Investing in a down market

Q:  We have been contributing to the government's TSP program for the past few years and are now concerned about the current economic crisis. Should we stop our contributions into TSP? Or should we ride out the crisis and take advantage of buying lower-priced stocks with our contributions? My husband is 40 and I am 36; we have no debt and a sizeable emergency fund.

--Cassandra, Naples, Italy

A:  Oh contraire!  You guys sound as if you’re building a great foundation: no debt, big emergency fund, and the capacity to save.  (And you’re living in Italy, too – my favorite country outside the United States!)  A financial planner considers that the dream scenario!  Based on your age, I think you have about 10 to 20 years until you retire and begin to use your retirement savings to supplement lifestyle expenses.  In the investment arena, we call that a long time horizon.  That means you have sufficient time for the market to go through its ups and downs and arounds. 

In fact, because of your long time horizon, the current markets may be offering you a tremendous opportunity to buy at cheaper prices.  Warren Buffett, arguably the world’s greatest investor said in a recent NY Times opinion piece, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.” 

I’ve been heard to say that your investment portfolio is kind of like a dress, you have to like it and it has to fit and make you feel good.  My recommendation would be to look at where the money is being invested; not wondering whether or not you should invest at all.  Choose an investment mix that suits your tolerance for risk and keep investing. 

In addition to what you’re currently doing, I recommend you look into investing in a Roth IRA. The IRS has income limits ($166,000 to $176,000), but if your modified adjusted gross income falls under that amount, you and your husband are afforded the opportunity to invest up to $5,000 each in the Roth ( for 2008 and 2009).  It works this way: you deposit after-tax money (I call it grocery money) into your IRA where it grows over time tax-deferred and then at age 59 and ½ and after you have held the account for at least 5 years, you can withdraw any earnings tax free!  It’s a wonderful way to have some control over your taxes in retirement.  I think your inclination of taking advantage of a down market is smart.  Keep up the good work and don’t lose the faith!

Buy a house now - or later

Q:  I have been in the military for two years now, and am currently deployed.  My husband is also deployed, but in a different branch than me.  We have been debating about buying a house. What kind of down payment and or price range can we afford to look into?  We are both e4, and he is about to get his e5.  We get out of the military in 2 and half years.  Should we buy now and start putting the housing allowance toward it, or save and buy later.  Thanks.

--Katie

A:  I really like your last four words…“save and buy later.”  Clearly one lesson that we have to take from the recent real estate market slump is that a home purchase is a long term proposition.  I would recommend that you start building your “home fund” by stashing away money – including your good idea of saving your Basic Allowance for Housing (BAH) - into a high yield money market or savings account.  In the meantime, decide where you want to live for the long term and figure out what you’ll do for civilian employment.  Your savings can be used for a down payment, closing costs, or just to outfit your future home.  When you actually get to the point where you’re ready to settle down and buy, a Veteran’s Affairs loan may make sense—it offers competitive interest rates and would allow you to buy without necessarily making a down payment.  That makes sense especially when you’re buying a fixer upper.  For now, focus on staying safe and building up your savings.

When the unsat contractor wins...what now?

Q:  Hi June,

What advice would you give to someone who’s been sued regarding where to come up with money to pay a settlement and legal fees, especially in this time of financial crisis?  I got in this situation for non-payment of a subcontractor who didn’t perform, and I was the one who was found at fault, so according to the law, if you agree to pay, you pay -- regardless of the outcome.  Boy, do I feel stupid for not just paying the guy whatever he wanted in the first place!  The lawyer is the only one winning.

Most of the advice I find is related to reducing debt. Some situations, like mine, require a person to come up with a large sum of money that they just don’t have, or else.

Do you have any thoughts on that?  Thank you.

--Gina, San Antonio, TX

A:  You are indeed in a pickle, but I understand. It is difficult to cowboy up and pay for substandard work. I would certainly consider turning your contractor into the Better Business Bureau to help warn off others who may be considering using this guy for their project. First, I would check with your attorney (or get a second opinion) regarding the judgment - can they get blood out of a turnip? Will the opposition settle for less than the judgment? Is your lawyer willing to negotiate legal fees or work out a payment plan with you?

Here's what I recommend (flying somewhat blind and assuming you have great credit) in the order of priority:
1. Tap your emergency fund as this truly is one.
2. Liquidate non-retirement investments. This is a tough time to sell but you could benefit from capital gains tax rates or if you have losses you can deduct up to $3,000 per year from ordinary income.
3. Take out an unsecured loan. These are usually for minimal amounts of money and interest rates can be high.
4. Leverage your home equity. Just be sure the monthly expected payment is affordable.  While you are putting your home at risk, at least you can benefit from tax-deductible interest.
5. Borrow up to $50,000 from your 401(k). You'll pay yourself interest on a set time schedule, but should you change firms you'll be expected to pay it all back at once or it's considered an early distribution (taxes and penalties).
6. Borrow from friends and family. This has obvious pitfalls.
7. Take an early distribution from retirement accounts. This will generally be subject to income taxes and penalties if younger than 59 and ½ (except Roth IRA contributions can be withdrawn anytime tax and penalty free).
8. Default on the judgment. Ask your attorney for info regarding the ramifications.
9. File bankruptcy. I'm not a big fan of this tactic as it will haunt you for years and years.

I really can't stand the idea of robbing your future by tapping investment accounts, but sometimes when your back is against the wall it's all you can do. Have you considered calling one of the local TV stations to do an “On Your Side” piece?  Most of them have a consumer reporter that looks into “unsat” stuff like this. I hope this helps and I wish you the best of luck.

Retirement Healthcare Benefits!

Q: I am engaged to marry a retired Navy man. He served from 1951 to ‘71, and is currently 74-years-old. He was widowed three years ago. My question is will I have Tricare health benefits after we marry? And will I continue to need a supplemental Medicare policy? I am 70 and am receiving Medicare benefits. Thank you for your help in answering this question.
-Maria, Cellina, Oh.

A: Thank your fiancé on our behalf for his service. Yes, you will be eligible for Tricare. Although I’m sure he’s very charming, that terrific medical benefit alone could be reason enough to marry him!! Your future husband will just need to get you “in the system”…the Defense Enrollment Eligibility Reporting System (DEERS). He can begin this process by logging onto the DEERS site. Once that is done, you’ll be eligible for Tricare for Life and probably won’t find it necessary to continue with your Medicare supplement policy. The best of luck with this new chapter in your life.

Get it in Writing

Q: My husband and I are separated and divorcing for the second time in 10.5 years. We never went completely through with the divorce the first time, but this time seems unavoidable. This is his second affair and I have proof. I was wondering is there anyway to get the SBP benefits initiated without a court order? I am being very much so kept in the dark as to the Coast Guard's disposition of my husband's infidelities and other legal issues and am not even sure if he'll still have a career much longer. What are my options outside the civilian law system?

--Camilla Mobile, Ala.

A: Goodness, it sounds like you’re in a tough situation. I would highly encourage you to pursue your options inside the civilian law system as that is the only way to enforce any agreements you two come up with. When it comes to divorce or any type of formal agreement or arrangement, it’s best to have it all in writing. The division of military retirement and retirement accounts, and protecting your interests (via SBP or life insurance) should all be a part of your divorce decree. Also remember, there is no time requirement for you to be entitled to a portion of your husband’s military retirement. Sometimes I hear folks talk about the “ten-year rule.” The reality is that this rule applies to an ex-spouse receiving direct payments from DFAS. I wish you the best of luck now and in the future.

The Greatest

Q: Where can I find out how many World War II veterans are still living?

--John, Dania, Fla.

A: The Greatest Generation. It still sends shivers up my spine to think about the sacrifices made by so many during WWII. I couldn’t find a definitive answer to your question, but according to the 2000 census, there were 5.7 million WWII vets. Unofficially, I found several sources that put the current number at around three and a half million…unfortunately that number is shrinking rapidly, so find one and say thanks for us all.

Into the Blue...Maybe??

Q: My boyfriend has told me that he has to be married to join the Air Force if he has a child. Is that true?
-Dominique

A: Believe it or not, that’s correct! According to one of my colleagues who recently served as a U.S. Air Force recruiter, they will review each case, but generally speaking they do not allow a single parent to join “the Blue.” All branches of the service have different requirements, so you two might check around. Be advised, they may also check his credit score.

Spouse VA loan rights

Q:  If a retired spouse passes away and the home mortgage is a VA under that person’s benefits, can the surviving spouse do anything with that mortgage? The deceased continues to get notices to refinance their VA at a better rate, but can the spouse take the deal?  Thank you.

--Marilyn, San Antonio

A:  I get offers in the mail on a regular basis to refinance my Veteran’s Affairs loan, too.  The thing is I believe most of those are not affiliated with the government at all.  Be sure to read the fine print, ask a lot of questions and if you choose to proceed, do so with caution. 

A surviving spouse who has not remarried may be eligible for a VA loan if the servicemember died in service or from a service-connected disability.  Based on the information you presented, the spouse may or may not be eligible to use a VA loan for a refinance.  However, keep in mind the spouse is not limited to using a VA loan for a refi.  A survivor with equity in the home and good credit may be eligible to refinance with a conventional loan. 

When it comes to refinancing, I always caution folks to keep an eye on costs, look to save at least 1% on the interest rate, honestly assess how long you’ll be in the home (a good rule of thumb is at least three years), and then crunch the numbers to see if there really is potential savings. Smart decisions are crucial especially during tough economic times like these!

Military pension worth hanging in there!

Q:  My husband has 23 years of service in the Air Force, and we were planning on retiring in June 2010, at just over 24 years, with the option of staying in if we needed to. However, we just received orders to a base that we definitely do not want to go to, and are considering taking the 7-day option. This would allow him to finish his service commitment to June 2010, but that's it. If we take the orders, we would stay in until September 2011, which would bring him up to 26 years (because of his deferred enlistment date) (using E-8 pay for all 3 years of his High-3). So that would increase our retirement pay by about $5,000 per year. Our military retirement is the ONLY retirement plan we have - no TSP, 401K, or life insurance other than SGLI, etc. Stupid on our part, but that's the cold, hard facts. I've been staying home raising our kids. We are planning to use the Survivor Benefit Program but I am unclear on how that is calculated and how much I will receive each month. We are both 41 years old. What should we do to secure our financial future this late in the game? Thank you!

--Sahm

A:  Yours is truly a good news/bad news story.  The bad news first -- you’ve done a poor job of saving (promise me you’ll do better in the future!).  And it doesn’t appear that you’re financially prepared to retire and hit the civilian job market.  I read recently that it’s taking approximately five months to find a job these days with unemployment running well over 6%.  What that should tell you is that you need to have at least six months of emergency reserve money set aside to cover lifestyle expenses while the hunt is on.  It would certainly make sense to dip your toe in networking groups and start the job search now while paychecks are still coming in.

As far as retirement benefits go, the good news is that you couldn’t be in a better place than the military given “the cold, hard facts.”  Unlike much of the civilian world, the military continues to offer a great pension benefit that’s adjusted for the cost of living (COLA) each year.  An additional $5,000 per year is substantial – especially considering it’s the only retirement you have!  I’d say it’s probably worth an extra year of service and here’s why:  It would take approximately $125,000 in savings earning about 5% per year to replace $5,000 in pension benefits with an annual COLA.  For an annual 5K bump in income for the rest of my life, I could stand on my head in a corner for a year.  Or, live in a place I don’t like.  I’m sure after 24 years in the military, you’ve gotten tired of bouncing around and living in temporary housing, but I’d gut it out one more year for the greater good.  I would definitely recommend you reconsider your decision to get out in 2010.  Hang in there!

Regarding SBP, I think it’s one of the great deals of the century.  Considering you are a stay-at-home mom, I definitely think your husband should opt for the full SBP amount.  In a nutshell, SBP would provide income to you should something happen to your husband and he passes prematurely.  It costs 6.5% (pre-tax dollars!) and the maximum benefit will be 55% of his pension.  That will help you carry on your lifestyle without him.  Here’s a link to learn more.  You should also be shopping for SGLI replacement life insurance.  Check out online calculators to figure out how much you need.

Good luck and thank you for your family’s service and sacrifice.

Free Webinar: Are you in trouble with payday loans?

Are you in debt? Or know someone who has fallen victim to payday lenders? Check out this webcast hosted by Pam Kreuger and Jack Gallagher from Money Track on PBS.

In uncertain economic times, military service members become targets for unscrupulous lenders. It’s not because they earn big incomes, but because of their steady, predictable paychecks and tendency to need quick cash. In today’s military, financial troubles become an issue of national security because they can keep service men or women from being deployed overseas.

Tips for protecting your family's finances are provided by Tom Bradley, Air Force Aid Officer and Financial Consultant for Travis Air Force Base; Andrew Roth, Director of Education and Outreach for California Department of Corporations; and June Walbert, Certified Financial Planner practitioner for  USAA Financial Planning Services and a lieutenant colonel in the U.S. Army Reserves.