personal finance

Finance Friday Articles

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Here are my favorites this week:

Confessions of an Ex-AUM Financial Advisor

The Relationship Between War & The Stock Market

What The White Coat Investor Really Thinks

 

Here are the rest of the articles this week:

5 Ways Investing Is Like Weight Loss

12 Investment Sins

Achieving Financial Freedom as a Physician is Simple, but Not Easy

A Real Estate Investor’s Guide to the Equity Waterfall

Backdoor Roth IRA 2020: Step by Step Guide with Vanguard

Before Hopping on the BRRRR Bandwagon, Consider This

Cut the Bonds?

Determining How Much To Contribute To A 529 Plan: Too Much No Good!

How Do Your Financial Priorities Stack Up With Our Pyramid?

If Only – What a $25 Savings Bond from 1987 is Worth Today

I Own 24 Units But Choose to Rent—Here’s Why

Mr. Money Mustache on Purposeful Work & Life After Financial Independence

Opening the Spigot: Learning to Spend After Decades of Saving

Physician Lifestyle Inflation After The First Big Paycheck

Read the Fine Print (this is particularly relevant to anyone in the BRS…if you fill the TSP too early, you lose out on the monthly 5% match, leaving free money on the table)

Should You Invest in a Roth or Traditional 401(k)?

Top 5 Ways a Virtual Assistant Improves My Life

Updating My Favorite Performance Chart For 2019

What Should a New Real Estate Investor Do With $10,000?

Would a Financial Advisor Add Value for You?

The Blended Retirement System Lump Sum – Probably Not a Good Idea

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Now that the Blended Retirement System (BRS) is in full effect, it is time to start digging a little deeper on some of its features, like the lump sum payment. Here is a pocket card put out by the DoD Office of Financial Readiness to explain the lump sum feature of the BRS:

BRS Lump Sum Factsheet

Reading through the card, I think it does the best job I’ve seen so far at explaining how the lump sum option works, especially for those who don’t understand what discounting is:

Discounting is the process of determining the present value of a payment or a stream of payments that is to be received in the future. Given the time value of money, a dollar is worth more today than it would be worth tomorrow. Discounting is the primary factor used in pricing a stream of tomorrow’s cash flows.

When discounting future cash flows to determine the present value, you have to use what is very much like a reverse interest rate, called the discount rate:

The discount rate also refers to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows.

The higher the discount rate, the lower the present value of your future cash flows and the smaller your lump sum would be. Some have criticized the DoD for setting the discount rate too high. While adjusted annually, it is 6.75% for 2020.

What I really found interesting about this pocket card I had found, and what caused me to write this blog post, was this part of it:

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Note that the DoD Office of Financial Readiness is admitting, “For most Service members, a guaranteed stream of income for life is likely better than a lump sum.”

Yes! One of my biggest beefs against the BRS is that it gives you options like this and the chance to make a mistake. You can’t screw up the guaranteed stream of inflation-adjusted income that comes with the legacy retirement system.

You can screw up a lump sum, reduced by a high discount rate, by blowing it on an expensive car, too large of a house, a weekend in Vegas, or whatever else people like to waste money on. Yes, you could use it productively, perhaps to start a business, buy a franchise, or acquire high-paying skills with further education. But you could just as easily buy one of these:

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Do yourself a favor. If you are in the BRS, when the time comes think long and hard before you reduce your future income streams and take a lump sum payment. As the DoD itself admits, “For most Service members, a guaranteed stream of income for life is likely better than a lump sum.

Make Sure You Snatch the Blended Retirement System Match

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Here’s a tip from one of my favorite blogs and authors, Jonathan Clements from Humble Dollar:

SNATCH THE MATCH. Are you on track to contribute enough to your 401(k) to get this year’s full matching employer contribution? If not, crank up your contribution now, so you can spread the required sum over this year’s remaining paychecks. In 2020, the maximum 401(k) contribution is $19,500, or $26,000 if you’re age 50 or older.

For nearly my entire career this wasn’t an issue for those in the military, but it is now due to the new Blended Retirement System (BRS) and its matching Thrift Savings Plan (TSP) contributions. To refresh your memory, if you contribute 5% of your pay to the TSP you get up to a 5% match. If you are in the BRS and you don’t contribute at least 5% every month, you are leaving free money on the table:

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Also, you want to make sure you don’t fill up your TSP too early. While many service members will find it hard to get to the 2020 annual limit of $19,500, for those that do they want to space it out over the whole year. If you fill up your TSP in October and can no longer contribute for November or December, you won’t a get a match that month and will lose out on that money.

While I’m not in the BRS, I do a few things with my TSP contributions that I’d recommend everyone do:

  1. Contribute from your basic pay and not from bonuses or other variable or one-time pays. Your basic pay is the most consistent so use that.
  2. Spread it out over the whole year. For 2020, I’m contributing about $1625/month so that I come in just at the $19,500 limit in December.
  3. I see how much of my TSP is left after the November LES is released, and adjust December to get as close to the limit as possible.

Automate Your Bill Paying

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Here’s a tip from one of my favorite blogs and authors, Jonathan Clements from Humble Dollar:

AUTOMATE YOUR BILL PAYING. That way, you’ll avoid late payments—crucial to maintaining a good credit score. The downside: You need to be vigilant about keeping enough in your bank account, so you don’t trigger fees for overdrafts or insufficient funds. This is a particular concern with credit card bills, which can vary so much from one month to the next.

How do you do this with USAA, which is where I do my banking?

To sign up with USAA, go here:

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Asset Location

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Here’s a tip on asset location from one of my favorite blogs and authors, Jonathan Clements from Humble Dollar:

After deciding what investments to buy, we should consider asset location. What’s that? It involves divvying up investments between taxable and retirement accounts. If investments generate large annual tax bills—think taxable bonds and actively managed funds—we’ll typically want to hold them in a retirement account.

Jonathan’s advice is the traditional advice. Put your taxable bonds, like the Thrift Savings Plan (TSP) F and G funds, into your retirement accounts. This is what I do. My F and G funds are in the TSP, clearly a retirement account, and my international bonds (which they don’t have in the TSP) are in an individual retirement account (IRA).

I don’t own actively managed funds, and I also don’t invest in real estate investment trusts (REITs), although I have in the past and I think about it pretty frequently.

There is another school of thought, though. The White Coat Investor has a different take. You can read about them in his posts entitled My Two Asset Location Pet Peeves and Bonds Go in Taxable!

Of note, just about everyone says to put actively managed funds or REITs in a retirement account, so you won’t find any arguments there.

If you’re really interested in this concept/discussion, the Bogleheads Wiki on tax efficient fund placement is a great read as well.