Tag Archives: militaryfamiliespersonalfinance

Target Date Fund Basics for Financial Counselors

By Barbara O’Neill, Ph.D., CFP®

The May 26  2015 MFLN Personal Finance webinar is about target date funds (TDFs), including the L fund investment option available in the Thrift Savings Plan (TSP) for federal government employees and service members. Also known as lifecycle funds (that’s what the “L” stands for), target date funds are “all in one” portfolios that typically include three types of investment categories known as asset classes: stocks, bonds, and cash equivalents (e.g., money market funds). Their asset allocation weightings (e.g., 50% stock, 30% bonds, 20% cash) automatically adjust and become more conservative (i.e., lower stock percentage) over time.

By viZZZual.com
By viZZZual.com

Target date funds typically have a date in their name such as the “2050 fund” and investors chose a fund with a date that is close to their expected year of retirement. Dates are spaced out at 5- or 10-year intervals (e.g., 2030, 2035, etc.). Most TDFs are “funds of funds” with underlying funds from the same fund family. Examples include Fidelity Freedom Funds, Vanguard Target Retirement Funds, and T.Rowe Price Retirement Funds.

TDFs were created in 1994 and have gained popularity in the last decade as a qualified default investment alternative (QDIA) for tax-deferred retirement savings plans such as 401(k)s and, starting in October 2015, TSP accounts for new federal employees. Some employees who are enrolled in employer investment plans fail to provide instructions for investing their deposits. In these cases, employers invest their plan contributions in the default investment. Investors also like TDF’s “low maintenance” style for savings outside of workplace plans.

Below are key facts about target date (lifecycle) funds that investors and those who counsel them need to know:

  • TDFs generally only make sense if they include the bulk of someone’s retirement savings. Otherwise, their asset allocation is altered by “outside” investments, which contradicts the whole premise of using them.
  • A defining characteristic of TDFs is their glide path, which determines the asset allocation mix over time. Pictured as a descending staircase, the glide path indicates how the stock percentage decreases over time.
  • Glide paths are a critical factor in TDF performance and investment companies use several types of glide path methods. Glide paths are used in both TDFs and age-adjusted portfolios in 529 college savings plans.
  • “To” glide path TDFs assume that retirement age is the target date and, at that point, the portfolio’s stock % weighting and investment mix remains static. “Through” glide path TDFs continue to decrease the stock percentage for a designated number of years after the target date before leveling off.
  • The “landing point” is the point in the glide path where a TDF reaches its lowest stock % allocation. Not surprisingly, TDFs with different glide paths and landing points have very different risk profiles.
  • TDFs are not without controversy. Performance issues during the financial crisis brought to light the fact that many TDFs were not as conservatively positioned as their names implied. This led to new disclosure rules by the Securities and Exchange Commission in 2010, including better disclosure of TDF glide paths.

To this webinar on May 26  at 11 a.m. ET or to view the recording,visit https://learn.extension.org/events/2030.

This post was published on the Military Families Learning Network blog on May 12, 2015.

Twitter Cohort Lite

By Molly C. Herndon , Social Media Specialist

The Personal Finance and Network Literacy teams will again be joining forces to create a learning opportunity for folks interested in Twitter. The 2-week event will begin May 18.

This year’s event will focus on asynchronous activities that participants can complete at their own pace. The event’s guides have assembled resources and homework for participants that will teach new skills and broaden existing networks. Watch videos and view last year’s syllabus here.

The Twitter Cohort Lite promises to be an easy way to get your feet wet and start tweeting with a supportive and encouraging network of professionals. By participating in this year’s event, you will:

  • Twitter-CohortBuild your Twitter personal learning network centered around your interests.
  • Engage in conversations with a Twitter community that starts with your fellow cohort members and reaches across the world.
  • Start online relationships that will last into the future.
  • Begin to see how Twitter can be used for teaching, learning, and connecting.

So if the Twitterverse seems intimidating or if you’re just learning to enhance your own personal learning network, register today for this immersive learning opportunity.

This post was published on the Military Families Learning Network blog on May 5, 2015.

Entrepreneurship Essentials for Service Members and Military Spouses

By Barbara O’Neill, Ph.D., CFP®

The April 2015 MFLN Personal Finance webinar was about entrepreneurship. Like many American workers, service members and their spouses are becoming entrepreneurs (a.k.a., independent contractors or freelancers) because they want to or have to. The U.S. is increasingly becoming a “freelance nation” as employers address their labor force needs by hiring people on contracts to avoid layoff hassles, payroll taxes, and fringe benefits.

By Stephen Depolo
By Stephen Depolo

Independent contractors work project-to-project and are hired to get a job done without regard for the means by which the result is accomplished. They use their own equipment and set their own work schedule, even if it is 3 am in their pajamas! It is estimated that 4 of 10 U.S. workers will be freelancers by 2020.

Becoming a successful entrepreneur requires certain personal qualities such as a strong work ethic, creativity, good people skills, a broad skill set, and comfort taking risks. It also requires different financial planning strategies compared to employees who earn a salary. Below are ten tips for aspiring entrepreneurs:

  • You are able to deduct self-employment expenses, such as equipment, materials, and travel, directly against business income on the Schedule C tax form. Be sure to keep good records, such as a travel log for mileage.
  • You must pay both the employee and “employer” portions of FICA tax for Social Security and Medicare totaling 15.3% of net earnings from self-employment.
  • You can’t use a budget that assumes a regular income when you’re an independent contractor. Instead, estimate baseline expenses and set aside money from peak earning months for times with lower income.
  • You should build a substantial emergency fund (many experts recommend 6 to 12 months of household expenses) to tide yourself over in between freelance work projects.
  • You must make quarterly estimated taxes to the IRS by April 15, June 15, September 15, and January 15 of the following year. Set aside at least 30% of self-employment income “off the top” for taxes.
  • You, like most Americans, must purchase health insurance. Sources include a government-facilitated Marketplace, a private policy, group insurance through a trade group, and a spouse’s employer plan.
  • You can save for retirement using a simplified employee pension (SEP), the easiest savings plan for entrepreneurs. Contribute up to 20% of net self-employment income by April 15 of the following year.
  • You can also fund a Roth and/or traditional individual retirement account (IRA) for retirement savings up to the larger of $5,500 ($6,500 if age 50 and over by year-end) or 100% of net earnings from self-employment.
  • You have many resources to assist you including professional advisors (lawyer, CPA, etc.), Small Business Development Centers, SCORE, and web sites sba.gov and http://www.extension.org/entrepreneurship
  • You should begin any entrepreneurial activity with a business plan that includes your objectives, product or service niche, marketing plan, pricing methodology, financial projections, and business title and structure.

To watch a recording of this webinar, visit learn.extension.org/events/2018

This post was published on the Military Families Learning Network blog on April 28, 2015.

2015 Personal Finance Virtual Learning Event

Molly C. Herndon

The image 14296 counseling & psychology by Texas A&M University Marking Communications Photography for this webinar is licensed Creative Commons CC BY 2.0.
By Texas A&M University Marking Communications Photography

Join us a 3-day learning event June 2-4 that will focus influencing positive change in clients. The 2015 Personal Finance Virtual Learning Event is an online learning opportunity to connect with colleagues, broaden your professional network, learn from experts in the field, and earn free CEUs!

On Tuesday, June 2 at 11 a.m. ET Dr. Barbara O’Neill will present Motivating Clients to Develop Positive Financial Behaviors. This webinar will describe ways to prompt positive behavior change in others. It will begin with a discussion of three leading behavior change theories and the concepts of locus of control and time preference. It will then discuss 20 specific financial behavior change strategies, relevant concepts from the field of behavioral finance, and implications for financial practitioners.

On Wednesday, June 3 at 11 a.m. ET, Dr. Mary Bell Carlson will present Financial Therapy Insights for Financial Counseling and Education. This session will explain what financial therapy is and how it differs from financial counseling, coaching, and planning. You will learn some of the specific techniques and models used in financial therapy and even some tips on how to incorporate some of these techniques into your sessions to help facilitate the opportunity for lasting financial behavior change with your clients.PF VLE 1 PAGER 2015

On Thursday, June 4 at 11 a.m. ET, Jerry Buchko will present Step by Step Financial Coaching Techniques. This webinar will deliver step-by-step techniques financial educators can employ to influence positive behavior change in their clients.

Each 90-minute webinar will be followed by a 1-hour Twitter chat. Engage, ask questions and post comments by using #MFLNchat.

Each webinar is approved for 1.5 CEUs for AFC-credentialed participants through AFCPE and 1.5 general CEUs for CPFC-credentialed participants through FinCert. Learn more about our CEU process here.

More details on this 3-day event are available here. We hope to see you online June 2-4!

This post was published on the Military Families Learning Network blog on April 21, 2015.

Remember, your kids are watching!

Dr. Michael Gutter

Consider that each time you use the credit card, or realize you don’t know how much you have available for bills, or  decide something costs too much or is not needed – your kids are watching. Recent studies have increasingly documented the important influence parents have on the eventual financial behaviors of their children; this includes the good, the bad, and the ugly.

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By Carissa Rogers

Consider how we can set a good example.

  1. Try to explain why you use a card when you do. The basic difference between a debit and credit card so they understand when you are spending family money.
  2. When you are planning to pay the bills, even it if is online, explain what you are doing and how you keep track of them. You don’t need to in depth while your kids are young. However as your kids finish high school, consider that they should be learning their own organization system.
  3. Give them goals to save for. This can start small such as saving money so they can spend it at an upcoming family trip, or for something big that they want.

As an aside, my son dropped many hints that he wanted an iPhone. I told him not only was the phone an expense, but also so is the addition to our family’s bill. I told him that would be an extra $120 per year. About six months later after some birthday, chore, good grades, and good effort money, he walked up to me with his wallet and said “lets go to the store.” For what” He opens his wallet, pulls out $270.

“Here is for my bill” handing me $120 and the rest is for the store. I looked at him, incredulously, and said, “Let’s go”

So remember if you teach them to save, they will understand it. If you teach them to be organized with their spending, they will see that. And if you teach them to spend, they will understand that too!

This post was published on the Military Families Learning Network blog on April 14, 2015.

Renting a Home as an Absentee Landlord

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension

Should a military family planning to move to their next duty station sell their home or keep it as a rental property? Like many financial planning questions, the best answer is “it depends.” There are many factors to consider when a service member is deciding whether to sell a home or turn it into rental property. Here are some key questions for Personal Financial Management Program (PFMP)staff to ask:

  • What is the housing market like in the area?
  • Are houses selling quickly or staying on the market for months (or years)?
  • Is there a strong rental market?
  • Is the service member prepared to be a long-distance landlord or able to afford to hire a local property manager to manage the property?
  • Can enough rent be charged to cover both the mortgage and any property management fees?
  • How much money is currently owed on the mortgage?
  • Does the service member owe more than the house is currently valued at?
  • Will a property insurance company insure the residence when it is vacant (some companies will not)?
  • Most importantly, can a service member afford to carry two homes if the first home can’t be rented or there are sporadic vacancies when tenants move?

    Photo by james.thompson
    Photo by james.thompson

These are just a few factors that service members must consider when deciding whether to sell or rent. For more information, see cbsnews.com/8301-505146_162-57443734/if-you-cant-sell-your-house-should-you-rent-it/

If service members decide to become absentee landlords, they should expect to pay a property management fee of around 10% of the cost of the monthly rent to the agency. They may also have to pay a set-up fee to open an account and keep a specific amount of money in the account with the property manager for emergency repairs costing a minimal amount, such as fixing a leaky sink. Major repairs, such as replacing a refrigerator or other appliance, should require authorization from the property owners.

Absentee landlords should consider purchasing a home warranty on the house for major components that could break (e.g., air conditioning). For a rental property, the cost is tax-deductible. Another recommended step is hiring a lawyer to review all rental agreement contracts.

Where can military families find a property manager who caters to rental units for military families? They can start with the Realtor who sold them the house. A good Realtor in a community with a large population of military families will have a network that includes local property managers who specialize in marketing to military families. The service member can also ask around among military friends and colleagues. Chances are someone will be able to recommend a property manager in the area who caters to military families.

Service members should interview at least three property managers before they decide which one to use. Cases have been reported of service members paying management companies only to find out later that they only did one drive-by in a year and/or never even walked into the house to check on the inside. Military families may also want to check out the websites militarybyowner.com and ahrn.com (Automated Housing Referral Network). They cater to service members who want to rent or sell a house to other service members.

This post was published on the Military Families Learning Network blog on March 30, 2015.

 

Income Tax Tips for Military Families

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension 

At the height of income tax filing season, it is appropriate to examine special tax benefits for military families. Military personnel and their families face unique life challenges with their duties, expenses, and transitions and, because of this, the following special tax benefits are available:

https://creativecommons.org/licenses/by/2.0/legalcode
U.S. Army photos by Pfc. Ma, Jae-sang
  • Moving Expenses: A service member on active duty who moves because of a permanent change of station (PCS) may be able to deduct unreimbursed moving expenses.
  • Combat Pay: If a service member serves in a combat zone as an enlisted person or warrant officer for any part of a month, all military pay received for service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. Service members can also elect to include nontaxable combat pay in their “earned income” for purposes of claiming the Earned Income Tax Credit.
  • Extension of Deadlines: The deadline for filing tax returns, paying taxes, filing claims for a refund, and taking other actions with the Internal Revenue Service is automatically extended for qualifying members of the military.
  • Joint Returns: Generally, joint income tax returns must be signed by both spouses. However, when one spouse is unavailable due to military duty, a power of attorney may be used to file a joint return.
  • Travel to Reserve Duty: Members of the U.S. Armed Forces Reserves can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform Reserves duties.
  • ROTC Students: Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay—such as pay received during summer advanced camp—is taxable.
  • Transitioning Back to Civilian Life: Service members may be able to deduct some costs incurred while looking for a new job. Expenses may include travel, resume preparation, and agency fees. Moving expenses may be deductible if closely related to the start of work at a new job location and certain tests are met.
  • Tax Assistance: Most military installations offer free income tax filing and preparation assistance during and/or after the tax filing season.

IRS Publication 3: The Armed Forces’ Tax Guide is an excellent resource because it summarizes many important military-related tax topics. Publication 3 can be downloaded from irs.gov or may be ordered by calling 1-800-TAX-FORM (800-829-3676). Another helpful resource is this list of federal income tax brackets. When someone knows their tax bracket, they can calculate the benefit of taking actions such as making charitable gifts and saving for retirement. For example, a $4,000 Thrift Savings Plan (TSP) contribution will save $1,000 in taxes for someone in the 25% tax bracket ($4,000 x .25).

This post was published on the Military Families Learning Network blog on March 2, 2015.

Encouraging Service Members to Save for Retirement

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension

More than 80% of service members never reach the 20-year mark to qualify for retired pay. That is why it is important for them to “hedge their bets” by contributing as much as they possibly can to the Thrift Savings Plan (TSP). Otherwise, they run the risk of serving in the military for a number of years and having absolutely no retirement savings to show for their service when they leave.

Service members can contribute a portion of their pay to the TSP while they are on active duty and can fund an individual retirement account (IRA)—a traditional IRA and/or Roth IRA—as well. A retirement planning calculator available at the Ballpark Estimate website  can help service members determine how much they need to save for retirement.

Financial experts agree that people who start saving money for retirement at a young age will see the largest growth in their savings. Service members can start contributing to the TSP when they begin their career. The TSP is savings they can take with them in the likely event they don’t receive a pension. The TSP.gov site demonstrates the value of starting TSP contributions as soon as possible.

From tsp.gov
From tsp.gov

TSP fund options are among some of the lowest-cost investments available anywhere. TSP fund expenses average 0.025% or 2.5 basis points (a basis point is 1/100th of 1% or 0.01%). Stated another way, TSP expenses are about 25 cents for every $1,000 invested. If someone had a $100,000 TSP portfolio, he or she would pay only $25 a year in investment management expenses. Learn more here. The TSP also offers many helpful financial planning tools.

A Roth Thrift Saving Plan (TSP) account is a good option for many service members. With a Roth TSP, participants invest after-tax dollars (i.e., money that has already been taxed) that cannot be taxed again upon withdrawal in retirement. While plan participants don’t receive an immediate tax write-off for the amount of their contribution, they receive tax-free earnings after age 59½ if their account has been open at least five years. Also, unlike Roth IRAs, there are no maximum income limits for Roth TSP participation.

Roth TSP accounts are especially attractive for young service members because they have four to five decades of tax-free investment growth ahead of them. In addition, they are likely to be in a lower tax bracket (e.g., 15% marginal tax bracket) currently than they will be later in life (e.g., 28% tax bracket), so a current tax will have less impact than a future one. Learn more here. For a list of federal marginal tax brackets, see http://njaes.rutgers.edu/money/taxinfo/.

How do you convince service members to save for retirement?  Show them the money! Provide a compelling illustration of how small amounts of money grow over time. Research indicates that people often save more when they fully understand how savings can grow with compound interest. Here’s an example from , a publication for military families. If someone saves $300 every paycheck, this lowers their take-home pay by $225 in the 25% tax bracket ($300 minus the $75 tax benefit). Do that twice a month and you’ll save $7,200 a year ($300 x 24 paydays). Assuming an 8% average investment return over 30 years from age 25 to 55, a service member would save more than $900,000.

This post was published on the Military Families Learning Network blog on February 9, 2015.

Paying Off Holiday Credit Card Bills

By Sharon Hahn Darlin
By Sharon Hahn Darlin

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension

It’s three weeks since Christmas and credit card bills with holiday expenses (gifts, travel, etc.) are starting to arrive.  When there isn’t enough cash available to pay them in full but more than the required minimum payments, questions like this arise:  Should service members pay more than the minimum on credit cards with the smallest balance or on those carrying the highest interest rates?  The answer is “it depends.”

Some experts believe it is cost-efficient to pay off debts with the highest interest rates, while others believe it is emotionally satisfying and motivating to pay off those with the smallest balance. Regardless of which decision is made, start clients off by making a list of all of their creditors and debts (e.g., Sears credit card). Next write down the corresponding balance, APR (interest rate), and minimum monthly payment for each debt.

Next, it’s time for Power Pay. Developed by Utah State University Cooperative Extension, PowerPay assumes that users are paying at least the required minimum payment to each of their creditors and can continue to pay the same total monthly amount until all of existing debt balances are down to zero. The program also assumes that no new debts will be added during the duration of the debt repayment plan. If they are, they will not be included in the debt repayment calculation.

To use PowerPay, log in with a user name and password and enter the following information:

  •  Names of creditors
  • Outstanding balance for each debt
  • Annual percentage rate (APR) on each debt
  • Monthly payment for each debt

Once this information is entered, PowerPay users can print out a calendar that shows how much to pay each creditor monthly. When a debt gets paid off, its previous monthly payment is added to the payment sent to a remaining creditor. The analysis shows when each debt will end and the time and interest saved by following the PowerPay program.

Generally, users save the most debt repayment time and interest with PowerPay by adding extra payment amounts to debts with the highest APRs. This might include credit cards with high penalty interest rates and high-interest rate department store credit cards which often have interest rates in the 21% to 28% range.

For further assistance with debt repayment, military families can contact a non-profit credit counseling agency. Most credit counseling is done by telephone and secure Web sites so driving distance to an agency need not be a problem. Counseling agencies can assist clients with budgeting and enroll them in a debt management plan (DMP) where one monthly payment is made to the agency and proportionately distributed among a client’s creditors. With some DMPs, creditors may be willing to accept lower payments and/or reduce interest rates and fees charged. To find a local credit counseling agency, visit http://www.nfcc.org/FirstStep/firststep_01.cfm.

This post was published on the Military Families Learning Network blog on January 12, 2015.

Year-End Tax Planning Strategies

By Molly C. Herndon

Social Media Specialist 

The temptation to put off organizing financial records and updating accounts until the new year may be overwhelming this time of year. Family get-togethers and the holidays stretch our time and our finances. However, planning now can mean a better outcome when filing your taxes next Spring.

Numbers and Finance  by reynermedia. Licensed Creative Commons CC BY 2.0.
Numbers and Finance by reynermedia. Licensed Creative Commons CC BY 2.0.

In our December 9 webinar, Year-End Tax Planning Strategies, Dr. Barbara O’Neill will discuss ways to plan ahead to increase deductions and be better prepared for tax laws that may impact your wallet. This 90-minute webinar begins at 11 a.m. ET and is worth 1.5 CEUs for AFC-credentialed participants.

The Personal Finance team has presented on the topic of taxes twice before. Earlier this year, Dr. Michael Gutter presented Tax Planning Updates for Members of the Military . This webinar focused on tax laws that affect military members, as well as unique issues related to combat pay and basic tax calculation. Watch the recording here:

In 2012, we presented Income Tax Filing Issues for Members of the Armed Forces. This 90-minute webinar teased apart the dense information that pertains to military members when filing returns. Watch the recording of this session here:

To join the upcoming December 9 session and for more information, click here.

This post was published on the Military Families Learning Network blog on November 25, 2014.