Smart Second Career Savings Strategies

Q: I am a retired (17 years) service connected disabled veteran (80%), recently married, and have one daughter living with us along with her new born twins.  I am with the exception of my home mortgage (which is less than 1/2 my retirement) completely debt free.  I own and operate a reasonably successful small business and am now looking to the future (financially speaking) and wondering - where the heck do I start?  I have six months living expenses in the bank.  I have Tricare (so health insurance is not a concern).  I have been looking into stocks and mutual funds and CD's and am ready to start stuffing a mattress and hoping for the best! Any suggestions?

-Thomas, Kenosha, Wis.

A: First off, thank you so much for your service and sacrifice.  It sounds as if you’ve done a great job turning what could have been lemons into lemonade.  I enjoy positive folks!  You have at least some of your essentials covered with health insurance and a robust emergency fund, so, you’re right, now is the time to turn your eye to the future…but no mattress stuffing!  Let’s look at three steps to consider as you begin to build your nest egg.

 1.  Do you have a retirement plan for your small business?  If not, this could give you the dual benefit of saving money on taxes today and building a nest egg for tomorrow.  Your business organization (sole proprietorship, LLC, S corporation) and structure (employees or not) will have an impact on your retirement plan choice.  But a few plans to review as you begin your research include: Simplified Employee Pension-IRA (SEP-IRA), Savings Incentive Match Plan for Employees (SIMPLE-IRA) or an Individual 401(k).  These plans all have different contribution limits, deadlines, and requirements, but they are also relatively easy and inexpensive to set up.  The idea is to get started right away!

2.  Still focusing on retirement, consider setting up Roth IRAs for you and your wife.  If you are under age 50, you can put up to $5,000 into a Roth IRA for each of you (be aware of IRS income limitations to be eligible to contribute).  If you’re 50+, then add 1K to that.  Investing your Roth in a no-load target retirement fund* might work well for you as an investment option to be considered.  This diversified mutual fund actually becomes more conservative as you get closer to the fund’s target date…the date that usually coincides with the date when you anticipate retiring for good.  The neat thing about Roth IRAs is that while they don’t help your income tax situation today (no tax deduction), when you pull growth or dividends from the Roth IRA (after age 59 ½ and having had the account for at least 5 years), your withdrawals are tax-free.  Coincidentally, this is my favorite kind on money!

3.  Set up a mutual fund account that you own outside of any retirement plan or IRA.  The idea here is to build up a pool of money that has no strings attached in terms of when you can withdraw and you may actually pay lower taxes over the long run than in the case of military retired pay or work-related retirement plans.  With this investment you’ll actually pay taxes on dividends and distributed capital gains on an annual basis.  Doesn’t sound too appealing, I know, but later on when/if you sell these investments (that you’ve held at least one year) at a gain, that gain would be subject to long term capital gains taxes which are currently capped at 15 percent. 

For any of these accounts, the specific mutual funds you select should be based on your risk tolerance, time horizon, and goal.  For example, in the case of number 3, maybe you want to use that money to buy a vacation home 10 years from now, so you may decide to invest in a mutual fund that has a mix of stocks, bonds, and cash. No mattress, please, but rather a tax-savvy investment plan that is built for the future, and provides flexibility.

This combination of investment accounts gives you a powerful opportunity to have some measure of control over taxes in retirement. Good luck!

*Consider the investment objectives, risks, charges and expenses of mutual funds carefully before investing.  Review the fund prospectus before investing.

 

College Savings Choices

Q: My husband and I have been discussing investing money for our children's college. We have a 9, 6, and 3 year old. We do not plan on funding their full tuition. We both were responsible for paying our own ways through college and feel that it made us more responsible with money and made us value our education a little more since we were paying for it and not on a free ride from our parents. With that said, we would still like to have funds available to help our kids pay for books, food, etc. As a military family, would a 529 college fund be appropriate for us? Isn't that a state run fund? We are never in the same state for more than 2 years at a time and we are not sure where we will be living when our children finally get to college age. Would a Coverdell account be any better for us? Any guidance is appreciated!

-Jennifer, Fort Rucker, Ala.

 A: I appreciate your viewpoint—there certainly is something to be said for kids having some “skin” in the education game. But, I also like your idea of putting money away to help out when the time comes. You know you’ll be tapped for some expenses! This is a big topic, so here goes. You mentioned two of the three main vehicles that come to mind when I think of socking money away for college: 529 College Savings Plan (529) and the Coverdell Education Savings Account (CESA). Either of these would work well, but let me cover several of the differences between the two plans and then explain a 3rd option.

First, the CESA is currently limited to a $2,000 per year contribution for each child; whereas most 529 plans have total contribution limits in excess of $200,000 (gift taxes would have to be considered if funding the 529 plan above the annual gift tax exclusion). You can switch beneficiaries of either plan from one child to another, but ultimate control of the 529 reverts to you, the parent. With the Coverdell, when your child reaches age 30 the account reverts to them, the beneficiary. The CESA can be invested at your discretion in whatever mix of stocks, bonds, mutual funds you choose; whereas the 529 plans typically have a menu of specific investment options, such as age-based options which morph into a more conservative mix as college approaches. Finally, the 529 can only be used for higher education, while the CESA could be used for elementary or secondary school expenses.

In either case, you could benefit from tax deferral and tax-free withdrawals for qualified education expenses*.

An important consideration is that there are 529 “savings” and “pre-paid tuition” plans. Savings plans, regardless of which state sponsors the plan, allows for funds to be used at virtually any school in the United States plus several international venues. The pre-paid plans are best used in the state with which they’re affiliated. Even though you’re in the military, you may currently pay state income tax in your state of residency. If that is the case, setting up a 529 plan sponsored by your state may result in some state income tax savings, otherwise, you can choose most plans without regard for the state affiliation. Hopefully, that gives you enough ammunition to choose the plan that’s right for you.

The third option is to save in your name or set up a Uniform Transfer/Gift to Minors Account (UTMA/UGMA) in each child’s name. Saving in your own name would not provide any special tax benefit, but would give you the most flexibility. You could set up a jointly owned mutual fund that you and your spouse earmark for educational expenses.

With an UTMA or UGMA you are actually giving the child a gift and invest it in their name. At your state’s age of majority the money becomes the property of the child—which some parents don’t like. After all, college may not sound appealing when you could buy a cool car with that money, right!? Additionally, UTMA or UGMA funds count more against a financial aid application than the 529 plan or CESA do. Also, there are taxes to consider. The first $1,900 of investment income that a child earns is treated favorably, but beyond that any additional income (capital gains, dividends, interest) are taxed at the parent’s marginal rate.

You didn’t ask about it, but an important military family benefit is the Post 9/11 GI Bill.  You sound savvy, so I figure you’re already taking the potential kid’s benefits into consideration. Whew! Lots to think about!

 *Tax-free earnings and withdrawals are for qualified educational expenses. Other withdrawals are subject to income tax and an additional 10% penalty on earnings. The availability of tax or other benefits may be contingent on meeting other requirements.

Divorce, Social Security, and Military Retirement

Q: I am a retiree with 23 years [military] service. After I retired I went through a divorce. I was married 20 years. My ex-wife gets 35 percent of my retired pay and I also agreed to continue SBP coverage for her. I have since remarried (2 years). My questions:

1. If my ex-wife predeceases me will I be able to name my current wife as the beneficiary on the SBP?

2. Related to the first question, if my ex predeceases me can she in her "will," will the 35 percent retired pay to someone else as "property" or does it revert back to me?

3. In regards to my social security benefits, if I predecease my ex and current wife, who can make a claim against my Social Security benefits? I have no dependant children.

-Carlos, Hudson, N. H.

A: Well, you’ve got some great, fairly technical questions. And I love it that you’re thinking through things so you may plan better. This financial planner likes that! The source for these types of questions is Defense Finance and Accounting Service (DFAS). The DFAS Frequently Asked Questions on SBP runs through several scenarios for you. Here’s my understanding:

1. You may be able to change your SBP coverage to your current wife right now, but only if you voluntarily provide SBP coverage for her. It could not have been required by a court order or divorce decree to provide “former spouse coverage.” So if you set up former spouse coverage voluntarily, you just need to contact DFAS in writing and change the coverage to your new wife. Otherwise, if your former spouse predeceases you, you could switch coverage to your new wife using Form 2656-6.

2. Despite retired pay being treated as marital property during the divorce proceedings, your ex-spouse’s right to payments terminates at her death…in other words, she cannot pass that pension on to someone else.

3. Finally, when it comes to Social Security, your ex-wife should be eligible to receive benefits as a divorced spouse based on your earnings record. To qualify your marriage to your ex had to have lasted 10 years (check) and she must remain unmarried (don’t know about that one). But the good news is that your current spouse should also be able to collect Social Security on your record, too, as long as you’re married nine months or longer (check) Here’s a link to information on this topic at the Social Security website.

SBP and Social Security

Q: I will soon be entitled to my own Social Security benefits as I have worked most of my adult life.  And I am currently receiving Survivor Benefit Plan (SBP) benefits.  Once I start receiving Social Security,  will it affect my  SBP?

-Janice, Port Royal, S. C.

A: I love being the bearer of good news.  Sometimes my days are filled with “no you can’t retire,” “save more and maybe you’ll make it,” “quit spending,” and so on.  In your case, the great news is that your SBP benefits will not be impacted by Social Security.  Up until a couple of years ago, this was not the case and it caused SBP to get an understandable bad rap.  That former-fact-turned-rumor has persisted though!  So let me set the record straight:  Effective April 1, 2008 what was called the Social Security Offset was eliminated. 

Prior to that change, SBP recipients saw their annuity shrinking from 55% of the service member’s retirement pay base amount to 35% when they hit age 62.  No more!  So you can scratch that off your worry list.  However, one thing that will impact SBP benefits is getting remarried before age 55.  Because you’re getting ready to apply for Social Security, I can say you’re obviously older than that!  But had you remarried before turning 55 your SBP benefits would have been suspended—only to be reinstated if your new marriage ended in death or divorce.  Enjoy those well earned Social Security Benefits.

Capital Gains on Home Sale

Q: I understand you can sell a house tax free if you've lived in it for 2 of the last 5 years.  But I also read that if you were in the military and received orders to another location, that time doesn't count in the 5 year total. My question is this: I lived in a home for 3 years, and then was transferred out of state. During that time I rented out the house. Later I retired from the military and chose not to return to our former house. If the time I was stationed elsewhere does not count, does this mean I have 3 years from the time I retire to sell the house without paying taxes on the capital gains?

 

-Diane, Wild Blue Yonder

 

 

A: There are a variety of nice tax “bennies” for serving our great country.  The bottom line on your question is that you can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the Armed Forces.  The suspension period cannot last more than 10 years. 

 

In your scenario, you may be able to suspend your time until retirement and then you would have 3 years in which it appears you would still meet the use and ownership tests.  However, the fact that you rented the property will likely impact the calculation because you may have claimed depreciation on your taxes and you can’t exclude the part of the gain equal to whatever depreciation you claimed.  Hopefully, this will get you started.  

 

While this next bit of information may or may not apply to your situation specifically, I think the extension of the First Time Homebuyer Credit will apply to many of your military friends.  First time homebuyers may qualify for a tax credit of up to $8,000 which would reduce your taxes dollar for dollar, but you must live in the residence for three years or you will be required to pay back the credit.  A credit of up to $6,500 may also be available to repeat buyers!  The military gets a break in the time limit if they serve overseas on “official extended duty” for 90 or more days during 2009 or the first four months of 2010.  In that case, you must be in a binding contract by 30 April 2011 and close the sale by 30 June 2011.  In and of itself, this is not a good reason to purchase a home. But, if you’ve made the decision that purchasing a home is right for you, the tax credit could provide a great incentive.  Read more details on irs.gov and military.com.

 

As with all things tax-related, I would recommend you find a savvy Certified Public Accountant (CPA) and flesh out your options.  Check out the IRS’ Armed Forces’ Tax Guide for complete information on a host of military-related topics including selling your home.  Happy retirement and thank you for your service.

 

 

Life Insurance for the Mature

Q: I am retired and 69 years old. Due to some financial obligations I would like to purchase a TERM life Insurance policy for the amount of $130,000. Are there any benefits available through the military for term life? If so, would it be possible to purchase at my age?

 -Bradley, Emery, S.D.

 A: Life insurance can be an excellent way to cover larger financial obligations. The military offers Veterans’ Group Life Insurance (VGLI), which is intended to replace Servicemembers Group Life Insurance (SGLI) for military members who are transitioning out of the service. But you have to apply for it within a year of separation…so I think you missed that deadline. However, assuming you’re health is in ship shape you should have no problem going into the civilian marketplace and obtaining a term life insurance policy. In fact, many companies will issue a 10-year level term policy through age 70. Best of luck to you and thank you for your service.

Avoiding Bankruptcy

Q: My husband and I recently closed our restaurant and in an effort to avoid bankruptcy have ended up with about $40,000 in credit card debt.  We have an excellent credit rating and are up to date on all of our credit card payments.  Is there another way that we can get out of debt?  These monthly payments are killing us!  Thanks for your help.

-Jenn, St. Louis, Mo.

A: Props to you for trying to dig out without waving the white flag and taking what might seem to be the easier way out—bankruptcy.  Forty thousand in credit card debt is massive, but not insurmountable.  I’ve seen worse!  Clearly, you’ve got to make payments to get out of debt; you just need to do it in a way that makes the most sense.  Your plan to lose the debt should start with a detailed budget or spending plan that is trimmed to the bone.  There is no choice in this.  In other words, make sure you’re spending less than you’re bringing in and find ways to free-up additional funds to direct towards reducing your debt.  If you don’t have a lean and mean budget that you’re able to live with, how you structure your debt is not particularly important.  I’m betting you have or will have this covered, so let’s now talk about the debt.

You could keep your credit card or cards in place and use a traditional strategy like making the minimum payments to all the cards except for the highest interest card—to that one you would direct every dollar available.  After zeroing it out, then direct that big payment to the next highest interest rate card while making minimum payments on the others.  And so on.  This method has proven to very effective.  Alternatively, you could direct all available monies to the smallest balance card to see progress quickly. 

If you’re looking for a definite beginning and end date to your current situation, you could look at a consolidation loan.  For example, a $40,000 seven-year loan at 12% would have a $706 per month payment.  This might not be dramatically different from what you’re currently paying on a monthly basis, but you have the clear knowledge that when the term’s up the debt will be gone. 

In a similar vein, if you own your home and have enough equity, you could use a home equity loan to consolidate your credit card debt.  I would only go down that path with an abundance of caution!  The very last thing you want is to leverage your home and then charge up those cards again.  I have to emphasize this strategy is not for everyone! 

If you utilize your home equity or go the consolidation loan route it’s all the more important to have a working budget in place!!  And you must be committed to it, otherwise you could end up in worse financial shape than you started.   The last thing you want is to get a big fat consolidation loan and then six months later have another $5,000 or $10,000 of credit card debt because you can’t control your spending.

I would definitely avoid the debt settlement or reduction companies we hear advertising on a continual basis!  They really can’t do anything for you that you can’t do for yourself.  Learn more about scams and how to protect yourself on ftc.gov.  

Finally, if you are getting squeezed on a monthly basis you should talk to your credit card company(s) and see what they are willing to do to accommodate you.  Perhaps they would be willing to lower your interest rate which would mean more of your money would be directed toward your debt.  Good luck, hang tough.

 

Tricare ends when you begin again

Q: My husband retired from the USMC in 1976 and passed away in 2002.  I am now 65, as of this year, and have Tricare for Life.  If I re-marry will I lose my benefits?

-Carol, Quail Nest, Colo.

A: In a word, yes.  You’re smart to be thinking about this.  Tricare is one of those wonderful military benefits and in this day of expensive civilian health policies, it would be a shame to lose it.  So here goes: when it comes to Tricare eligibility getting remarried is not a good thing…whether you’re a surviving spouse or former spouse, remarriage does trigger termination of Tricare eligibility.  Here’s a link to the information at the Tricare website.  If you’ve found another love that is not eligible for Tricare, be sure you two plan for your healthcare needs as a new couple.  That may include utilizing Medicare with a supplemental policy to fill the gaps Medicare doesn’t cover.  There are a variety of choices available, so do your homework.  Good luck!

Post military divorce health care benefits

Q:  If you are married for 20 years and divorced, can the ex-spouse still receive health benefits such as going on base for doctor appointments and medicine if Tricare Prime is still in force?  How will the ex-spouse renew the military ID card?  Does the divorce decree need to stipulate these conditions?  The primary is retired after 20 years of active duty.

-Kristina, Cheyenne, Wyo.

A:  The answer could be yes, but it’s all in the numbers.  In this case the numbers we’re considering are the service member’s years of creditable service, years of marriage, and years the marriage overlapped the service.  If the service member has 20 years of service (in your case, yes), the marriage lasted 20 years (again, yes), and the 20-years of marriage were all during the service (not sure about that one) then the ex-spouse would be entitled to health care benefits—regardless of what’s in the divorce decree (unlike distribution of retirement benefits, the divorce decree does not impact Tricare eligibility). 

Here’s a link to the specific rules.  As you’ll see if there was at least 15 years of overlapping marriage and service, the ex-spouse would be entitled to military healthcare benefits for at least a one-year period depending on the date of the divorce.  Finally, to be eligible for this coverage the ex-spouse cannot remarry nor be covered by employer-sponsored health insurance.  You’ll have to make sure your information is updated in the Defense Enrollment Eligibility Reporting System (DEERS) and get a new military ID card (using your Social Security number) on base. To do this, you’ll need your marriage certificate, divorce decree, and the service member’s DD Form 214.  Good luck.

Over your head in debt

Q: I am receiving multiple calls from debt collectors, from past due car payments to timeshare payments, student loans, credit card debt.  How do I get help possibly doing debt consolidation or bankruptcy?  I am leaning towards consolidation but I don’t know where to begin.  Any advice would be greatly appreciated.

 

-Jameson, Santa Barbara, Calif.

 

A:  Stress, pressure, frustration, maybe even despair.  Those are all feelings associated with being in over your head.  I wonder how you got into this shape…maybe you lost your job and didn’t have back up funds to get you through.  Whatever the situation, I’m so sorry.  I think your best choice is to seek professional help from a debt counselor that will help you understand fully your choices and the ramifications of each.  Of those you mentioned, I like the idea of debt consolidation the most.  It’s a way for you to have a fixed payment at a fixed interest rate for a defined period of time.  One of the problems you may face is that you may possibly need a larger unsecured loan than you can get.  The other two options you mentioned – settlement and bankruptcy - are seven year decisions.  It will take that long to drop those bad boys from your credit report, so weigh those options very carefully.  Your next smart step is to find a credit counselor near you via the National Foundation for Credit Counseling.  No, we’re not talking about any program where you have to put out a slug of cash to enlist the help of some organization that may not actually get you anywhere.  Rather, we are talking back-to-basics, doing the right things, making good decisions and with time, patience and effort you’ll see results.  I wish you the best as you right your financial ship!  For current and future reference, all good things begin with a budget—a plan to spend less than you earn.