Military Members Saving for a Child's College Education

Giving your kids a college education is extremely important.  Like any investment, the best time to start planning and saving is now.  The military provided me with the resources to get my bachelor’s and master’s in business administration.  There are many options to properly save for your kids’ college education.  As in all proper financial planning, avoiding taxes is key.  Here are the main ways to save for a child’s college education.  If you’re a civilian, skip the Post 9/11 GI Bill.   

·         Post 9/11 GI Bill – One of the major changes when the Department of Defense switched from the Montgomery GI Bill to the Post 9/11 GI Bill was the ability to transfer the benefits to your spouse or qualified dependent.  The Post 9/11 GI Bill can pay for 36 months of tuition, provides a housing and book stipend.  Military members do not have to put money into this fund, but they must meet minimum Time-in-Service requirements.  As long as Tuition Assistance (TA) still pays for 100% of tuition (some Master’s programs will cost more than the TA provides) while on active duty, then many military members will be able to transfer their benefits to their children[1].  Transferring your benefits does come with a 4-year active-duty service commitment—which I’ve heard is incredibly hard to get out of.  

·         529 Plan – The most common method for parents to save for their kids’ education is to a 529 Plan.  These are state-sponsored programs that allow you to invest your money and not pay taxes while your invested money grows.  If the child uses it for qualified education expenses, the withdrawals are also tax free.  You can put $14K a year into a 529 plan.  If your extended family is looking for birthday and Christmas gifts, they can send you money to put into the child’s 529 plan.  You can invest in stocks, bonds, or mutual funds (or any investment) and it will grow tax free; however, this does expose your savings to market risk.  Once your child is ready to withdraw the money, you may want to read on tips how to maximize 529 plan deductions.  For example, for a couple making $160K, or $80 for a single parent, the first $2,500 of qualified education expenses are tax deductible under the American Opportunity Credit ($160K couple, $80K single, $2,500)[2].  Little tricks like that will help maximize the money you saved.  The Security and Exchange Commission has a great starting point for all things 529 plans. 

·         Scholarships – As a parent you should thoroughly research scholarships.  My parents provided me with absolutely no information regarding college.  I didn’t even know that scholarships existed.  Finding scholarships from schools and degree types will help you focus your efforts in preparing your children for college.  For example, many colleges have unfilled scholarships for females in golf, tennis, and most of the STEM degrees (science, technology, electronics, and mathematics).

·         Child ROTH IRA – A more obscure way of saving for your kids’ college education is to start a child ROTH IRA.  It works very similar to a 529 Plan, but the child doesn’t have to use it for a college degree.  It’s simply an IRA that you can use to avoid taxes when you withdraw the money for qualified education expenses.

NOTE:  Qualified Education Expenses: tuition, fees, books, supplies, and equipment and an eligible institution

This blog post assumes that you want to save for your kids’ college education.  Some parents don’t believe in paying for their kids’ college education.  What are your thoughts?  Should parents pay for college education or should kids have to “work for it”.

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[1] http://www.benefits.va.gov/gibill/post911_transfer.asp

[2] https://www.irs.gov/uac/American-Opportunity-Tax-Credit

Financial Milestones for your Thirties

I have a growing concern that my generation (30-39) will have to work well beyond the age of 55.  Additionally, the future of “Mandatory” government spending programs like Medicare and Social Security is in jeopardy.  The excessive consumerism driving excessive debt and the lack of saving by our generation is very worrisome. 

GENERALLY SPEAKING, the decisions we made from 18-29 determined what social class we would end up.  Those of you that were already blessed to start in a good social class or became educated or found an extremely high-income job quickly will be wealthy in the future.  Those of us that became educated and started a career early are probably in the middle- to middle upper-class.  Those of that remained static since high school, or had a series of unfortunate events, are probably lower class.

The 30-39 years will determine at what age you can stop working at the social class you created when you were 18-29.  I started with generally speaking, because through entrepreneurship, inheritance, or the lotto, some of us will be able to bypass the 18-39 time period.  But if you’re 30-39, there are certain milestones you should have achieved to mathematically ensure you can retire at 55.

If you don’t meet 2 or more of the following, you are mathematically in danger of having to work past the age of 55.

1. $100,000 in net assets (before debt) – You should have $100K and more by the time you’re 30-39 to be able to retire by 55.  Unless you’re the next Warren Buffett, you’ll be tied to the same market returns as everyone else.  To retire by 55, you’ll need $100K or more to be invested correctly.  If you’re earning 4-8% a year in returns, then you’ll need ~$100K to start working now.  Additionally, if we have several years of negative returns, you’ll need more money to offset those losses.
2. Household income of $100K or more – Your household income, whether you’re single or married, should be $100K or more before taxes.  With the crazy inflation of nearly every commodity, an income of $100K is simply middle class.  For simplicity, I won’t go into the cost of living of each city, in each state; however, on a national average, $100K is basically middle income now. 30-39 is the prime age to maximize your income.
3. Job with full benefits (life insurance, medical, dental, unemployment credits) – No other commodity in America has grown as quickly as medical expenses.  Without proper insurance, medical bills can financially destroy a person for the rest of his or her life.  Neither political party has tackled the rising costs of medical care, only tap-danced around insurance coverage.  Insurance companies take your money, invest it and earn crazy investment profits, and then nickel and dime you.
4. 1 or more real estate investments – This is mathematically self-explanatory.  If you’re 39 and don’t have a mortgage yet, then even with a 15-year mortgage at 40-years old, you’ll be paying for a house all the way into your 55th year.  If you’re 39 and just bought a 30-year mortgage, that’s okay because you’ll have significant equity by 55, so you’ll have power moves available to you at 55.
5. Excluding your mortgage, you have less than 1-year’s income in debt – To include student and car loans, you shouldn’t have more debt than you make in a year.  If you only make $50K a year, you shouldn’t have $60K in student loans and a $40K car loan.  When you’re 30-39 with that much student debt, it may be a signal that your career didn’t correlate with the price of your education.  If you’re only making $50K and have a $40K car payment, then you’re probably living way above your means.
6. You have one or more different tax-sheltered retirement accounts – You have many options to properly save for retirement.  Here are several you should have: Federal Government (to include military)/Civil services/State worker pension; 401(k) or similar accounts, Thrift Savings Plan (for government workers), Individual Retirement Accounts (IRAs), and 529 college plans for your kids.

UPDATED (20 Nov 17) Although I don't like these "vanilla" measurements, it helps people conceptualize how much they need.  Some financial planners recommend having half your annual income by 25.  So if you make $50K a year, by the age of 25 you should have $25K in net assets.  By 30, you should have 1 times your annual income.  By 35, 2 times your annual income.  By 40, you should have 3 times your annual income. 

These are GENERALIZED milestones.  If you don’t meet 2 or more of these, then you need to start immediately reconsidering your retirement aspirations.  This Thanksgiving “break” reminded me that weekdays and weekends are something that we humans created.  It’s not scientifically real; just our perception of time.  Wealthy people who are financial independent don’t wait for the weekends; same with properly financed retired people.  Do you really want to be in this daily grind into your 60s or 70s or beyond?  Or worse, be totally dependent on politicians and government programs? 

Military Financial Report Video Series - Episode #7 - Military Retirement Information

Check out the seventh video in my Youtube series.  I show you the value of your military retirement, using the U.S. treasury 30-year bond interest rate.  I also show how rising interest rates can impact the "value" of your retirement.

4 Steps to Make Money when the Stock Market Crashes

The DOW Jones has fallen to around 16,000 after hitting a high of 18,300 on May 2015; a 13% drop. Depending on what you’re invested in, you may have seen a large drop in your TSP, 401(k), or your taxable brokerage account. If you’re under 55, you should see this as an opportunity. If you’re over 55 and you’ve seen a 13% or more drop in your portfolio, then you’re not correctly investing your money in the first place. For those under 55, stock market drops can be a good thing to take advantage of. Here’s how:

• Put more money in as the stock market drops. Most people have their retirement savings on autopilot. TSP and 401(k) contributions are automatically taken out of our paychecks. Some people also have IRAs and a taxable account as well. As the stock market is dropping, you should increase the money you’re putting in your TSP or 401(k). For military members, you can go to MyPay and change the amount anytime you want. For civilians, you’ll have to use your online retirement system or go through HR. Remember, you can only put $17,500 a year in a retirement account.

o    As the stock market drops, you’re able to buy more at the lower prices. Think about it like a sale on stocks or a military discount. You can buy your favorite stock at a 10% discount when the market falls.

• Find high-paying dividend stocks. In Jim Cramer’s book, “Getting Back to Even,” he calls stocks that pay high dividends because their stock price fell, accidental high-yielders. When World Wrestling Entertainment’s (WWE) stock dropped, its dividend rose to 4% and I bought it. There are many dividend-paying stocks whose dividends rise because of the overall stock market dropping.

o    This mainly applies to people choosing their own stocks or mutual funds. You can use any stock screen to find these. I like Yahoo! Finance and Fidelity’s stock screeners. I search for stocks that have fallen with a 3% or higher dividend yield.

• Avoid selling stocks. Over the long term, people who sell stocks automatically after a certain % drop tend to lose money. If you’re buying individual stocks, then you should only buy and sell based on a company’s fundamentals and not stock movement. 99% of the DIY investors Buy High and Sell Low because they are too emotional. When Tesla (TSLA) hit $290, a friend got excited and recommended it to people because he wanted to be a part of the stock’s rising price. Unfortunately, the stock lost steam and, at one-point, fell back down to $180; yet my friend was no longer promoting the stock at the discounted price.

o    If you know you’re emotional then avoid buying and selling individual stocks and mutual funds. You’ll lose money over the long run.

• Don’t time the market. People often wait on the sidelines for the perfect moment in the market drop. They’re so scared of investing at the wrong time that they miss an opportunity all together. This is the major reason why after nearly two decades of DIY investing that I’m not a billionaire; because I’ve incorrectly timed the market. I’ve bought on the way down (low) and sold on the way up (high). Don’t worry about trying to find the perfect time to buy. If your portfolio is less than $1M, then minor changes in your returns/losses will be less than missing out on opportunities all together.

Buying low and selling high seems like such an easy system but when the stock market declines or increases rapidly, people often do the opposite. This psychological response is why gambling is so profitable for the “bank” and so disastrous for gamblers.