stay insurable post-military with VGLI should something happen to them while in the military.  These are the other benefits broken out:

  1. Should you pass away, your family or designated beneficiary will also automatically receive a death gratuity payment of $100,000 regardless of whether you have SGLI coverage or not.
  2. If your death is determined to be in the line of duty and if you are married, your spouse will also receive monthly non-taxable Dependency and Indemnity Compensation (DIC) payments of at least $1,357.56 and an additional $336.32 for each surviving child are payable. DIC is generally adjusted annually for inflation.
  3. The family will also receive one year of BAH based on the current rate they were previously receiving.
  4. If you die while on active duty in the line of duty, your family is protected by SBP at no cost to you. The formula for this looks like this:  SBP = 0.55 x (2.5% x YOS x average of the highest 36 months basic pay).
  5. Due to some recent changes to how DIC and SBP work together, you should research the most current status to determine how much if any offset is given between these two payments.
  6. For our example here, we will just assume a surviving spouse and one child at $20,316 a year.

So how much life insurance would you approximately need today in order to provide a $20,000 a year inflation-adjusted annuity for the rest of your spouse’s life?  I plug the requirements into the calculator here (I used ~3% for the interest rate as inflation) which says that annuity is worth about $509,000 in today’s dollars given a spouse’s age of 30 and IRS expected life span.

That means I would need to carry an additional $609,000 ($509K + $100K death gratuity) in life insurance today to provide that same level of benefit to a spouse.  For the sake of estimating, we’ll use the SGLI rate of $0.07 per $1,000 of coverage at $609,000 x $0.00007 = $42.36 a month or $511.56 a year. [Note: You could potentially get a lower term life insurance rate than this rate given underwriting characteristics]

The equivalent costs of term life insurance vs. SGLI are usually easy to compare and many servicemembers often carry life insurance through companies like AAFMAA, USAA, or Navy Mutual.  Many people though don’t think about pricing out the income streams that their families could also earn through DIC and SBP when considering their life insurance needs.

Pay Raises

The PSMC next has you calculate the value of annual pay raises, longevity increases, and promotion raises.  While the annual raises haven’t always tracked directly with inflation, the longevity increases, and promotion raises both offer standardized opportunities for increases in pay.  This one is a lot more difficult to measure though and depends on you remaining in the military so we will skip it for this analysis. 

One important consideration for you though might be the comparison here between regular raises in the military and whether or not your civilian career offers the same chances to regularly grow your pay.

Commissary and the Exchange

This category is very dependent on how much each family uses the Commissary and Exchange.  Recent PSMC estimates list out that the average Commissary benefit is about $4,600 a year for a family of four with most people saving about 30% of their grocery purchases.  Take into your purchasing habits to fully analyze this one for you.

  • Formula: [(Average Monthly Commissary Spending x 1.24) x 12] – [(Average Monthly Commissary Spending x 12] = Average Benefit
  • Note: To get a more accurate estimate, an older Stars and Stripes article breaks out the average savings by region and can range from around 19% to over 44% for OCONUS.

Federal Long-Term Care Insurance Program (FLTCIP)

This benefit primarily offers long term care insurance for those looking to help cover the cost of nursing home and other end-of-life care.  The goal of FLTCIP is to help preserve your retirement savings should a long-term care need arise.  Those eligible for the FLTCIP include all Federal Employees (Uniformed Service members), their spouses, adult children (including natural, adopted & step), parents, parents-in-law, and stepparents.  Given my current age, current and projected savings rate, and expected financial independence long before my 60s, I don’t have a need for this.  Your situation may be different especially if your parents could purchase through this benefit program.

Note that this benefit is not as good as it once was and is not necessarily something I would automatically recommend.

  • Formula: Other Annual Long Term Care Insurance Cost – FLTCIP Annual Cost = Benefit

Education Benefits

The military offers some pretty incredible education benefits through Tuition Assistance (TA), the GI Bill, ROTC scholarships, Academy appointments, job certifications, and numerous other opportunities.  I’ve written about that using my own example here where I figured out how I turned $80,000 of education benefits into more than $2.1 million in lifetime value!

The primary education benefit to account for here is TA or service-specific associate degree program since it is a function of remaining on active duty whereas the 9/11 GI Bill vests after 36 months of qualifying service (ROTC scholarship and Academy grads take note that you must first finish your education commitment before starting to earn credit towards the 9/11 GI Bill).

If you are currently still serving towards the 36 months to earn 100% of your benefits or are still serving an ADSC because you transferred the benefit to a dependent, include a pro-rated portion in the calculation below.  There will be lots of variation about how much the 9/11 GI Bill education benefits can be worth so you can personalize this to your own unique situation.

Service Activities

Everyone’s use of the services provided by their base will differ greatly so this is another highly personalized analysis.  Among the most financially impactful is the child development center (CDC) since this cost is subsidized based on rank.  For those that utilize the CDC, you can try to determine the cost of a similar daycare off base and compare the CDC cost to add up your benefit.

Other things to consider include the fitness center, auto facilities, hobby shop, outdoor recreation rentals, etc.

Counseling and Assistance Programs

The PSMC helps provide some figures here ranging from $30 an appointment up to more than $5,000 for transition assistance services to help you analyze the costs for free personal financial management counseling, relocation services assistance, transition counseling, spouse employment consultation, and assistance from a wide range of services available from their services’ community centers.  Again, each individual circumstance will differ here. Note that some of these are given as an estimated hourly rate.

  • Personal Financial Counseling/Education: $ 250 – 375
  • Spouse Employment Counseling: $ 585 – 990
  • Transition Assistance Services: $ 5096
  • Non-Medical Counseling: $ 30 – 100

Legal Counseling

Military members and family members can get free legal assistance in a wide range of areas, including consumer law, landlord-tenant law, family law, estate planning, and tax assistance services.  The PSMC again offers their estimates for costs associated with everything from notarization or powers of attorney to tax returns preparation and consultations with an attorney. Note that some of these are given as an estimated hourly rate.

  • Consultations with an Attorney: $ 150 – 175
  • Wills: $ 250 – 3,000
  • Notary: $ 10 – 20
  • Advance Medical Directives: $ 100 – 250
  • Client Correspondence: $ 125
  • Powers of Attorney: $ 60 – 250
  • Tax Return Preparation: $ 147 – 273

Space-A Travel

Space available travel for Uniformed Services members can provide substantial savings over commercial airline fares.  Space available travel is defined by DoD policy as a privilege (not an entitlement), which accrues to servicemembers as an avenue for travel.  This is again a highly individual element likely based on how close you are to frequent space-a travel opportunities.

Tricare Dental Program (TDP)

Tricare dental provides fairly good coverage, but is not quite the comparison as Tricare health insurance is compared to civilian counterparts.  Based on equivalent quotes for comparable coverage, most people could be covered by a similar plan where you live for about $30 – 80 a month.

Other Military Benefits

The PSMC stops its analysis here, but there are a few other benefits to consider.

Leave

The average civilian job has much less paid time off (PTO) than the annual 30 days of leave a year each and every servicemember receives.  Although I’ve never met someone who only uses that leave to take a month straight off each year, one way to think about it is that you are getting paid 12 months’ worth of salary for 11 months of work.

Military life demands many more sacrifices on your time (TDYs, deployments, long shifts, etc.) and there’s certainly no such thing as overtime so perhaps this issue ultimately is a wash.  However, don’t discount the amount of paid time off you do get lest you be surprised when your civilian job starts out with only around 5 days a year.  Expectant or future mothers should especially value the longer military maternity leave as it outpaces most companies in the country as this is a rarer benefit. 

Disability Insurance (DI)

At most other jobs either your company offers some small level of disability insurance or you can purchase this on your own.  While most people might not know what disability insurance covers, they have probably seen this product advertised somewhere thanks to a famous quacking duck.

Disability insurance is coverage that will help pay a reduced portion of your previous salary if you were to get hurt or otherwise be unable to work anymore.  In the military, this is provided by the VA if you were to become seriously injured or disabled while serving in the military.  You would be evaluated and given a disability rating which would then be used to determine how much you get paid.

You would otherwise have to purchase a DI policy on your own to provide this coverage. The average cost for a disability income insurance policy is around 1% – 3% of your annual income (take note that most policies will only allow you to purchase around ~60% of your previous salary).  You would have to get a personalized quote from an insurance agent to get more details.

VA Benefits

Outside of the VA benefits specifically mentioned already, there are a host of other benefits available such as the VA loan, education and career counseling, VA medical resources, and other support.  Evaluate what services you already use or might expect to use when you separate for an estimate here.

Military Discounts

You may never have considered this one, but this perk can really add up as long as you remember to ask about it wherever you shop.  This benefit again is highly dependent on how much you spend and if the places you shop offer it.

Invaluable Camaraderie and Leadership Experiences

This consideration isn’t here to try and put a financial number on this one.  However, one of the biggest trend items from separating veterans is how they miss the close bonds of friendship that are often more like family for most.  You need to have realistic expectations that your average civilian employer will have a different (not inherently bad) culture in this area. 

Summary

Let’s add up some example numbers to see what the total estimated annual compensation is:

  • Basic Pay = $85,047.96
  • Special Pay = $2,472
  • Total Direct Compensation = $87,519.96

PSMC estimate of indirect compensation (federal income tax benefit of BAH/BAS) = $3,275.21

  • State Income Tax = $2,000
  • Tricare = $16,000
  • TSP = $310
  • DIC and SBP = $511.56
  • Pay Raises = $0
  • Commissary and Exchange = $800
  • Federal Long-Term Care Insurance Program = $0
  • Education Programs = $180
  • Services Activities = $400
  • Counseling Assistance = $300
  • Legal Help = $400
  • Space-A = $0
  • Tricare Dental = $216
  • Leave = $0
  • Disability Insurance = $1,740
  • VA Benefits = $0
  • Military discounts = $2,000
  • Total Indirect Compensation Estimate = $24,857.56

Example Total Estimated Compensation = $87,519.96 + $24,857.56 = $112,377.52

Service in the military can bring with it quite a lot of financial benefits that are often underappreciated or not considered when evaluating total compensation.  In fact, most servicemembers earn more in total compensation than their civilian counterparts when you consider similar levels of education and experience.  After this article, I trust you are better able to understand and analyze your PSMC.  This can then help you evaluate equivalent civilian employment opportunities or perhaps even come to the realization that you’re better off staying the military for now.  In any case, make sure to appreciate each of these benefits now whether you’re getting out soon or will stay for a whole career.  In this case, it’s pretty interesting to realize that the total compensation is significantly higher than what the LES says!

Categories
Financial Planning Investing Savings Taxes

Do Military Families Really Need a Financial Planner?

military families financial advisor

Do Military Families Really Need a Financial Planner?

I am frequently asked some form of this question, and my short answer is, “Yes, military families need a financial planner.” You may think I believe military families need a financial planner because I am a financial planner. And while I would never turn away a new prospective client, my reasoning might be even sneakier than you think!

Every military family needs someone to do the things a financial planner does. These include, but aren’t limited to:

  1. Develop specific and measurable financial goals consistent with their values
  2. Develop saving, spending, investing, and tax strategies to efficiently meet those goals.
  3. Develop risk mitigation strategies for the unexpected: 1) Insurance against loss of income;  2) Insurance against catastrophic loss;  3) Contingencies to reach plan goals even if the planner isn’t there to see it
  4. Accountability to execute the steps of the plan
  5. Establish efficient asset transfer when the plan has ended
  6. Periodic review and update the plan as life happens

It is not always necessary to outsource those duties to a professional financial planner. The person performing those tasks can be a family member. There is an endless supply of free information about financial planning on the internet. Much of it is good enough to help individuals do a creditable job managing their family’s financial plan. If you do it yourself, the price is right, there are no issues of trust, and (you don’t need to tell me) financial planning can be fun!

Therefore, my sneaky response that every military family needs a financial planner is just me having a bit of word fun.

You need a financial planner. You just don’t need to hire one if you’re willing to do the work yourself. However, even if you’re willing to be your own financial planner, you might still want to hire one. Here are a few reasons why.

You Prefer to Pay for the Service

I know how to change the oil in my truck. I can change the oil in my truck for less than it costs me to pay someone else to do it. When I was a young sailor, I used to get under my vehicles every 5,000 miles and change the oil and the filter. I’m 55 now, and I’m not crawling under that truck ever again. There are hundreds of things I’d rather do.

Likewise, you can be your own financial planner. You can read and study on personal finances to stay abreast of the trends, opportunities, and ever-changing tax laws. You can burn a Saturday or two each year reviewing your overall financial situation and making some tweaks to your plan to keep it on track. Or, you can hire someone else to do it and go and do hundreds of things you’d rather do.

Professional Financial Advisors have Greater Objectivity about Your Money

There used to be a fellow on public radio named Garrison Keillor. He told humorous stories about his hometown where “all the women are strong, all the men are good looking, and all the children are above average.” The joke is that only the people from that town believe in their superiority – and they believe it because their emotional attachment to their town causes them to lose their objectivity.

The same is true for people and their money. Money evokes strong emotions in people. (Not having money evokes even stronger emotions!) I’ve too often seen successful, well-adjusted people make emotionally-fueled decisions when the markets are gyrating like they were when the pandemic first hit. It can be helpful to have a professional advisor take a more objective view of your finances when the ride gets bumpy.

There’s Something to Be Said for Experience

Have you ever been the licensed passenger with a teen and a new permit? That’s some white-knuckle fun! They kinda know what they are doing, but they don’t know what they don’t know. They haven’t seen things like the car beside them changing lanes without signaling, or an emergency vehicle trying to make a left in front of them, or a gaggle of bicyclists blowing through stop signs. You have seen things like this; hence, the white knuckles!

If you are your own financial planner, then you are a bit like that teenager. You may have studied diligently and learned many things, but you don’t know what you don’t know. You may have studied for many hours, but you’ve only ever seen one financial plan – yours! Professional financial planners have seen hundreds of financial plans. They’ve seen rental homes, student loans, SBP, and tax law changes. They’ve dealt with the things you’re dealing with, and that experience can be useful.

Financial Advisors can Provide Continuity

“Jim” was adept at personal finance. After his military career, he worked in management for a Fortune 500 company. He amassed a portfolio of stock and real estate worth more than $2 million. My very first client was his widow. I was volunteering at a free financial clinic. She was literally the first person I ever tried to advise. She came to the financial clinic because she wanted to learn how to handle money. Jim had always taken care of it when they were married, and she had no clue what to do. When I first met her she was inhabiting only the upstairs of her house because the downstairs zone heater was broken and she didn’t know how to get the money to have it repaired. She was working in the lunchroom of the public school to have money to pay for her daughter’s tuition. She had $2 million, but she was living like a pauper because she was scared to death to access the assets for fear she would screw up something.

I envisioned Jim looking down from Heaven with his face in his palm. There was no way this is what he intended. If they had worked with a financial advisor while Jim was still alive, they could have had a plan to deal with him unexpectedly passing. A plan that kept the heat on and the tuition money flowing without his widow slinging hash in the school lunchroom. A plan that provided simple peace of mind.

Military families do need a financial planner, and the first step in that plan is who will orchestrate it. An individual family member can take on the responsibility of making sure all the required elements of the financial plan are accomplished, but a military family may want to hire a professional financial planner. If they do, we hope they first consider a member of the Military Financial Advisors Association. We believe the education, experience, and fiduciary standards we require of our members are exactly what military families deserve.

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