Here are my favorites this week:
Here are the rest of the articles:
You’ve read steps 1, 2, and 3 to crush the Thrift Savings Plan (TSP), and now you’re ready for step 4 and to start investing. In step 3 you came up with your desired asset allocation, so make sure you have that. You’re going to need it for the rest of the post. Just to make life a little easier, we’re going to use an example asset allocation of 80% stocks and 20% bonds.
For the bond portion of your asset allocation, you only have two investment choices:
- G Fund – US government bonds (specially issued to the TSP)
- F Fund – US government, corporate, and mortgage-backed bonds
Both of these are US bond options, which is just fine. There are no international bonds available in the TSP.
We could have an intellectual discussion about the subtle differences between these two bond funds, but we’re not going to. It isn’t necessary. They’re both fine bond funds, so just split the difference, diversify, and put half of your bond allocation in the G fund and half in the F fund.
To illustrate, in the example allocation of 80% stocks and 20% bonds, we’d put 10% in the G fund and 10% in the F fund.
That’s it. The bonds are done.
The Stock Allocation
This is a little more complicated. The largest decision you have to make is how you’re going to divide your stocks between the three options. Here are your choices:
- C Fund – stocks of large and medium-sized US companies
- S Fund – stocks of small to medium-sized US companies (not included in the C Fund)
- I Fund – international stocks of more than 20 developed countries
The first question is what percentage of your stock allocation should go to the I fund. There are a few schools of thought on this.
John Bogle, the founder of Vanguard, is famous for believing that you don’t need to invest any of your stocks in international stocks. His long held belief was that the US companies are doing business globally, so they are already worldwide diversified. For example, Coca-Cola is clearly selling Coke products all over the globe. He would say you should put 0% of your stocks in the I fund.
At the other end of the spectrum are people who believe that you should invest proportionally. If you look at the worldwide value of stocks, it is about a 50/50 split between the US and the rest of the world. These people would say you should put 50% of your allocation in international stocks.
Both of these opinions are reasonable, so anything between 0% and 50% allocated to the I fund is fine. What do I do?
I rely on the research done by Vanguard, an institution managing over $5 trillion. I figure they have more money and resources to research this stuff than I do. What does Vanguard do?
If you look at their Target Retirement Funds, which are meant to be a “one stop shop” kind of investment fund, you’ll notice that they split their stock allocation so that 60% is US and 40% is international. They used to do it 70% US and 30% international, but their research showed 60/40 to be a better split so they moved to it a few years ago.
You’ll notice that a 40% international allocation is between the 0% Bogle viewpoint and the 50% global weighting viewpoint, so it seems fine to me and that is what I do.
If you want another opinion, you can look at the TSP Lifecycle funds. You’ll notice that they do about a 70% US and 30% international split, like Vanguard used to do. Again, that seems reasonable.
Ultimately, you can pick anywhere from 0% to 50% and find someone really smart who agrees with you. I’d encourage you to have some exposure to international, so I’d say you should pick at least 20%, but it really is up to you.
Not sure what to do? Go with 30% (the TSP Lifecycle approach) or 40% (the Vanguard approach) for the I fund and call it a day.
How to Split the C and S Funds
This is easier, or at least I think it is. The C fund is basically an S&P 500 index fund of large companies, with the S fund having the rest of the small and medium sized companies. If you want to mirror the US stock market, you want to put about 75% of your US stock allocation in the C fund and the other 25% in the S fund. You’ll notice that this is what the TSP Lifecycle funds do, further backing up my assertion.
So, I recommend that you split your C and S fund allocation 75/25, respectively.
Putting the Stock Portion All Together
For the stocks, here’s the math:
- (Your desired international stock %) X (your total stock allocation %) = % that goes in the I fund
- (Your total stock allocation %) – (% you are putting in the I fund) = % you must divide into the C and S funds
- (Your % you must divide into the C and S funds) X 0.75 = % that goes in the C fund
- (Your % you must divide into the C and S funds) X 0.25 = % that goes in the S fund
Let’s use the 80% stock and 20% bond example we started with to illustrate. Let’s assume we’re going with a 40% desired allocation to international (like I personally use):
- (Desired international stock = 40%) X (total stock allocation = 80%) = 32% goes in the I fund
- (Total stock allocation = 80%) – (32% that is going in the I fund) = 48% we must divide into the C and S funds
- (48% we must divide into the C and S funds) X 0.75 = 36% that goes in the C fund
- (48% we must divide into the C and S funds) X 0.25 = 12% that goes in the S fund
That gives us a stock allocation of 32% I fund, 36% C fund, and 12% S fund.
The Bottom Line
We split our bond allocation 50/50 between the G and F funds. We put the desired percentage for international stocks in the I fund. We split the remaining stock allocation 75/25 between the C and S funds, respectively.
For the 80% stock and 20% bond portfolio we are using as an example, this plays out:
- 10% in the G fund
- 10% in the F fund
- 32% in the I fund (based on a hypothetical 60/40 US/international stock split, which can vary as discussed above)
- 36% in the C fund
- 12% in the S fund
This can be tough to grasp in a blog post, so if there are questions or points that need clarification just put them in the comments section and we’ll straighten them out.
The next step you need to crush the TSP is to decide if you’re going to go Roth or traditional.
“If you rent an apartment or house, the idea of buying renter’s insurance…may not have crossed your mind. But it should have.” – Get a Financial Life: Personal Finance in Your Twenties and Thirties
It makes sense that if you rent you might need renter’s insurance. If you live on base, though, you might need it as well. For example, the Navy changed policy for people who live in Public Private Venture military housing. Renter’s insurance used to be included, but now it is not. The Air Force did the same in 2015. And as you can read in this Navy article, “All Sailors are encouraged to obtain renters insurance, however, regardless of where they choose to live.” The same is probably true for all others in the Department of Defense.
What is renter’s insurance?
Your landlord’s insurance won’t cover your personal belongings like furniture, clothing, and electronics if they are stolen or damaged. For that you need renter’s insurance, which protects your belongings and offers liability protection, similar to homeowner’s insurance used by homeowners.
The liability protection might be needed if someone injures themselves in your apartment and you are held liable. The renter’s insurance could cover their medical bills and any legal costs you have.
In addition, some policies will cover your expenses if something happens to your apartment/home and you cannot live there for a period of time.
What doesn’t renter’s insurance cover?
This will vary from policy to policy, but in general renter’s insurance will not cover flood damage. To find out if you are in a flood zone and need insurance, go to FloodSmart.gov. It might not cover tornado or earthquake damage either, so you’ll need to check. For info on earthquakes, go to EarthquakeAuthority.com.
Are there limits to the coverage?
As you might imagine, yes, there are limits. Your policy will provide insurance up to a certain amount. It could be $50,000 or $75,000 or whatever you pick and are paying the premium for.
In addition, each policy will either provide coverage for the current cash value or replacement costs. For example, assume you have a $2,000 computer that is 3 years old and is damaged in a fire. A replacement cost policy would give you whatever it costs to replace the computer with a new one, somewhere around $2,000. A cash value policy would only give you what the 3-year-old computer is actually worth, which is likely to be significantly less than $2,000.
Certain items, like expensive jewelry, often have a cap on their coverage. For example, if you have $5,000 of jewelry your policy might only cover up to $1,000 of it. If you want coverage for a particularly expensive item or items, you may need to purchase a “rider,” which is an additional coverage on the policy for specific items like jewelry, electronics, or fine art.
How much liability coverage do you need in your policy?
You should have at least as much liability coverage as your net worth. If you have a net worth north of $500K, you would need to purchase additional liability coverage in the form of umbrella liability insurance.
Do you always need renter’s insurance?
“What if you figure your personal possessions aren’t worth that much or replacing them won’t cause that much of a financial burden? If that’s the case, you may want to skip renter’s insurance – unless your landlord insists you get a policy as a condition of renting the apartment.” – Jonathan Clements Money Guide 2016
Even if this is true, though, you may need the liability coverage.
How can you make it less expensive?
There are a few ways you can reduce the cost of your renter’s insurance:
- Have as high a deductible as you can afford. Your deductible is the amount of money that you must pay before an insurance company will pay the rest of the insurance claim. In other words, if you sustain $2,000 of damage and your deductible is $500, then you would have to pay the first $500 and the insurance company would pay the additional $1,500. The higher your deductible, the cheaper your insurance policy is.
- Make sure you shop around, as prices will vary. I’d check out:
- Think before you file a small claim. If you have a $700 loss but a $500 deductible, you could get $200 from the insurance company if you filed, but they would probably see you as a higher-risk customer since you filed a claim and raise your rates, costing you much more than $200 over the long haul. Only file claims that are large losses you can’t afford.
- Ask about special discounts for safety features of your rental property like smoke detectors, fire sprinklers, security alarms, doormen, etc.
- Get multiple insurance policies you need from the same company. If you get your auto and renter’s insurance from the same company, you could get a discount.
There are certain things in life that deserve their poor reputation, and one of those things is junk mail. It is called junk mail for a reason, and that reason is because it is junk. Trash it. Shred it. Recycle it. Burn it. Learn from it.
What? Learn from it?
Yes, learn from it.
Let’s learn about insurance by looking at some of my junk mail…
My Energy Company
Two years ago I received this letter from Dominion Energy, my energy company:
They are requesting a response from me, so I figured it had to be important.
I was dismayed to learn that my status was “Not Covered.” Everyone wants to be covered.
I read on to learn that I was fully responsible if my sewer or septic line would need repair and that this repair would cost hundreds of dollars. And that’s when I recycled this letter.
Actually, I didn’t recycle it but saved it for this post, but that is when I normally would have recycled the letter. Why?
The Purpose of Insurance
The purpose of insurance is to pay an insurance company to assume some risk that you cannot individually assume. For example, if I died my family would need a little more money than we currently have. Not much, but a little. I cannot assume this risk myself, so I pay an insurance company to assume this risk for me by buying term life insurance.
In the case of this junk mail, it is describing a risk (my sewer line needs repairs) that I CAN shoulder myself because apparently it only costs “hundreds of dollars.”
They say it “may burden finances.” Not mine.
But they cover up to $5,000 of repairs…that’s a lot!
Not for me. So I’m not buying this insurance.
Central Lesson of This Blog Post – You only buy insurance for risks you cannot personally assume.
Example #2 – Pet Insurance
I love the Military Officers Association of America. It is great organization, and I’m a lifetime member. They are looking out for us in Congress, and they provide very thorough updates on what is going on with military and veterans benefits. I’d highly recommend you join if eligible. But they sent me this:
Hey, I’m all about pets. In fact, I have a golden retriever just like in this postcard. But I’m not buying pet insurance. Why?
Because of the…
Central Lesson of This Blog Post – You only buy insurance for risks you cannot personally assume.
Yes, you guessed it. I have pets (two dogs), but if something happens to them I can pay the bills. Therefore, I don’t need pet insurance.
Your Insurance Needs Will Change as You Age
At different times in your life you’ll have different insurance needs. When I was younger and had a lower net worth, there were risks I could not afford to assume. As a result, I had:
- A larger life insurance policy.
- Supplemental disability insurance on top of the military disability system.
- Lower deductibles on my insurance policies.
Now due to my higher net worth, I have:
- Umbrella liability insurance.
- The highest deductibles USAA will allow on all of my insurance policies.
- Much less life insurance.
- Cancelled my supplemental disability insurance.
Here you can read all about getting properly insured.
Regularly Reevaluate Your Insurance Needs
Once a year I call USAA and reevaluate my insurance needs. Because there have probably been changes to the risks I can afford to bear, and I remember the…
Central Lesson of This Blog Post – You only buy insurance for risks you cannot personally assume.
Here are some more articles about the Social Security tax deferral:
Here are my favorite articles this week:
Here are the rest of the articles:
Here’s a cheat sheet developed by Dr. Dustin Schuett* for the issue discussed in the article below:
Here’s a link to the Military Times article:
*Note: The views expressed in this blog are those of the author and do not necessarily reflect the official policy or position of the Department of the Navy, Department of Defense or the United States Government.
Guest Post – Servicemember’s Group Life Insurance (SGLI) and an Important Note Regarding Individual Disability Insurance Eligibility
Understanding the value of maintaining life insurance to protect loved ones, the military makes group term life insurance available under the Servicemember’s Group Life Insurance (SGLI) program to the following service members:
- Active duty
- Ready Reservists or National Guard who are assigned to a unit and scheduled to perform at least 12 periods of inactive training per year
- Commissioned Members of the National Oceanic and Atmospheric Administration and the Public Health Service
- Cadets or Midshipman of the U.S. military academies
- Members of the Reserve Officer Training Corps engaged in authorized training and practice cruises
If you are on this list, at the end of this article provides a link on how to enroll. This coverage is not free as you must pay a monthly premium. This article will provide you the information you need to make an informed decision about life insurance.
SGLI is group term life insurance which means it will pay your beneficiary, a person or entity you choose, who will suffer a financial loss in the event of your death. If you can’t think of anyone, for example if you are single with no dependents, you can stop reading because you probably don’t need life insurance. However, if you are married with children, mortgage, etc., this protection is extremely important. Financial planning calculators indicate that an insured individual should maintain 7-10 times their annual income in life insurance until their youngest child is 25 years old.
SGLI provides up to $400,000 of coverage regardless of health and age for $24 per month. A similar private policy from the open market issued on a 30-year-old non-smoker will cost between $22-$32 per month, so the SGLI policy is competitively priced. This is because most active duty military are young, healthy and retire fairly young so the liability for the insurance company, Prudential, is mitigated.
Upon separation from service, SGLI can be converted to Veterans Group Life Insurance (VGLI) within one year and 120 days from separation. If done within 240 days of separation, no health qualification is required. Thereafter you must meet good health standards. Unlike SGLI, VGLI is not competitively priced and rates are determined by age and increase in five-year increments. A $400,000 VGLI policy is $40 per month between ages 30-34, $68 per month at age 40, $144 per month at age 50 and increases every five years to $1840 per month at age 75. Similar individual policies are approximately 60% of the cost of VGLI but you must qualify medically.
Taking into consideration the incomes of most military physicians and dentists, not only is SGLI inadequate in terms of need but it can lead to providing a false sense of security and result in the postponement of establishing an adequate personal term insurance program early in one’s military career before the development of health issues, nicotine use, avocations, or deployment. The only exclusions on individual life insurance policies are suicide during the first two years so war is covered but you cannot initiate coverage if you are stationed outside the country or have received orders to do so. Once again, the sooner you apply for coverage the wiser.
It is prudent to examine your individual life insurance options sooner rather than later. Please contact our office with any questions and don’t forget to ask about the disability insurance discount for new policies.
Important Note Regarding Eligibility for Individual Disability Insurance
Receiving orders for deployment outside the USA will prevent you from being able to apply for a non-cancelable and guaranteed renewable to age 65 policy until you return to the USA. This would mean paying a higher rate for the duration of your career. Since OCONUS PCS orders are given when you are at the end of training, it is prudent to explore establishing coverage prior to that time period. Avoid this potential pitfall and others by working with us and our extensive experience with military physicians and dentists today.
Andy G. Borgia CLU
SGLI Online Enrollment System (SOES) – Life Insurance https://www.benefits.va.gov/INSURANCE/SOES.asp
SOES is the Servicemembers’ Group Life Insurance (SGLI) On-Line Enrollment System. It replaces the paper-based SGLI/Family SGLI (FSGLI) enrollment, maintains elections and beneficiary information, and provides 24/7 self-service access to SGLI information. SGLI provides insurance coverage to eligible members of the active and reserve components.
BLUF – If your monthly basic pay is less than $8,666.66 per month you are going to get extra money deposited in your accounts for the rest of the year, but they will take it back in early 2021.
Here’s the military relevant text from the DFAS page discussing this COVID related Presidential initiative:
In order to provide relief during the COVID-19 pandemic, a Presidential Memorandum was issued on August 8, 2020 and guidance followed by Internal Revenue Service on August 28, 2020, to temporarily defer Social Security (Old Age, Survivors, and Disability Insurance (OASDI) tax withholdings. This change is effective through the end of the 2020 calendar year.
Military Members – Effective for the September mid-month pay, DFAS will temporarily defer the withholding of your 6.2% Social Security tax if your monthly rate of basic pay is less than $8,666.66. If your monthly rate of basic pay is at or above this threshold, your social security tax withholding will not be affected by the temporary deferral. Military members can use their August or prior LES as a good reference for their typical Social Security tax amount. The Social Security tax is labeled as “FICA-SOC SECURITY” on the LES and is calculated as 6.2% of basic pay.
Military members are not eligible to opt-out of the deferral if their Social Security wages fall within the stated limits. The deferral will happen automatically.
Per IRS guidance, collection of the deferred taxes will be taken from your wages between January 1 and April 30, 2021 for both military members and civilian employees. Additional information on the collection process will be provided in the future.
If a military member or civilian employee separates or retires in 2020 before the Social Security tax can be collected in 2021, they are still responsible for the Social Security tax repayment. Additional information on the collection process will be provided in the future.
For questions on the temporary deferral of the 6.2% OASDI withholding:
- Visit the IRS page: https://www.irs.gov/newsroom/guidance-issued-to-implement-presidential-memorandum-deferring-certain-employee-social-security-tax-withholding.
Still have questions? See the FAQs for more information.
Here is an action from Jonathan Clements‘ blog Humble Dollar. Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get…free:
LOOK FOR INSURANCE GAPS. Many folks agonize over whether their policies are too large or small. A bigger danger: Not having coverage at all, because your life has changed but your insurance hasn’t kept up. Just had kids? It’s time for life insurance. Grown wealthy? Consider umbrella liability insurance. Started working for yourself? You may need disability coverage.
I’ve written a good bit about insurance. Here’s an article about getting properly insured.
How is insurance different for those in the military? It is a little more complicated. Many life insurance policies used to have war/military clauses. Some cater to the military, though, and aren’t as restrictive. Here’s how to buy life insurance in the military. Also, don’t forget about the other death benefits of being in the military.
It is also hard to get supplemental disability insurance (DI) if you need it. Most of us in the military are okay with the coverage we get from the military’s disability system, but if you are a top earner like a pilot, nuclear engineer, doctor, dentist, or someone else with a high salary and bonuses, you might want to check out this article on the White Coat Investor. While written for doctors, the company I wrote the article with also will sell insurance to other military high earners.
What insurance do I have right now? What insurance did I used to have? Here’s the current status:
- Disability insurance – I used to have supplemental DI, but I cancelled it because I no longer need it due to my adequate net worth and the military disability system.
- Medical insurance – TRICARE Prime, baby! Which is the most under-appreciated benefit of being in the military, by the way.
- Homeowner’s insurance – Got that through USAA.
- Renter’s insurance – I don’t rent, but when I did I had it through USAA.
- Auto insurance – I have our three vehicles insured through USAA.
- Umbrella liability insurance – I have enough through USAA to cover my net worth, which is the usual recommendation.
- Life insurance – I only have SGLI right now because I no longer need more than that. I’ve had as much as $3,000,000 total during my life, most of it through Navy Mutual Aid Association.
- Flood insurance – I’ve got flood insurance through USAA and FloodSmart.gov.