Category: Savings

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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.

 

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Financial Planning Goals Insurance Military Pay Military Retirement Savings Taxes

Military Retirement: Should You Take SBP?

Military Retirement - Should you take SBP

Military Retirement and the Big SBP Decision

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

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

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

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

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

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

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

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

Why is your SBP decision so critical?

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

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

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

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

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

Why do you need SBP?

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

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

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

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

What’s so special about SBP?

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

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

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

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

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

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

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

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

Are there situations when I don’t need SBP?  

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

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

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

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

What are some special considerations with SBP?

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

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

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

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

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

Some myths about SBP

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

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

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

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

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

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

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

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

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

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

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

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

Concluding thoughts on SBP

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

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

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

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

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

 

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Goals Military Pay Savings

Small Goals, Big Impact

small impact, big goals

Goal Setting in 2021

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

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

Financial Wellness

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

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

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

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

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

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

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

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

Small Inputs can Drive Big Outcomes

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

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

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

Find an advisor here!

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Investing Real Estate Savings Taxes

Top 7 FAQs for Military Real Estate Investing

Top 7 FAQs for Military Real Estate

Understanding Real Estate Investing for Military

There are numerous ways to engage in real estate investing. There’s flipping, commercial offices, wholesaling, investing in notes, and the most popular among military families – residential rentals. Becoming a landlord may be the most popular form of real estate investing for military families by default. With steady incomes and incentives to buy houses heaped on service members, many become homeowners. When you own a house and receive military orders to another city your choices are limited. You either sell it, or you turn it into a rental property. Whether by plan or by fate, becoming a landlord is a solution often chosen.

Real estate investing also has a natural appeal to many military folks. Military families are do-it-yourself, ‘bootstrap’ people. There’s an air of self-determination around real estate investing. A sense that you are more in control of your destiny with real estate than you are with traditional investments.

Initiative and hard work seem like they can be turned into profit with a property on Main Street in a way that can not be realized with securities on Wall Street. Financial professionals describe it as inefficiencies in the real estate market that can be profitably exploited. I believe it is true, although more difficult to master than it seems.

The major obstacle to getting started in real estate investing is typically the initial cost. You can get started in TSP for 1% of your paycheck. With an app like Acorns you can open a brokerage account with your spare change.

To get into real estate investing takes capital, often tens of thousands of dollars of capital. It’s a big commitment. 

Big financial commitments generate questions. Access to VA loans and other programs lowers the barriers to entry into real estate investing, but most military families have at least one member with enough sense to know you don’t spew cash at an idea like becoming a landlord without looking a little before you leap. I am asked about it frequently.

Following is a list of the seven most common questions I am asked by people who are contemplating investing in residential real estate rentals. Each of them probably merits its own article, but I’ll try to give you some useful short answers here. 

Is real estate a good investment?

Let me break this news to you gently; it’s not about the real estate, it’s about you. Money can be made in real estate investing, but the path to it isn’t for everyone. In addition to technical know-how, a successful investor must have the ability to avoid frustration and derailment when people disappoint you. Because in residential rental real estate you have to deal with people, and people disappoint.

Sooner or later you will discover some tenants are vandals, some property managers are lazy idiots, and some contractors are thieves. If you believe the hype I see all over the internet about how easy it is to make money in real estate, you should not invest in real estate.

The successful landlords I know are hustling every day for their profits. The rest are trying to get back to even.

What are the tax benefits of real estate investing?

With respect to being a landlord, OWNING rental properties can have many tax benefits. SELLING rental properties usually has significant (and painful) tax consequences. Landlords are business owners. They own and operate residential real estate for the purposes of collecting rents.

The biggest expenditure in such a business is the cost of the property being let to the tenant(s). As a business owner, you can recover the cost of the buildings on your property by deducting them from your taxes over the lifetime of the building. This cost recovery process is known as ‘depreciation’, and its effects can make a tremendous impact to your bottom line while you own the building. However, if you sell the property you will likely owe the IRS for all the depreciation previously claimed on the building.

In addition to depreciation you can deduct all the ordinary and necessary operating expenses of a business. There are numerous ways to take advantage of this situation, but none of them will turn a bad investment into a good investment.

If you are thinking about getting into real estate investing do so because you want to make money from the investments and then take advantage of the tax benefits to maximize your profits. DO NOT get into real estate investing with the primary motive of reducing your taxes.   

Why don’t financial advisors give real estate investing advice?

First – a few of us do. But, I get it. We are so difficult to find as to be indistinguishable from non-existent. Take heart, our numbers are growing! The primary reason there are so few of us is related to how the financial planning field evolved.

Financial planning, so the story goes, was the love child of a few insurance salesmen and stock brokers trying to do the right thing. All the first generation planners came from one of those two fields. You sold insurance and did financial planning or your sold stocks and did financial planning. Nobody sold real estate and did financial planning. The second generation of financial planners were nearly all “investment managers”. They took a piece of the action (a percentage) of all the assets they could gather and manage. Still no real estate.

The third wave is coming. In this wave we take a more holistic approach to financial planning. Some are even calling it ‘life planning’. Some advisors have observed that in life many people invest in real estate, so we are starting to include it in the plans we build with our clients. We are mostly self-taught, though. For example, the inclusion of real assets in a portfolio is not covered in the CFP (R) curriculum. (I am working to get that changed, btw.) 

Should I form an LLC for my rental property?

Many people believe you must have your houses in an LLC to qualify for certain tax benefits. This is not true. There are no tax benefits to placing your rental properties in an LLC. 

Zero. 

None. 

Your rental property business is a business whether it is within an LLC or not. Your ability to deduct business expenses is not impacted by forming an LLC.

There may be legal considerations for forming an LLC in terms of limiting your liability. That is a question for a lawyer. I am licensed to give tax advice. I am not licensed to give legal advice. 

When is the best time to sell my rental property?

In terms of tax strategy – never. As I wrote above, OWNING rental properties can have significant tax benefits. SELLING rental properties frequently turns those significant benefits into significant burdens.

In many cases the most efficient tax strategy for rental properties is probate. When you die owning depreciated property your heirs inherit it with a cost basis reset to current market value. The tax burden is transferred to the government and is no longer a problem for you or your family. 

If you absolutely must get rid of the property, then the second-best time to sell is likely today. The tax burden on the property is most likely going to grow over time, so getting rid of it now is like ripping off the band-aid. Just get it over with.

That said, every case is different. You should have a tax professional knowledgeable in real estate issues evaluate your situation before you act. 

How does the ten-year extension for military people work?

Home sellers can exclude a significant amount of capital gain (frequently all the capital gain) from the sale of their primary residence as long as they meet certain guidelines. The short version of how to qualify for that exclusion is called the ‘2-in-5’ rule. You must live in the house for 2 of the 5 years immediately prior to the sale. There are additional rules, but those are the basics. That means you could move out of your house and turn it into a rental property for up to 3 years, then sell it, and still qualify for the exclusion from capital gains. (Because in the 5 years immediately preceding the sale you lived in the house for at least 2 of them.) 

Military families receive up to an additional 10 years to this ‘2-in-5’ rule if they were moved more than 50 miles from the residence on military orders. This means military families could live in a house for 2 years, take a PCS move to another state, turn the house into a rental property and sell it up to 13 years later AND still qualify for the capital gains exclusion. It’s a pretty nifty benefit!

A related question I frequently get is ‘how long do we have if the military member retires while living at the other duty station?’. The answer is that once the service member retires the extended period stops. Military families receive UP TO 10 years. When you retire your extension stops and you essentially have 3 years from the retirement date to sell the property before you will have to pay capital gains on the sale.

My depreciation is wrong on my prior tax returns, how do I fix it?

The short answer is to hire a professional to do it for you. 

The medium answer is that you can only fix a depreciation issue by amending returns if it was wrong on only one filed return. Once it’s been wrong on two filed tax returns you must submit an application to the IRS to change your method of accounting. This is done on form 3115, and it is a very complicated form. On the last page of the instruction book for form 3115 it estimates that it takes more than 36 hours to learn and prepare form 3115.

Save your time, hire a professional. If you prepared your own tax return and you didn’t get the depreciation right, then it is unlikely you will get form 3115 right.

The outcome of filing the form 3115 depends on how your depreciation was wrong. If you had been under depreciating the property, then you would get an adjustment allowing you to take a one-time additional beneficial depreciation adjustment on your tax return. (You get to claim an additional expense that year.)

If you had been over depreciating the property then you also get to take a depreciation adjustment to your tax return, but you won’t like it as much. The amount of over depreciation gets declared as additional income that year and you must pay tax on it. There are some strategy elements regarding the timing of these adjustments, so you should consult a tax professional knowledgeable in real estate investing before you act.

The Bottom Line

Real estate investing can be financially and emotionally satisfying when done well. At Redeployment Wealth Strategies we have some military families who are profiting nicely with their real estate investments. Unfortunately, we have a larger number of clients who got on that real estate investing highway before they thoroughly researched their situation, and now they’re looking for the off-ramp.

We urge you to carefully consider whether real estate investing is right for you before you make that large capital commitment to participate. Learning the hard way can be very expensive.

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to investing in real estate. We would love to be of help and have a free consultation.

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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.

Contact one of our advisors to learn more with a free consultation

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Savings

Do Military Members Need an Emergency Fund?

Do Military Members Need an Emergency Fund?

The short answer is yes! Yes, you need an emergency fund.

You might think that having a military pension or being an active duty service member is enough of a security blanket but that’s simply not true. Emergencies come in many flavors and they tend to always happen at the most inconvenient times. Getting ready to deploy? Well, your car is about to break down on I-95. You have a brand new baby at home? Get ready for your garbage disposal to make it rain and destroy your kitchen. Or just your friendly neighborhood hurricane running you out of town.

Ok, I’ve convinced you to start an emergency fund, hooray!

Where do you start?

  1. Set a goal. Do a budget and to see what your monthly expenses look like. Normally I recommend 3 to 6 months of living expenses in an emergency fund.
  2. Open a high yield savings account. Look for an FDIC insured bank (online banks offer great rates) that doesn’t have minimum balance requirements. It usually takes 3 days to transfer money out of a high yield savings account but you’ll be earning more than in a traditional savings account. Ally Bank, American Express, Capital One 360, Barclays and HSBC are all good options.
  3. Start a small recurring deposit. You only have $10 extra a paycheck? Start with that and increase it as you’re able to.

I have 3 months of savings, now what? First off, high five! How do you know if it’s enough? I’m going to give you the classic financial planner answer: it depends. Ask yourself:

  • Does your family depend on you solely for income? If the answer is yes, then your emergency fund should be closer to 6 months of living expenses.
  • Are you getting ready to transition out of the military? A larger emergency fund will give the flexibility to take a job because you want to take it, not because you have to.
  • Does anyone in your household have a seasonal job or is self-employed? I recommend a larger buffer, especially if you depend on this income to pay your normal bills.
  • Will you be heading back to school? Is your work contract ending soon? Do you have a baby on the way? These are all good situations where having a larger emergency fund will also provide additional flexibility and peace of mind.

When to Use an Emergency Fund

Now, you’ve built up your emergency fund and you’re happy with the amount you have in your savings account. You did it! You might be wondering, when should I use these savings? Should I ever use them? As military families, we deal with a number of stressful situations so it can be difficult to determine what is a true emergency. Below is a list of examples where using your emergency fund would be using it for its intended purpose:

  • Car repair
  • Death in the family
  • Unexpected medical expenses
  • Job loss or furlough
  • Pay issue (these never happen in the military, am I right?)

History has shown us that even those of us with stable government or military jobs are subject to uncertainty, job layoffs and furloughs. Having an emergency fund will allow you to handle these emergencies without delaying the progress you’ve made on your other financial goals.

Do you have questions or wonder how you can start an emergency fund? Contact one of our advisors to get a free second opinion on your finances!

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