Which is best: renting or owning?

Q:  June, do you think it is better to rent or own?  I have read several articles on-line stating your money is better off in a 401k or some other portfolio than in real estate/owning a home.

-Don, Md.

A: The old saying “timing is everything” is especially relevant to your question of renting or owning.  There are definitely points in all of our lives where renting makes all the sense in the world.  To name a few, these include times when:

• employment is uncertain or job security is lacking
• you will be in a particular location only for a few years
• your proverbial ducks are not in a row (for example, when a mortgage payment doesn’t fit into your budget, you don’t have an emergency reserve, or you have no down payment or “move-in” fund)

On the other hand, owning a home is the original American dream!  In the right circumstances buying your home can allow you to build equity over time, potentially benefit from tax deductions, and ultimately know that the roof over your head is not contingent on anyone else’s whims or rent demands.  So, do I think you should use retirement vehicles like a 401(k) to build a robust nest egg for retirement—yes!!  Do I think owning a home is a good thing under the right circumstances—yes!!  The bottom line is that regardless of where you live, you should be saving for your financial security and retirement.  The decision to buy a home should be based on your own specific financial situation and outlook.  If the time is right, there’s more than enough room on your plate for a 401(k) and a home! 

Trying to understand Tricare

Q: My husband retired in December 2007. I had a baby in October ‘08.  My son was born 2 1/2 months premature which meant a long hospital stay.  Tricare said we are responsible for up 25% of all the hospital bills since my husband is retired.  My question: is there a transition period where a service member and their family members are still entitled to full coverage?  Did my health benefit change to Tricare Prime the day after my husband retired?  Thank you.

-Nadine, Dayton, Ohio (made up location :))

 

A:  As a financial planner I’m constantly asking folks what they plan to do in retirement.  It’s rare – okay it never happens – that someone says, “Have kids.”  Best wishes with that little bundle of joy! 

When your husband retired he should have been offered the option of enrolling in Tricare Prime, otherwise the default would be Tricare Standard (which, by the way, doesn’t have an annual enrollment fee).  Since you refer to that “25%” figure that would indicate to me you’re actually using Tricare Standard.  The good news is that regardless of which option you have, the maximum out-of-pocket costs are limited to $3,000.  So, that should help.  The Tricare website is chocked full of good information and contact phone numbers so that you can fully understand this valuable benefit!

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Seek chain of command help with pay problem

Q:  My pay has been wrong for several months.  I have tried putting in pay inquiries and talking to my chain of command and nothing has been done.  I was promoted months ago, and lately even more deductions have been made and I am getting swamped with bills.  What can I do!  Thanks!

-Kyle, Fort Lewis, Wash.

A:  Of all the organizations I’ve been a part of the military has done the best job of taking care of its people.  Granted, sometimes it takes a time or two to get it right…but the intent is to do just that!  So, keep asking the right questions, involve your chain of command and eventually finance will get it right.  The good news is that you should get a big paycheck making up what you didn’t receive back to your promotion date.  What a great opportunity that will be for paying off debt and maybe setting up an emergency fund.  In the meantime, keep making at least your minimum payments, stay up-to-date on all of your bills, and start building a budget which includes a plan to get rid of your debt, build an emergency fund, and start saving for the long haul…because trust me, the long haul gets here before you know it.

 

AD, reserve retirement pay considered marital property

Q: I am getting a divorce after 17 years of marriage. I served 27 years in the military.  I spent four years on active duty and 23 in the reserves.  The reserves use a point system and you don't collect retirement pay until you are age 60.  I had 10 years of service before my marriage which included four years of active duty where I earned most of my retirement points. Is my soon to be ex-spouse entitled to any of my retirement when I turn age 60?

-David, Elk Grove, Calif.

A:  As a reservist and a financial planner, I’m very familiar with the reserve retirement system of which you write…not that I’m counting my points.  When it comes to divorce, most things, including a portion of your military retirement, are up for grabs.  Make sure you enlist the services of an attorney that is experienced and knowledgeable in military divorce arena.

 Just to give you an idea of what might be fair and how the calculation might work, I’m going to assume you earned 100 points during each of your 23 years in the reserves and last year transferred to the retired reserves as an E-8 at age 45. Here are the numbers:

Total Points: 3,760

Points earned while married:  1,700

Percentage of retirement earned while married: 45%

Ex-spouse’s projected share of 2009 retirement value:  45% * ½= 22.5%

 

Using the Army Reserve Retirement Calculator, I calculate a total retirement benefit of about $1,325 in today’s dollars.  So, your ex-spouse would be entitled to $298 per month ($1,325 * 22.5%) when you turn age 60.  Notice, I did not use the age 60 values that include inflation adjustments to calculate your ex-spouse’s share.  In my mind, these inflation adjustments are earned by continued availability and service in the retired reserves.  In this scenario, if we assume 3% inflation, your pay at age 60 would actually be around $2,000/month…of which she would receive the roughly $300/month.

 

Obviously, this is relatively complex and you should, as I mentioned earlier, focus on getting a quality lawyer in your corner.  Thank you for your service and best of luck.

 

Let them repossess it...that's the question

Q:  Hello June, I have this problem and I really need some advice.  The payment on my car was due plus I am behind for two months.  Should I let them repossess the car instead of paying?  Because I just started working, I won't be able to come up with the amount I owe.  Please.  I really need some advice.  Thank you.

-Monica, San Diego, Calif.

 

A:  I’m glad to hear you’re working—that’s a key first step!  Congratulations!  I know life can sometimes dog pile us, but we still must be financially responsible.  After all, you’re likely going to want to borrow money again someday for another big purchase like a car or perhaps a house?  But a question you really need to ask yourself is: Can I really afford that car?  Sometimes it makes sense to “trade down” to a more affordable mode of transportation.  I know that’s not easy, but reality can be tough – particularly if you owe more than it’s worth.  If you’ve decided with your new income that you can indeed afford the car, then put on your big girl shoes and call the company/bank that has your car loan and talk with them.  Explain that you’re interested in meeting your obligations, but that you just recently got a job.  They’ll truly be happy for you as this is a tough job market!  Ask if they’d be willing to negotiate your interest rate to lower the payment?  Or might they be willing to recoup the missed payments over the next few months (and possibly without adding more dings to your credit report)?  I’m sure they would rather work with you than repossess your car.  Good luck!

Webinar: Investing in Today's Tough Economy

You’re invited to take part in a free USAA webinar, “Investing in Today’s Tough Economy.” It will feature Wasif Latif, USAA assistant vice president of equity investments, and Bob Wiedower, Certified Financial Planner™ practitioner.

 

The webinar will take place on Wednesday, March 25^th from 7-8 p.m. (CST).  You can listen in from the comfort of your own home.

 

The presentation is geared toward those with at least moderate investing knowledge and experience. Participants will learn strategies to invest in today’s tough economy. There will also be a live Q&A with USAA experts.

 

Topics to be covered:

§         How our economy got to its current state

§         The value of diversification and dollar-cost averaging

§         Historical market performance in context with recent market fluctuations

§         Now may be a good time to get into the market

§         Creating a plan for your financial future

 

Anyone may register by visiting the Newsroom section on the front page of usaa.com.  Simply scroll down to the bottom of the page and click on the word Newsroom. 

 

Once registered, participants will receive an e-mail notification with a link to the webinar.

 

In today’s challenging environment, it’s important to understand the best strategies for investing and what you can do to help lead yourself to financial success.

 

We hope you can take part.

Credit card rates do matter

Q:  I am an Army spouse, and stay-at-home mom.  I have a credit card that I got before we were married, and used it a little too much.  The account is expired and no longer used.  I owe almost $6,000 on it and the interest rate is 29%.  With such a high interest rate, (and we struggle to pay the minimum payment now) should we consider credit counseling, where they try to reduce the interest and we pay them monthly instead of the creditor? I feel like otherwise we will never get it paid off.

Thank you for your help.

--Katie,  Honolulu, Hawaii

A:  Katie, I would recommend that you take advantage of financial counseling available on your installation or through an organization that is part of the National Federation of Credit Counseling (www.nfcc.org).  In my mind, this one account should not be enough to make or break your overall financial situation.  Is there more to the story?  Everything financial starts with a clear understanding of what comes in and what goes out…a budget.  With the help of a counselor you may be able to develop a budget which results in more money being available to service your debt.  Your counselor will also recommend that you contact the credit card company and determine if they are willing to reduce the interest rate, since you are determined to pay off the debt. 

 

Interest rates matter.  At the current interest rate of 29%, if you’re paying $200 per month, it’ll take you four and a half years to pay off the debt (that is if you don’t add to it!) and will cost a whopping 4,800 hard-earned dollars to pay off.  Ouch.  If you got aggressive and doubled your payment, you could wipe the slate clean in a year and a half at an interest cost of approximately $1,500.  Check this out: if you are able to lower your interest rate to 15% (which is reasonable in the current interest rate environment), a $200 per month payment will take 38 months to pay off with a cost right under $1600.  While a $400 per month payment will wipe out the debt in 18 months with a cost of $690.  Your credit card company may not be inclined to lower your rate right away, but once you get busy and start paying aggressively  and on time every time, they may consider it. Hey, you can’t get a “no” without asking!   

 

Buckle down, cut spending, live on a budget and make paying off that balance your 2009 mission.   You can do it.  And, don’t say “just charge it” anymore.

Another point of view

Q:  Hi. How is it that people who are trained for and learn to kill professionally, have any value in a modern society? Hasn't their development as contributing humans been permanently stunted? Regards.

--Steve, East Setauket, NY

A:  My best answer is reflected in this quote:  “I disapprove of what you say but I will defend to death your right to say it." I’m not 100% sure to whom this quote should be attributed. Some say Voltaire. But it addresses the right to speak your mind. A right that we enjoy as Americans due to the service and sacrifice of our military men and women.

The inside scoop on being a military spouse

Q: I was told that there are many benefits to take advantage of as a military spouse, but where can I find exact information and how to utilize the benefits???? It would be nice to know insurance benefits, and educational resources...but every site I go to runs me in circles...any help?

--Lexa

A: It’s not easy to sort through life as a military spouse! Thank you for your service to our Nation. If you want to stick with official sources, I recommend you start your research with DoD-sponsored Military One Source. Your questions could be best answered by other military spouses who walk in your shoes every day. If you want to speak in an online discussion forum, try Homefrontonline.com, militaryspouse.com and CincHouse.com. For fun, lively and relevant radio shows, check out Army Wife Talk Radio with Tara Crooks; Navy On The Homefront with Beth Wilson and Navy Wife Radio with Wendy Poling. You can also log onto military.com for additional resources and information. Don’t miss out on the installation family support groups. I’ve heard great things about those hard working and caring women.

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.