Category: Goals

New Law Changes Handling of VA GI Bill Program Debts

Post author By Adrienne Ross, CFP®, AFC®
Post date July 13, 2021

New VA Management of Education Debts

The Johnny Isakson and David P Roe, M.D. Veterans Health Care and Benefits Improvement Act of 2020 passed into law January 5, 2021. While the law is full of changes and expansions to the variety of GI Bill programs, this post will focus on changes VA management of education debts.

Students and schools can receive overpayments of benefits through withdrawing from classes, withdrawing from school, or from failing to pass classes. Prior to the passage of the most recent Veterans Health Care and Benefits Improvement Act, students that received the overpayment were typically assigned financial responsibility for the debt. The Department of Veteran’s Affairs would then collect directly from the students. That has changed, although, the VA is still working to implement changes to comply with the new law.

What you need to know

If you are using VA GI Bill Benefits to pay for college, changes to your enrollment impact your benefits. If you drop classes on or prior to the first day of classes and the VA has already paid the school, the school is responsible for repaying the VA. If you drop classes after the first day of school, the student is financially responsible for repaying the VA. If you drop below full time and have already received benefits, you will be responsible for repaying any over payment amounts.

The Big Change

The VA will no longer collect tuition and fee debts from students. Moving forward, the VA will collect debts from the school and the school will be responsible for collecting from the students. Schools will be the holder of the tuition and fee debt. Students will have to work directly with the school to repay tuition and fee debts. Students who owe money to the school need to be aware of how tuition and fee collections work in their state.

Books and Stipend Debts

The Post 9-11 GI bill generously includes a housing allowance and books and supplies stipend. Changes to enrollment, such as dropping below full-time status or withdrawing from enrollment result in debts owed to the VA. Don’t forget that changes made to enrollment, such as moving from full-time to half-time status, are applied retroactively to the start of the semester. There are exceptions to repayment for specific mitigating circumstances. There is also a 6 Credit Hour Exclusion to repayment. If you don’t have a mitigating circumstances exception and you have used your OTE, be prepared to repay benefit overpayments. It makes sense that as the benefits are paid directly from the VA to the student, the VA will still own the repayment debt. The VA will still collect the repayment debt directly from the student.

The Bottom Line

First, read those emails you get from the VA. They help you stay up to date on changes that directly affect your benefits. Secondly, if you have to withdraw from classes after the first day, be prepared to repay tuition and fees to the school. Third, if you fall below full time or withdraw from enrollment, be prepared to repay housing allowance and stipends directly to the VA.

Tags 9/11 GI Bill, Federal Student Aid, VA

Financial Planning Goals Investing Savings

I Learned Everything I Needed to Know about Investing in Kindergarten

Post author By Paul Allen, CFP®, MQFP®
Post date June 20, 2021

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.

Financial Planning Goals Insurance Military Pay Military Retirement Savings Taxes

Military Retirement: Should You Take SBP?

Post author By Pam Bergeson
Post date May 20, 2021

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!

Goals Military Pay Savings

Small Goals, Big Impact

Post author By Pam Bergeson
Post date January 23, 2021

Goal Setting in 2021

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

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

Financial Wellness

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

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

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

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

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

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

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

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

Small Inputs can Drive Big Outcomes

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

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

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