Objectives: The learners will be able to discuss and understand:

1. Basic military and veterans benefits

2. The basic concept and types of insurance commonly encountered

3. Common major financial decisions at various stages of your career

4. Sources of useful information

Suppose you stay in the military…when your recruiter said "Uncle Sam will take care of you", what did that mean?

Guaranteed Benefits Inherent to Military Service (Active Duty):

1. Basic pay and allowances

2. "Free" healthcare services

3. Malpractice coverage

4. Disability "plan"

5. Retirement plan

6. Base privileges and other miscellaneous "bennies"

7. Death benefit

8. Educational benefits

Guaranteed Military Retirement Benefits:

1. Retirement pay (taxable)

-a percentage of base pay (not bonuses, allowances, etc.) determined by the plan in effect when you joined the service and the years you served.

2. Healthcare insurance (no longer free)

3. Veterans benefits as determined eligible

-Disability compensation (tax free)

-VA health care

Veterans Benefits

- GI Bill

- home loans

- disability as determined

- many others for specific groups (congressional acts)

Social Security

Will it be viable when you retire? (Current estimates have the SSA going bankrupt in 2030.) Will it make a big difference in your standard of living?

Issues to Consider at Any Stage of Your Career, In or Out of the Military:

1. Who depends on your paycheck, career, or health?

-What happens if you die?

2. When do you want to retire?

3. What other major financial expenditures do you need to plan for?

-college, own home(s), children’s weddings, world cruise, etc.

4. What standard of living do you want after you retire?

  A few facts to consider:

1. 75% of working Americans carry a debt load equal or greater than one year’s earnings.

-Mortgages, credit cards, car loans, etc.

2. 75% of Americans retire with insufficient funds to maintain their previous standard of living.

3. The average American saves only 20% of what they would really need to maintain standard of living.

Insurance

All insurance is a bet between you and the insurance company. The central question is: Do you feel lucky?

Life Insurance: 4 basic types
 

Type	Premium Cost	Purchaser Control	Cash Value	Maturity
Term	Low	None	None	Costs a lot more with age
Whole Life	Higher	Minimal	Yes	Matures, eliminating premium
Variable Premium	Highest	High	Yes	No maturity clause (perpetual)
Annuities	Variable	High	Yes	Start collecting after 59.5 yrs old

Some life insurance facts:

1. Only 2% of people who buy term life insurance ever collect on it. It becomes exponentially more expensive as you get old.

2. Life insurance is for those who depend on you for support.

3. Life insurance, as in investment, usually pays lower returns than you could achieve investing similarly on your own (because of policy costs) Beware the agent selling life insurance as an investment.

Disability Insurance:

Consider: At least 25% of "breadwinners" between 30 and 60 years of age will become disabled at some time in their working career. At least 25% of them will be permanently disabled.

Q: What are your federal benefits if you become disabled? A: It depends…(and is subject to change!)

These are very general guides, and there are many exceptions and special circumstances…
A. Less than 12 years active service and up to 20% disabled (unfit for duty):
    Disposition: Medical Board and Discharge from the military.
    You get: 2 months BASE pay times years of military service. (this is basically severance pay)
    That’s all!

B. Less than 12 years service and more than 20% disabled:
    Disposition: Medical Board and Discharge from the military.
    You get: 2 months BASE pay times years of military service. (this is basically severance pay)
    Eligibility for evaluation for disability by Veterans Administration
    VA determines percent disability and how mush $$ you get.
    Will be much less than your base pay was! (max= about $2000/month)
    Eligibility to apply for Social Security benefits under some circumstances

C. 12-20 years service and partially disabled:
    Disposition: Medical Board with recommendation for or against retention.
    Med. Board may recommend/authorize one of the folllowing:
        -Discharge
        -Temporary Duty Retirement List (TDRL)
            -disability must be 30% or higher
            -for circumstances where degree of disability is likely to change (up or down)
            -5 year maximum, ultimate disposition of retirement or return to duty.
            -annual re-evaluation
            -example: cancer patients
        -Medical Retirement
        -Retention on Active Duty with permanent "profile"

D. 12-20 years service and totally disabled:
    Disposition: Medical Retirement
    You get: 75% of current base pay until 20 year mark, then retirement
                Eligibility for VA evaluation and benefits (likely qualify as 100% disabled)
                VA disability replaces retirement pay (can’t double dip)
                VA disability payments are not taxed by IRS (retirement may be)
                Eligible to apply for S.S. benefits under some circumstances
E. More than 20 years of service and partially or totally disabled:
       Disposition: almost always retirement. (exception for VIP’s, critical needs)
       You get: Retirement, VA and possible SS benefits as above.

So, should you purchase disability insurance?

Again, generally speaking, the need for disability insurance is relatively greater if:
        You are early in your career
        You have financial commitments using up most of your pay (that you’re unwilling to forego)
        Your family has few/no alternative sources of income
        You live a high risk lifestyle

Investments:

General principles:
Pay yourself first.

Get started early. Let compounding work for you.

Have discipline and a plan.

Manage your Credit and credit record.

Understand your risk tolerance.

The longer your time horizon, the better the risk tolerance

Investors demand greater returns on investment for taking greater risk

    (thus, high return investments tend to be riskier or more volatile)

Keep an "emergency" fund of some sort of liquid investment.

    (usually 3-6 months NET income)

Don’t put all your eggs in one basket. Diversify.

Adjust plan as situation changes.

Some Definitions:

Agent: someone with legal authority to enter into a sale or contract on behalf of an individual or a corporation

Broker: someone who puts buyers and sellers together; a deal maker (does not own the item being bought/sold)

Dealer: someone who owns an inventory of investment instruments to sell

Diversify: to spread investment money among different instruments in order to reduce volatility or risk.

Equity: ownership stake (piece of the pie)

Liquidity: the speed with which you can cash in an investment (how fast can you get the money out of the account and into your hands?)

Portfolio: organized saving and investment plan containing all pertinent financial instruments

Volatility: tendency for an investment instrument to deviate from its expected rate of return

Securities:

Stocks: Equity share of a corporation (a piece of the company, and the risk) Corporations issue stock (referred to as taking a company "public") as a way of raising cash. Investors holding stock have a claim to a share of the wealth of the company, but, are last in line to cash in should the company go bankrupt (hence, the risk).

Bonds: These are securities by which governments or corporations raise cash. It is a promise to the investor, in return for the investment, to pay them an annual fee called a coupon (think of it as renting your money from you) and them paying back the principal at the end of a specified period. (days to decades) It is not an equity stake. If a corporation goes under, bonds are paid off before equity holders (stockholders) get their share. Thus, bonds may be less risky.

    -Corporate: Generally taxable

    -Municipal:  Usually tax-free

    -Treasury (taxable)

        T-Bills

        Savings Bonds

Cash Securities:  These are among the least risky ways to save money, but the returns are paltry by comparison to sticks and bonds.

    -Money Market Accounts

    -Savings and Checking accounts

    -Certificates of Deposit (CDs)

Capital Assets: Risk and return are highly variable, and these investments tend to be less liquid than those above.

    -Real Estate

    -Collectibles

    -Precious Metal, Gems

    -Intellectual Property

        -copyrights, patents, trademarks, etc.

Mutual Funds: "Pools" of investors’ money distributed among various investments with a particular goal in mind. Goals might include growth, cash dividends, capital appreciation, or building equity. Mutual funds are "professionally" managed. The investor picks the fund, the manager picks the investments. Mutual funds charge fees for managing your money. Mutuals may include any of the investment categories listed above.

Individual Retirement Accounts (IRAs): an investment account that you designate to be recognized by the IRS as tax-deferred until you withdraw money after age 59.5 years of age. IRAs can include any of the above investment instruments.

General Comparison of Investment Instruments
 

Security Type	Returns	Risk	Liquidity	Access
Cash Securities	Low	Very Low	Immediate Access	Self/Fin. Institution
Bonds	Low to Moderate	Low to Moderate	Moderate to Fast	Bank/Broker/Dealer
Stocks	Low to High	Moderate to High	Moderate to Fast	Broker/Internet
Capital	Low to High	Mod. To Very High	Very Illiquid	Self/Broker/Dealer
Mutual Funds	Low to High	Low to High	Moderate to Fast	Broker/Bank/Internet

Investment Advice (get some!)

1. Budget

-Figure out where your money goes, how much you have to spend, savings potential

-Live beneath, not above, your means.
        -Figure at absolute minimum, saving 10% of gross income per year. If you aren’t, re-eval your expenditures. (Do you REALLY need that new BMW?)

2. Establish financial goals and priorities

-crunch some numbers…many tools available to figure out how much saving or spending you need to reach your goals.

3. When forecasting retirement and other savings plans, figure conservatively. Remember, the stock market has been on a historic bull run for 9 years. It’s NOT likely that you’ll get 20% returns on average indefinitely. For instance, figure 10% stock returns, 5% inflation, etc. That way, you’ll err on the side of saving more than you need, not less.

4. Estate planning

    - a good will

    - living trusts, other tax relief

    - understand your net worth (really important when total net worth exceeds the estate tax threshold of $600,000.)
 
 
 

Age	Financial Decisions/ Questions
20-30 (Starting out)	Start saving/budgeting if you haven’t already Do you need insurance? What kinds? Do you need to plan for college?
30-40 (Entering most productive years)	Is your career on track? Are you beginning to see the benefits of compounding? When do you want to retire? Do you have a retirement plan? Has estate planning begun? Have your insurance needs changed? Is the college plan on track?
40-50 (Peak of productive years)	How is your health? When will you retire? Have your insurance needs changed? Are retirement, college, other savings plans on track? Is the investment risk appropriate? Is debt under control?
Over 50 (Pre-Retirement)	Is your portfolio safe enough for your time horizon? Are you ready to retire soon? Have your retirement plans changed? How much will you need? Are your insurance needs declining yet?

 

Resources:

Stanley, Thomas J., and William Danko. The Millionaire Next Door. Atlanta: Longstreet Press, 1996.

Entertaining, easy read with enlightening info on common traits of people who become financially successful. Some surprises and LOTS of common sense things YOU CAN DO.

quicken.com/

Terrific information resource, with educational materials, quick reference to stuff like Social Security, IRA’s, and most areas of financial planning. The most comprehensive site I found. No sales pitch.

smartmoney.com

Excellent website run by Wall St. Journal, with interactive tools to help you with retirement, savings plans and lots more good info. Play with some of the tools to find out how much you have to save to reach your financial goals. No sales pitch here.

smithbarney.com

Another good site with tools to figure financial plans. Since this is a brokerage firm, I suspect your information might lead to some kind of solicitation from the company…

fool.com

Interesting and educational site from the Motley Fool guys about stock investing, from the basics to more advanced, conservative advice. They also have books out, check Amazon.com.

militaryinfo.com

Info on retirement benefits, VA benefits, etc. Links to VA and Social Security has calculators that can figure what your benefits would be.