Podcast
Money Pilot Financial Advisor Podcast
Hosted by Kathleen "Katie" Cannon · EN
Financial life advice serving military and government employees.
87episodes
Episodes
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Episode 56 Inflation
Jul 28, 202100:14:06Tap to summarizeBack in Episode 41 we talked about inflation basics. Today we’ll talk some more about what inflation is, who has the mission to control inflation, what we can expect, and some ideas on how it may affect you.Put simply, inflation makes things you buy cost more. Another way to look at it, is that $1 after inflation is worth less, it has less buying power. Inflation is usually quoted as a percent per year. The Federal Reserve, often called "the Fed," is the central bank of the United States. A key mission of the Fed is to foster both maximum employment in the US and maintain price stability which interprets as keeping inflation growing at about 2% a year over the long-term. This can be a tricky balancing act. There are a lot of things that affect employment and inflation. Unemployment is still well above pre-COVID levels. The Fed Chairman has said that he is focused on getting back to full employment and that he won’t be swayed by temporary rises in inflation. And the Fed announced last August that it would tolerate higher inflation than its 2% target rate for a modest period of time since inflation has been too low for the last 10 to 15 years. Higher inflation isn’t necessarily a bad thing. If you have debt l you’ll be paying your loan back with dollars that are worth less than they are now. But for retirees living on a fixed income, each dollar buys less than it used to. Americans that were able to work through the pandemic generally spent less and saved, and now have more money to spend. There is a pent up demand for more goods and services. If you have a home mortgage, see if refinancing while interest rates are still low makes sense for you. And if, if inflation is rising, don’t be in a hurry to pay that low interest rate loan off faster than necessary. Remember, you will be paying the loan back in the future with dollars that will be worth less because of inflation.Stay the course with your long term investment goals. Stay diversified. Now is not the time to bet the farm and go all in on gold, or any other one “inflation proof” “sure thing.” Gold and real estate do tend to hold up well to inflation, but they are not fool proof. Gold and other commodities have huge price swings, they are very volatile. Real estate tends to beat inflation over the long haul, but with record low mortgage rates the real estate market is hot and prices are already high right now. When your investments are diversified, for example with US and foreign stocks and bonds, perhaps real estate, and maybe even a gold or oil mutual fund you can rebalance when one investment category does much better or worse. This is a simple way of buying low and selling high. Generally, wages tend to follow inflation up. If high inflation starts putting the pinch on, it may be a good time to ask for a raise. Or find another career that you enjoy, and that pays well will help you build a good financial future despite inflation. If you’re a military retiree or CSRS federal employee you enjoy full cost of living adjustments (COLA) each year . FERS federal employees receive a smaller COLA and you won’t receive any COLA on your retirement pay until you reach age 62. Will permanently reduce your pension’s buying power. Higher inflation may be a good reason to stay in until 62. FERS employees who retire under the special provisions s can retire younger and begin receiving their COLA immediately.Fortunately, Social Security payments are tied to general inflation and should maintain buying power better. Now for anyone that might have the ever-more-rare private pension or annuity, your pension is likely fixed. High inflation can significantly erode the purchasing power of your pension. And if that pension or annuity makes up a large part of your income in retirement, with higher inflation you may need to find other sources of income or reduce your expenses.
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Episode 55 TSP Withdrawal at 55
Jul 20, 202100:08:05Tap to summarizeHello and welcome to the 55th Episode of the Money Pilot Financial Advisor Podcast. For those of you who have stuck with the podcast to middle age, Thank You! I love speaking with you each week and bringing you info on money and finance that you can use to live your best life. In celebration of Episode 55, today we’re talking about you turning 55 and your Thrift Savings Plan (TSP). TSP is very similar to a workplace 401k. But there are a few differences and today’s discussion is about one, TSP and being age 55.You have probably heard that you can’t withdraw money from your TSP before age 59 ½ without paying a 10% tax penalty. But if you separate from service in the year you turn 55 years old or later, you can withdraw any or all of your TSP without paying the 10 % penalty. You will still have to pay tax on Traditional TSP withdrawals, but you won’t face a penalty. Now, if you are a federal employee under the special retirement provision for law enforcement, firefighting, and air traffic control personnel who reach retirement eligibility earlier than other federal employees, you can make penalty-free withdrawals from TSP when you separate from service at age 50 or later.This penalty-free withdrawal is only available if you separate from service when you are age 55 or older. This applies to both military and civilians. In practice, few military will be able to serve until age 55, even if you wanted to. But if you do, you can take advantage of this penalty-free withdrawal just like the civilians. If you separate or retire before that, you won’t be able to take advantage of this when you turn 55. You must separate at 55 or later. Or if you are under the civilian special retirement provision age 50 or later.Just because you can tap your TSP early without penalty, it doesn’t necessarily mean it is a good idea. You could be living in retirement for 40 more years. TSP makes up a key component of Federal Employee Retirement System (FERS) and military Blended Retirement System (BRS) retirements. Leaving TSP to grow can help offset higher costs of living later in life because of inflation and higher need, like more healthcare as you age. But if you need it, maybe for a gap in income or a one- time expense, you can takea TSP distribution without a penalty if you separate at 55 or later. For example, minimum retirement age for most FERS employees is between 55 and 57 years old. But you can only begin receiving retirement benefits at that MRA if you have 30 years of service. If you have at least 20 years of service you can receive your full retirement pay starting at age 60. This is a good example of a situation where you might need or want to tap TSP early. If your federal MRA is age 56 and you call it quits at age 58 with 26 years of service. You’ll eligible for your full retirement at age 60. But still that’s 2 years away. You may have saved enough to tide you over to 60, or take up another job outside of government service. But if you still have a gap and need a source of income for those 2 years before your pension starts, this rule could be a solution. To wrap up, anyone can begin withdrawals from your TSP any time after you reach age 59 ½ without penalty. But if you separate from service when you are age 55 or older, you can begin distributions from TSP without paying the 10% penalty anytime. Just remember you will still owe income tax on distributions from Traditional TSP. But if you meet the 55-year-old rule, you won’t have to pay the additional 10% early withdrawal penalty. And lastly if you under special retirement provisions, the rule is 50 or older for you.I hope you’ve enjoyed today’s podcast and keep your questions coming. I specialize in helping military and federal employees navigate transitions and gaps. If you’d like help with your financial decision making, reach out, I’m here for you.
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Episode 54 Child Tax Credit 2021
Jul 13, 202100:07:18Tap to summarizeIn March of this year the American Rescue Plan Act of 2021 was signed into law. One of the key elements of this new bill was the expansion of the Child Tax Credit for 2021. A few important points about this tax credit increase is that it only applies for 2021, the amounts of the tax credit went up, the tax credit is fully refundable, and more children qualify. Also for the first time, families will receive a tax credit in advance beginning next week. S Here are the details. First, for children under age six the child tax credit has increased from $2,000 to $3,600 per child. If you have a newborn any time during 2021, that child will also qualify for the full $3,600 credit. For children ages six to seventeen the child tax credit has increased to $3,000 per child. So not only have the amounts of the credit gone up, but this year seventeen year olds also qualify. For dependent children that are 18 years old, you will receive a one time tax credit of $500. And for dependent children ages 19 to 24 that are full-time college students you’ll also receive a one time tax credit of $500. Another big change is that this year families will receive one-half of their Child Tax Credit in advance for children 17 and under. Beginning July 15th you will receive half of the credit spread out over the next six months, and the other half of the credit when you file your 2021 tax return. For each child under age six you will receive $300 a month from July to December, then the rest, $1,800 per child, when you file your tax return after the end of the year. For children six to seventeen, the payments will be $250 per month, and $1,500 when you file. If you get tax refunds from he IRS through direct deposit, you should get these payments in your bank account on the 15th of each months until the end of the year. If you don’t use direct deposit, you should receive your payments in the mail around the same time. Note that a child must live with you at least six months out of the year, must be a US citizen and have a Social Security number. Also there's a phase out of the credit based on for income. If you file as head of household and have an adjusted gross income (AGI) of $112,500 or less you get the full tax credit amount. Married filing jointly your AGI needs to be $150,000 or less to qualify for the full amount. Both phases out above that. Also for this year, the child tax credit is fully refundable, soeven families no income will receive the full amount of the tax credit. If you filed tax returns for 2019 or 2020, or if you signed up as a non-filer last year to receive stimulus checks, you are already signed up and don’t need to take action. Otherwise, you can sign up using the IRS Non-filer Signup Tool to start the monthly payments at: https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-toolAnd lastly, it’s important to remember, that while there is talk of making these changes permanent, it is still only in place for 2021. And will revert back to the old rules for 2022. Keep in mind, the monthly payments aren’t additional credits. Th IRS is paying you half of tax credit in advance. So the refund you receive when you file next spring may be less than you got last year, and the monthly payments won’t be made in 2022 either unless the law is changes again. So, you’ll want to plan on that in your budget next year. If you have any questions or would like my help with your financial life, got to my website www.moneypilotadvisor.com and drop me a line.
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Episode 53 Bonds
Jul 6, 202100:13:19Tap to summarizeWhen you buy a bond you are make a loan and they have to pay you back with interest. Companies as well as local, state, and federal governments issue bonds you can buy as an investment. Most bonds have a face value of $1,000, and a set interest rate they will pay for a fixed period of time. A bond with 4% interest that will mature (expire) in 10 years will pay you 4% interest, usually two times a year, for 10 years and then you get your initial $1,000 back. The interest payments are predictable and can be a steady source of income. Because of this they are generally considered less risky than stocks. Some government bonds don’t pay you the interest as you go along, but pay it all at the end. They are called a zero-coupon bonds and are issued for less than their face value. Some bonds pay more interest than others. Like during COVID when overall interest rates are very low. Another key factor is how credit worthy is the issuer. The federal government is considered the most credit worthy. So they can pay lower interest rates on their bonds. A company that is struggling financially would have to pay the highest interest rates. Those bonds are typically called high yield or junk bonds. Lastly, bonds that are issued with a short maturity like 3 years will offer lower interest rates than bonds with a long maturity like 30-year. You can buy federal government bonds directly from the government. And like stocks,you can buy individual bonds through exchanges, that is the market. But buying individual bonds to build a portfolio can be pretty complex. Part of the complexity is that a $1,000 almost always sells for a higher or lower price in the market where prices are based on supply and demand. Most individual investors get into bonds through a mutual fund or exchange traded fund (ETF). The funds buy many bonds to diversify and you own a slice of all that when you invest in the bond fund. For our military and federal employees, you can invest in bonds through the Thrift Savings Plan. TSP offers two bond funds the F fund and the G Fund. The F Fund invests in a wide range investment grade (no junk bonds), US government and corporate bonds. The G Fund is unique. It invests in only US Government issued securities that are only available to TSP. It is guaranteed not to lose money and in that way is extremely safe. However, because it is so safe the interest the G Fund pays is also low and may not keep up with inflation. I already mentioned the steady, predictable income that bond interest can provide. This may be especially useful when retire and could use the cash for regular expenses. Also bond prices tend to less volatile than stocks. So when stocks drop, bond usually values drop less or even increase some. This is really good if you will need to cash in some of your investments at a particular time, like for a home down payment, college tuition, or upcoming transition out of the military. Most likely your bond investments won’t grow as much as your stock investments, overall. But they are much less likely to plummet in value right before you need it.In general, stocks are king when you can leave the money there and let it grow. If you're retirement that is still 30 years off, you may be in all stocks. Will you need to cash from your investment in a few years for a big purchase or for living expenses? Bonds are a steadier, safer bet. Just don’t expect a lot of growth. If you fall in between,mix of stocks and bonds may be ideal for you. Does a mix sound hard? You can invest in a TSP Lifecycle Fund or other target date fund. You choose a year you will need he money. The fund will automatically invest for you and gradually shift from stocks to bonds as you get closer. Would like my help with your unique situation? Reach me at moneypilotadivosr.com
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Episode 52 Stocks
Jun 29, 202100:14:45Tap to summarizeToday we are talking stocks, what they are, their benefits, their risks, and how you can invest in them. Stocks are also called shares or equities. When you own a stock, you are an owner. Yes, if you own one share of Amazon stock, you are an Amazon company owner. All owners participate in is sharing the profits. When a company like Amazon earns a profit, they may retain or keep some of that money to make improvements like buying new equipment or expanding operations. Or they may share some of profits with the owners by issuing dividends. Some companies may keep all the profits. And some regularly return profits to owners through dividends. That’s cash back, usually four times a year. The hope is that the overall value of the company grows and as an owner you own a share of that value. The value of your share has literally gone up, even if you don't receive dividends.Unfortunately, even when a company keeps it’s profits to improve operations, it doesn’t always go up in value. In fact, it’s common for stock values to go up and down, sometimes a lot. And sometimes a company’s stock price never fully recover from a big drop. It may be because the company made poor choices or the overall economy of the country caused the problems. and it could go belly up.Overall stocks in the US have averaged an annual return (that is the profit stock owners make) of 10% a year over the last 100 years. The risks are that stock prices go up and down like a roller coaster. And you might have to sell a stock for less than you paid for it. The best way to minimize risks is to diversify by buying shares in many companies, including those in different lines of business. There are three ways of doing this with limited cash. Fractional shares, mutual funds, and exchange traded funds (ETF). Fractional shares, also called share slices, are just what they sound like. You work through a broker dealer like Charles Schwab, Fidelity, or Betterment and you can buy partial shares, or tiny slices of many different stocks. A basket with many different stocks is called a diversified portfolio. With share slices you can choose your stocks and build a diversified portfolio with less than $100.You have plenty of things to do other than research hundreds of companies to try to build your own special portfolio? Me too. That brings us to mutual funds and ETFs. With both of these, they pool your money with many, many other people’s. The fund then goes and buys lots of stock in many different companies. These funds do the research and all the buying and selling for you, and will send you your share of any dividends or reinvest that money for you in the fund. The value of a mutual fund goes up and down based on the value of all the company stock it bought with the pooled money. When you want to take money out of the mutual fund, you get the money from the fund based on the overall fund value at the end of the day. You can invest in a mutual fund directly with a fund like Vanguard. Or buy mutual fund shares from a broker dealer. Exchange traded funds also pool investor money and operate a lot like mutual funds, but ETF shares are traded on the stock exchange, so ETF prices fluctuate during the day based on supply and demand. The funds still can’t guarantee a certain returnor that you won’t lose money, but the risk is much lower than buying stock in just one company. What if you have to sell when prices are down? The stock market can provide a very good return on your money over time. It is a good place to invest money you don't need for at least five years. For short term goals a savings account is a safer place save. Check out podcast Episode 39 Stash the Cash for more. For mid term goals or goals that will start soon but continue for a long time (like an upcoming retirement) a mix of stocks and bonds may be a good choice. Next week we’ll talk all about bonds, so stay tuned.
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Episode 51 Rental Depreciation
Jun 22, 202100:16:47Tap to summarizeToday we’re going to talk about depreciation and how that affects your taxes. First I want to clear up, depreciation only applies to rental property you rent out to others and collect rental income. Not the home you live in. Also, today’s discussion applies only to those of you who are not real estate professionals, they fall under some different rules. Rental property owners use depreciation to deduct the purchase price and improvement costs of the property from your tax returns over time, and depreciation is required by the IRS. There are a lot of rules involved and good record keeping is important. Depreciation is claimed as a deduction yearly, the information is carried over on your tax returns year after year, and will also impact your taxes when you eventually sell the property or the it out of service as a rental. See IRS publication 527 Residential Rental Property. https://www.irs.gov/publications/p527 Consider having an accountant do your taxes for your first year with the rental property to get your started out right, even if you do your own taxes again after that.In short, depreciation can decrease the taxes you pay while you own the property and are earning rental income, but will increase the taxes you would otherwise pay when you sell it, something called recapture. Depreciation only applies to your rental property structure and improvements that typically wear out over time, not the land itseDepreciation is calculated based on IRS rules and distributes the deduction across what the IRS considers the useful life of the property. You can find these depreciation tables in IRS Pub 527 and most tax preparation software have these tables built in. So in the first year you put your rental property in service, you’ll have one depreciation schedule for what you paid for the house structure plus any immediate improvements, and expenses to get it ready to rent. That schedule will be updated each year with that year’s depreciation and a running total. Each additional improvement you make, will begin its own depreciation schedule.At tax time, you deduct the depreciation allowed for that year from your rental income like you would other rental expenses on your tax form Schedule E. But you can’t deduct a rental property loss from your taxable income that year. It will be carried forward until your property reports a profit or is sold. Depreciation starts as soon as you place the property in service as a rental property or when it's ready and available to use as a rental. So your first year’s taxes you may only be able to claim only a partial depreciation deduction.When you sell your rental you will pay capital gains tax on the amount you receive from the sale minus its basis just like many other investments. But there is one tricky part. You will be subject to depreciation recapture. All the cumulative depreciation you claimed, will be taxed at your regular income tax rate in the year of the sale. Calculations on the IRS Form for this are pretty convoluted, it’s an entire page. But the important thing to understand is the concept that the “profit” from the sale, that is the sale proceeds you receive minus what you originally paid and improvements you made, is taxed at a lower capital gains tax rate. The total depreciation that you reported over the years will be taxed all at once when you sell the property, or take it out of service, at your higher income tax rate. That’s the depreciation recapture that takes some first time rental property owners by surprise.For information on how to figure and report any gain or loss from the sale, exchange, or other disposition of your rental property, see IRS Publication 544, Sales and Other Dispositions of Assetshttps://www.irs.gov/publications/p54
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Episode 50 The Big 50
Jun 15, 202100:10:47Tap to summarizeSince our podcast is 50 years old today, I thought we’d talk about things to consider when you turn 50. Let’s start with catch up contributions. The normal contribution limit 401k and TSP is $19,500 per year. But, if you turn 50 anytime this year or are you’re already 50 years old, you can contribute an extra $6,500. Those contributions can be traditional pre-tax contributions or ROTH contributions or a combination of the two as long as your total doesn’t exceed $26,000. IRA’s have their own rules and limits. The 2021 IRAs contribution limit is $6,000 a year, plus the extra catchup contribution of $1,000, for a total limit of $7,000 a year, if your 50 and over. I want to point out that the rules for 401k/TSP are completely separate from IRAs. IRAs are available to everyone with earned income, and even their non-working spouses. So if your employer offers a 401k or TSP, and you are 50 or older, you can contribute up to $26,000 a year to that, $7,000 to and IRA for you, and if you have a spouse with little or no earned income, you contribute to an IRA for them as well. You spouse’s IRA limit would also be $6,000 if they are under 50, or $7,000 if they are over.It’s also a great time to review whether you want to make ROTH or traditional contributions. The limits are the same for each, but they are taxed differently. I did a three part series in my podcast all about ROTH and Traditional retirement accounts. This would be a great time to go back and listen to those again if you have any questions about these confusing rules. The shows are: Episode 28 Meet ROTH, Episode 29 ROTH IRA, and Episode 30 To ROTH of NOT to ROTH. I’ll put links to those episodes in the show notes. https://www.buzzsprout.com/934996/7264000https://www.buzzsprout.com/934996/7366591https://www.buzzsprout.com/934996/7503172As you turn 50 your probably in highest earning years. And some of your expenses may be going down. Grown children may be moving out and finishing school. You may have paid off your mortgage or other debt. Now may be a good time to re-look you budget to find some more cash for retirement savings.Here’s a couple of other thoughts about working and saving after 50. Lately I have been talking with some clients about the cost and benefit of carrying a mortgage right now. If you want to max out your retirement plan contributions, but don’t have the cashflow to do that, you might consider refinancing. Interest rates are very low right now. A lower rate, or maybe even a slightly longer time, might free up enough cash to maximize your retirement savings. Another thing to look at is ROTH vs Traditional contributions. Just starting out in the workforce, it usually makes sense to make ROTH contributionsbecause, you are likely in one of the lowest tax brackets of your life. So tax wise this makes a lot of sense. As you get older, if you are earn more money and stepup into higher tax brackets the tax benefit is lessened. So if you hit fifty and don’t have the cashflow to max out your retirement savings contributions, you might consider switching from ROTH contributions to Traditional. Then use the amount that your taxes go down each year to increase you retirement contributions. Your fiftieth birthday may be a good time to give your investment asset allocation a checkup. It’s not necessarily the time to radically reduce you risk, like putting the majority of your saving in bonds or TSP G or F funds. You may need those investments another 50 years. It's a good time to reassess your particular situation and have an allocation that can meet your needs when you retire and still work for you over the long haul.Here’s to another great 50 episodes of podcasting together!
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Episode 49 Home Insurance Checkup
Jun 8, 202100:12:03Tap to summarizePeople have been asking, “with home prices rising so fast, do I need to up my home insurance?” Spoiler alert – yes you may need to up your coverage, but not for the reason you think. So today we’ll talk about your homeowner’s insurance, including a quick review of what’s covered and how to make sure you have enough coverage. The housing market has been really hot lately. That means the value of your home may also be higher now. Surprisingly the market price of your home doesn’t determine the amount of your coverage, you need if your house is damaged or destroyed. Homeowners insurance covers replacement of the building, it has no relation to the value of the land that it sits on. The cost of replacing your home is most affected by cost of building materials and labor, not how “hot” the real estate market is.But, it happens that rebuilding, costs have really jumped up lately too. So if you insured your home for X dollars when you bought it, that might not be enough to repair or replace it now if you have a loss, even with replacement cost coverage. Most insurance requires you to maintain a coverage amount that is at least 80% of the current replacement cost. So if you insured your home for $150,000 when you bought it and construction costs have gone up and now the cost to replace your home would be $200,000. If a fire does $100,000 worth of damage to your home, the insurance company would pay $75,000 and you would be on the hook for $25,000. That’s an ugly surprise. If you had been covered for at least $160,000 which is 80%, the insurance would have picked up the whole $100,000 tab. So what am I saying? Do a regular checkup with your insurance provider. Here’s a few other tips and areas to discuss with them.The amount of your insurance is coverage for your house. Separate structures like a detached garage, shed, or barn are typically covered up to 10% of your home coverage. So if you have $200,000 of home coverage, your other buildings are insured up to $20,000. This is fine for most people, but if you have farm with a large barn or a detached garage with and mother-in-law suite, you may want additional coverage. Again talk about it with your agent or insurance company. Homeowner’s insurance also covers your personal property, usually up to 70% of the value of the home. Coverage applies to everything in your home besides the house itself— furniture, appliances, clothes, electronics, and even food in the fridge. I recommend you keep an inventory of these items. One of the simplest ways to do this is to walk through your home and take pictures of everything. Some expensive items, like jewelry, art, musical instruments, collections, and even gold bullion or cash have very limited coverage, much lower than their actual value. If you have anything like this, check your policy for details about how much they will reimburse and look into additional coverage. One of the most important things to know about your policy coverage is if it’s Replacement Cost Coverage (the best) or Actual Cash Value (avoid). For your belongings you can think of Replacement Cost coverage as the cost to buy new replacements for what you lost. Actual cash value is its value based on what it would cost to buy something of the same age and wear and tear. Think of actual cash value as what you could get for the item on eBay. Your home is similar. The insurance company will depreciate, that is lower the amount they would pay out based on the age of the home, if you have actual cash value coverage. I definitely recommend you purchase Replacement Cost coverage.And one more note, read your policy to see under what circumstances, called perils, will your insurance cover a loss. Most insurance covers a wide range of scenarios. But, standard policies DO NOT include damage from floods, you have to buy a separate policy for that. I do recommend flood insurance.
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Episode 48 Bridge the Gap
Jun 1, 202100:17:27Tap to summarizeThis week, we're going to talk about how to bridge the gap if you've decided you want to try something you've always dreamed about, find a different career, or just take a much needed break. When planning for this, think what do you want this gap to be and for how long. Then come up with a budget for that gap. Your current budget is a good place to start, then make adjustments. Another key budget consideration is health insurance. This is NOT the place to skimp. It's not worth putting your whole financial future at risk by skipping health care insurance. This can be a bit of a challenge, but there are options. For example, if you're in the military you're when you transition out, you’re eligible for the Continued Health Care Benefit Program,but it is quite expensive. Anyone, can shop for health insurance on healthcare.gov. There's different plans you can choose from and you may qualify for a tax credit to pay for some of the premium costs.. You will need to know where you plan to home base, because these plans vary by state. If you're healthy you may save money selecting a high deductible health plan. Your premiums would be lower in exchange for paying more out of pocket expenses and having a higher catastrophic cap Next consider life insurance. If you have someone you support financially who would struggle without your income when you pass, like children and or a spouse that has been out of the workforce awhile, or is earning a lower income, you need to plan for continuing life insurance during your gap. If you are meeting that need now with workplace group life insurance like SGLI or FEGLI, you will need to buy life insurance before you start your gap. Term life insurance policies are usually quite reasonably priced.Once you've developed a budget for your gap t, look at how much time you have until your gap starts, and put a dollar figure on much you need to save from each paycheck to get there. The last big decision is what to do with those savings until you need them. If you're one to three years out from your gap, the best thing to do is save that money in an FDIC insured bank account. That can be a savings account, a money market account at a bank, or certificates of deposit. If your gap is more than three years away depending on your tolerance for risk and whether you've got flexibility in the timing of your gap, you may earn a higher return. But that means taking some risk. Bonds are often a good choice for these sort of mid-term goals. Your returns will fluctuate, but not as much as stocks. Stock are riskier, but on average provide even higher returns. It's helpful to have some flexibility in timing your gap. If for instance, you're able to just put it off a year, you can continue saving, and that gives time for the markets to rebound a bit. And then you could get that back in line and probably even exceed your initial goal. If you can wait.A good vehicle for doing this saving into low cost index funds. You can buy these funds directly from a mutual fund company or open a brokerage account Another option is Betterment. They invest your savings in low cost index funds that track an entire stock and bond market, just tell them what percentage to invest in stocks and what percentage to invest in bonds. Vanguard has Life Strategy Family Funds look at how much time you have until you need your savings, then invest in mutual funds for you. I hope you’ve enjoyed my podcasts on funding a gap. I’d love to hear about your dreams for a transition or gap and how you will save for it. If you’d like some help with the planning reach out for a free consultation. I love helping you live your dream life.
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Episode 47 The Library Life
May 26, 202100:10:38Tap to summarizeI had a great time on Monday as a guest on Lacey Lankford’s Live Youtube broadcast for the Military Appreciation Month where we discussed how to save. I you missed it, catch the recording here:https://www.youtube.com/watch?v=_gV43N02HSkLacey also has great resources on her website:https://laceylangford.com/ Lacey's podcast The Military Money Show:https://laceylangford.com/podcast/Today I thought we'd talk about gaps in life. I love doing all kinds of financial planning with my clients both long and short term, and everything in between. A simple way to think about life planning is like its a one act play. The whole of your life is on the same stage, it's got one set of actors, and these actors come in and out of the story. It has a cohesive plot from start to finish. This linear one act play makes planning a lot easier. But you know, a whole lifetime is rarely that simple. Instead, you may think of your life as more of a novel. Each chapter has its own sub plot. For a long life, a novel may seem like a better way to look at it all and use for planning your finances. Chapters might be joining the military or your first job. There may be chapters for marriage, children, second career, retirement, and so on. A cohesive story that flows seamlessly from one chapter to another. But I find, especially with military, life isn't really like a play or a novel. I like to think of it more like a library where as you go through life you may be choosing a book or two at a time. You may have a favorite genre, or theme in life for a while. And then lay that book down to pick something else up. Anything's possible in a library, especially a big library with a lot of choices. If you're trying to plan for a financial life that is more like a library, its more challenging. Knowing how to save, for what, and when is more complicated. But it also provides you with more options, with you in charge. I think one of the most challenging times when your life is a library is the transition. That time between books. So the big question is how to approach those gaps. They maybe planned, or not. You could be forced out of the military or a career. Maybe you thought you’d make a long career where you are now, but things change and you need or really want something else. A good emergency fund will help you cover life’s costs in an unexpected gap. But if you can anticipate a gap, you can plan for it and have a smoother transition. Rather than just grasping for the first book you can reach when you enter the library. A planned gap can give you time and space to reset, think about the life would you really like to next, and find a choice you’ll love.I’ve seen more than one servicemember do a “seemless” transition. They go right into full retirement or have a second career laid out before leaving and start their new job immediately. They PCS the family, invest in a new wardrobe, and dive into the next big book. Only to find out the new phase isn’t what they thought it would be. It’s not the life they thought they would love. So they either gut it out or transition again. If you have the time and resources, you may consider planning for some gap time to decompress and explore a little. Maybe you’d like to go back to school on the GI bill to start a different career that excites you. You could plan and save for that gap. Maybe you intern somewhere, or work part-time to test drive something new. Or maybe you really could use a mental break and just do something for you and your family for a little bit. Planning and saving for for a gap before your next transition is worth considering. Next week we’ll talk more details of what to consider, and how to plan and save for a gap.
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