servicemember

Singer/songwriter Zack Mannino is currently stationed in North Dakota with the US Air Force.  He recently joined us in studio to talk about his music, the generations of artists in his family,  his collaboration with fellow local artists and more, check it out! 

I had a great time on Monday as a guest on Lacey Lankford’s Live Youtube broadcast for the Military Appreciation Month where we discussed how to save. I you missed it, catch the recording here:
https://www.youtube.com/watch?v=_gV43N02HSk
Lacey also has great resources on her website:
https://laceylangford.com/
Lacey's podcast The Military Money Show:
https://laceylangford.com/podcast/

Today I thought we'd talk about gaps in life. I love doing all kinds of financial planning with my clients both long and short term, and everything in between.  A simple way to think about life planning is like its a one act play. The whole of your life is on the same stage, it's got one set of actors, and these actors come in and out of the story. It has a cohesive plot from start to finish. This linear one act play makes planning a lot easier. But you know, a whole lifetime is rarely that simple. 

Instead, you may think of your life as more of a novel. Each chapter has its own sub plot. For a long life, a novel may seem like a better way to look at it all and use for planning your finances. Chapters might be joining the military or your first job. There may be chapters for marriage, children, second career, retirement, and so on.  A cohesive story that flows seamlessly from one chapter to another. 

But I find, especially with military, life isn't really like a play or a novel. I like to think of it more like a library where as you go through life you may be choosing a book or two at a time. You may have a favorite genre, or theme in life for a while. And then lay that book down to pick something else up. Anything's possible in a library, especially a big library with a lot of choices. If you're trying to plan for a financial life that is more like a library, its more challenging. Knowing how to save, for what, and when is more complicated. But it also provides you with more options, with you in charge. I think one of the most challenging times when your life is a library is the transition. That time between books. 

So the big question is how to approach those gaps. They maybe planned, or not. You could be forced out of the military or a career. Maybe you thought you’d make a long career where you are now, but things change and you need or really want something else. A good emergency fund will help you cover life’s costs in an unexpected gap. But if you can anticipate a gap, you can plan for it and have a smoother transition. Rather than just grasping for the first book you can reach when you enter the library. A planned gap can give you time and space to reset, think about the life would you really like to next, and find a choice you’ll love.

I’ve seen more than one servicemember do a “seemless” transition. They go right into full retirement or have a second career laid out before leaving and start their new job immediately. They PCS the family, invest in a new wardrobe, and dive into the next big book. Only to find out the new phase isn’t what they thought it would be. It’s not the life they thought they would love. So they either gut it out or transition again. 

If you have the time and resources, you may consider planning for some gap time to decompress and explore a little. Maybe you’d like to go back to school on the GI bill to start a different career that excites you. You could plan and save for that gap. Maybe you intern somewhere, or work part-time to test drive something new. Or maybe you really could use a mental break and just do something for you and your family for a little bit. Planning and saving for  for a gap  before your next transition is worth considering. Next week we’ll talk more details of what to consider, and how to plan and save for a gap.

Hello and welcome to our last podcast episode of the year. As if dealing with the Coronavirus in 2020 wasn’t crazy enough, the government is taking government funding authorizations down to the wire this year. As I’m recording this on Monday, December 28, the president has signed the monstrous 5,593 page, 2021 Appropriations Act. This Act includes authorization and details of the second round of Coronavirus stimulus checks and federal unemployment assistance, as well as a number of other changes.  
Expect to see more information on all this in the coming days and weeks. To roll everything up, remember if you got a stimulus check in the first round, you should get another soon, $600 for each eligible person. If didn’t receive a check, but your income is lower this year than last, and below the phaseout threshholds, you will receive the stimulus benefits as a tax credit on your 2020 tax return. Unemployment benefits have been extended another 11 weeks, and for that time will include an extra $300 federal benefit, and will begin in the first week of unemployment. We talked about two changes to tax deductions. Itemizers can now deduct medical expense over 7.5% of AGI. The 90% of people who do not itemize can receive an above the line deduction for up to $300 per return for 2020. This was extended to 2021 and joint filers will be able to deduct $600 in 2021. If you claimed the Earned Income Tax Credit or Additional Child Tax Credit last year, but will have less earned income for 2020, you can use your 2019 income to calculate your 2020 credit. This should prevent you from losing out on those credits when you file your taxes this spring. If you have a Flexible Savings Account with funds left over at the end of the year, check with HR to see if they will be authorizing participants to rollover those funds to use next year.

I know his has been an earful of talk about taxes, but the just signed government funding authorization does have something in it for just about everyone. I hope you have found this useful. I you have any questions, reach out to me at katie@moneypilotadvisor.com. And I especially want to wish you a Happy New Year and good riddance to 2020.

For most military and federal employees deciding whether you should rent out your home usually comes up because you have orders to move to a new duty station or will be going on a long deployment. We’ll talk about the decision to sell or rent out your house, and then if you do decide to rent at your home what should you consider. Selling your home up for sale and finding a buyer takes time, so start early. Ask will you be able to sell for profit, or at least get enough to pay off the mortgage. Remember there will be closing costs, repairs and getting house ready for sale, fees for the real estate agent which can easily add up to 10% of your selling price. If you would have to dip into savings to pay off the mortgage after you sell, consider renting out. If you think you’ll return, it may be easiest and most profitable to just rent it out while you’re away.

Ideally the rent will cover all of your expenses including the mortgage, insurance, property taxes, maintenance and repairs, finding new tenants, and paying a management company. Mortgage interest rates are low now, it may makes sense to refinance. Rates are lower for a primary residence than a rental property. So it may pay to refinance while you are still living the home. Lower monthly payments may be the difference in whether your rental income would be more than your expenses. Don’t assume the rent in your area would automatically be enough to cover all the expenses. Do some research to get a realistic idea of what rent you could expect.

Can you meet all your living expenses if the rental was vacant for a while or needed a major repair? Do you expect home values in the area to go up? If homes are sitting empty or if the local economy is floundering, it may be better to sell while you can. Are cut out to be a landlord? You, or a management company, will need to find a good tenant, receive applications, do credit check and criminal history checks and check references. And make a detailed written lease applicable for the state and local area where the house is located. This is important especially if you need to evict a tenant. 

Remember you need rental home insurance, also called fire insurance. To caver the home itself. You should encourage tenants to buy their own renters insurance cover their things. And consider hiring a management company, especially if you’re a first time landlord. They can help with all these things we just talked about. 

Another thing to consider is the tax you would pay on the sale of your home. If you have lived in your home for at least two of the last five years before you sell it, you will not pay any federal tax on the first $250,000 of profit if you’re single, or $500,000 if you’re married. For federal employees and military service members, time stationed overseas on orders doesn’t count. If you don’t meet that 2 of 5 year rule you will owe capital gains tax on the profits, typically 15%, depending on your tax bracket. If you plan on hanging to the rental property long-term, then the income and possible appreciation would probably offset at additional cost in taxes. 

Home ownership and having rental property can be a great way to built wealth, your tenants essentially buys you a home over time. But it comes with extra risk and being a landlord isn’t for everyone. And depending on your particular circumstances, it may not give you a positive cash flow. Weigh your options and ability to pay any unexpected expenses that may come up with the rental home. And especially if this is the first time becoming a landlord, don’t hesitate to work with a management company to help with the process.

Today we’re talking about the Thrift Savings Plan’s switch to the spillover method for catchup contributions. We’ll talk about what means, who is affected, and how you designate your catchup contributions going forward. Then we’ll go back over pointers for all TSP participants to help you max out your contributions and how to make sure you get your full match. 

What is a catchup contribution? Everyone is eligible to contribute $19,500 to TSP for 2021. Once you reach age 50 you can make additional contributions if you want to, up to $6, 500 a year. So for participants 50 years old and up, the total amount you can put into TSP each year is $26,000. This even applies to you if you start off the year as a 49-year-old and turn 50 during the year. 

What’s changed? Beginning with the first pay period of 2021, if you’re eligible to make catchup contributions, you now only need to fill out one form and it will stay in effect year after year until you make a change. 

How do you max your contributions and get you full TSP matching contribution, if you’re eligible. Once you reach the annual limit, TSP will not process any more contributions for the rest of the year. Then, as long as you don’t make any changes, it will start up automatically again in January.  But you need to know what happens to your agency or service matching contributions once you reach the annual limit. For CSRS feds and non-BRS military you are not affected by this timing because you don’t receive any matching contributions. But if you’re a FERS employee or blended retirement system (BRS) servicemember, your agency matches your contribution each pay period, then stops matching once you reach the annual limit. The problem is that the matching contribution is based on the amount of your contributions you make each pay period up to 5% of your basic pay that period. So if you hit the annual limit before the last pay period of the year, there’s no match in any pay period for the rest of the year. Make sure you spread out your contributions throughout the whole year so you contribute at least 5% of your basic pay every single pay period. That’s every month for military and every 2 weeks for Feds. 

To figure out the minimum you need to contribute to get your match, check your LES. See what your base pay is for the pay period and multiply it by .05. This is the minimum amount you need to contribute to get your full match each pay period. Depending on your circumstances, you should definitely consider contributing more than 5% a pay period for retirement. 
Once you’ve decided how much to contribute, make sure to spread it out through the year. You don’t want to hit a limit before your last pay period. You’ll take your annual base pay and divide that by the number of pay periods. For military that’s 12, and for civilians that’s 26. Take that number and round up to the nearest dollar. And that’s what you put on your TSP form. By rounding up to the nearest dollar that you’ll max out every penny of match. 

If you are partially into a year and need to make a change, maybe because of a pay raise or change in circumstances, or just hate math, you can use the How Much Can I Contribute calculator on the TSP website at  https://www.tsp.gov/calculators/how-much-can-i-contribute/#top I’ll put the link in the show notes. 

Check out TSP’s website at https://www.tsp.gov/ for info on all things TSP. If you’d like to talk about your situation or would like you’re your question answered on a future podcast, send it my way to through my website https://www.moneypilotadvisor.com/ or you can email me directly at katie@moneypilotadisor.com Talk to you next week.

Today, we'll ask the question, Do I need to buy life insurance? We'll answer the questions: Do I need it? Do I already have some? Is it enough? What kind do I need or want? What will it cost? And we'll talk about some timing for insurance. 

Do I need to buy life insurance? First what is the purpose of the insurance. If you're young and on your own, you might not need life insurance. But if you have a spouse, young children, a family member with special needs or parents that are counting on your income, you should consider life insurance to take care of them. 

How much insurance do you need? Consider covering your end of life costs at a minimum. The average cost of a funeral and burial can be around $10,000 to $12,000. Your debts and final bills will have to be paid off and your assets and belongings distributed according to your will or state law. This process is called probate and there are court costs, filing fees, and attorneys fees. In most states, if it’s just your car and some personal belongings there's a simplified process, which is quicker and cheaper. Otherwise, estimate 3% to 7% of your assets, or around $20,000 on average. Consider carrying insurance to pay off your debts, like your home mortgage, your car, and any credit card debt. Insurance is paid directly to your beneficiary, usually within days.

The next think about is providing regular income to the people that depend on you.. A typical rule of thumb is to have 10 times your yearly salary in life insurance to care for your loved ones. But if you're a fairly young family with children 20 times your annual salary would probably be even more appropriate. This can seem like a crazy amount of life. But remember, you and your family were counting on your future earnings to live on, to save for retirement, pay for the children's education, and pay off the home you live in. Fortunately, insurance is relatively cheap when you're young. Over time as you crossed these milestones, your insurance needs will be less and less. 

If you're single and don't have anyone depending on you, a very small policy to cover your funeral and burial and legal fees may be quite adequate, and could be as low as $20,000. If it's just you and your spouse, no children and you both work, 10 times your annual income may be adequate.

Next, Do I have that much insurance already? If you're working you probably already have  employer provided life insurance called Group Life Insurance. For active duty military there’s Service Members Group Life Insurance (SGL I). For federal employees, you're automatically enrolled in Federal Employee Group Life Insurance (FEGLI). The one downside - you lose your job, you lose your insurance. 

If your group life isn’t enough, what kind of insurance do you need? For most people, term life insurance will cover your needs for the best value. It's called term because you buy it for a certain amount of time, typically 10, 20, or 30, years. For those number of years, your yearly premium will stay the same. When you reach the end of the term, the insurance ends. You just match how much insurance you need, and for how long to the policy. Usually Term Life is renewable, which means you can add another set number of years to your existing policy just before it ends. Your premium will be higher for the new term, but you normally don't need to undergo a physical. 

There are other types of insurance as well, such as whole life, universal life, and variable life to name a few. These policies are designed to stay in force for your entire life. They are much more expensive. And if your insurance needs decrease over time as is typically the case, you're paying a lot of money for insurance, you don't really need later in life.

If you have any questions or you'd like to get a second opinion on your ins

Show Notes – Episode 6 TSP L Fund Changes

This July, the Thrift Savings Plan (TSP) has made some changes to its L Lifecycle Funds. These funds get their name from year you plan to retire and begin withdrawing your money, called the target date. You choose one appropriate target date fund. Then that fund invests your money based on how much longer you have to retirement. They manage a shift in risk by following a set plan, called the glide path. They invest in higher risk investments while your young and gradually shift your portfolio to less risky investments as you get close to retirement. Target date funds are typically available in retirement savings accounts like TSP or a 401(k) where you can invest by payroll deduction. You can also open an IRA and invest in a target date fund.

 Target date funds  continuously re-balance the fund as needed when the value of stocks values change and throw the fund out of balance, off the glide path. The fund managers are constantly “buying low and selling high" to keep the balance and stay on the path.

In choosing a target date consider when you will start withdrawing your retirement savings. You normally can't draw from these retirement plans until you're at least 59 1/2 years old, or you pay a 10% early withdrawal tax penalty. For military, its very unlikely you will be that old when you leave the service, even if you retire. So pick a date where you’re at least age 60. There is an exception for FERS employees. Your TSP will be exempt from the penalty if you separate from federal service in the year you turn 55 or later. For Special Category Employees (SCE), it's 50 or later. For everyone, the penalty will apply for most withdrawals from an IRA before age of 59 ½.

 Also consider what kind of “retirement” you envision. Many peoples’ views are changing and they’re not just planning to hit 65, collect social security, and sit in a rocking chair. You may be thinking of a second career or doing something part time when you separate from government service. In that case, your target date might be even later. It’s up to you. 

 TSP calls its target funds Lifecycle (L) Funds. TSP has five core mutual funds C, S, and I are stock funds, G and F are bond funds. The L Funds invest in the 5 core TSP mutual funds in different percentages depending on where your target date year is along the glidepath. For example, L 2060 will invest almost entirely in the C, S, and I stock funds and a very small amount in G and F bond funds. That will shift gradually over time, so you are invested mostly in conservative F and G bond funds and much less in the stock funds at the target date. Once a target year arrives, that fund is retired and your savings are put in the L Income fund. This is the fund designed for TSP participants who are withdrawing their funds in retirement.

This July, there was some changes to the L funds. First off, there are more of them. They used to have an L fund for 10-year intervals. So if you were planning on retiring in 2025, you had to choose between L 2020 fund or L 2030 fund. TSP has now added more funds farther out, and at 5 year intervals. That’s an L Fund every 5 years from 2025 to 2065. This gives more options to our younger employees and servicemembers and makes it a little easier to pick an appropriate target if you were between the 10 year marks.

If you would like more detailed information, you can check out a blog I wrote for the Military Financial Advisors Association at their website: http://militaryfinancialadvisors.org/blog/You can find more information at: https://www.tsp.gov/funds-lifecycle/If you have any questions about today’s show, or would like to learn more, reach out and let’s do this, together. https://www.moneypilotadvisor.com