Spoiler alert: You’re a bond.

Dr. Milevsky’s book presents new ways of approaching (and mathematical modeling) your savings for retirement.  The book was originally written in 2008 and updated in 2012 with new data and figures.  Dr. Milevsky’s book is divided up in to three parts.

Part One discusses the concept of Human Capital.

Human Capital is the future value of your earnings from work.  If you’re a race car driver, you are a “Stock”- you might have a few endorsement contracts (kind of like dividends) providing a bit of your income, but you only get paid in unpredictable, infrequent bursts when you win a race.   Once you get an idea of what the value of your Human Capital is (the net present value of your future earnings), you can use this number to bracket the upper value of a life insurance purchase.  The lower value of your life insurance calculation is the traditional “expense-based” model (pay off all your debts, send your kids to college, leave a bit more behind for your survivors).   The final answer to what your life insurance contract should cover will lie somewhere between the floor (expense-based value) and the ceiling (your Human Capital value at your present age).

As for figuring out if you are a Stock or Bond…

If you are a high-level executive at an investment bank, you’re a “Stock” – most of your compensation is in the form of bonuses and stock options.  Your compensation is not just tied to the stock market, but the daily value of your own company’s stock.  So don’t risk your retirement by piling more company stock (and stocks in general) in to your portfolio.

If you are a tenured Professor like Dr. Milevsky, or a “permanent” Government Employee- you’re a “Bond”.  Your compensation comes in regular ‘coupon’ payments like clockwork every month, just like a Bond.  Your earnings or rock-steady, but you’ll never hit it big with a huge payday when your employer goes public in an IPO or writes you a fat bonus check at the end of a banner year.  Your retirement savings should lean heavily towards stocks, and he even makes a compelling argument that “Bond” employees should buy highly leveraged equity products (like leveraged-equity ETFs) to INCREASE your exposure to the upside of equities.

Part Two discusses the importance of Asset Diversification using traditional  financial products (stocks and bonds).

Halfway through the chapter Dr. Milevsky demonstrates that many of the ‘Monte Carlo’ simulations being used during the accumulation phase of retirement are bogus.  He shows two competing mutual fund products, each with the same average rate of return and standard deviation only the sequence of the returns are backwards over a 20-year period.  He demonstrates that in the accumulation phase (saving for retirement) that it makes no difference what the returns are from one year to the next- that with the same average returns and standard deviation, both mutual funds are worth exactly the same value 20 years later.

But here’s where the ‘Monte Carlo’ simulation IS appropriate, and sometimes under-emphasized.  There is a severe hazard regarding the sequencing of returns when you begin taking money OUT in retirement. If you retire in to a bear market, you’re forced to sell more shares than necessary in a flat or up market, and the burn rate of your retirement portfolio accelerates.  This is why Dr. Milevsky makes a compelling argument in Part Three to annuitize or “Pensionize” part of your retirement funds, so that you have at least a minimum value to live off of in retirement.

Part Three of the book discusses the concept of PRODUCT  Diversification.

It discusses the PROs of purchasing annuity products- be they the media-hated Variable Annuities or not-so-hated Single-Payment-Immediate-Annuities (SPIAs).  Dr. Milevsky makes compelling points that even the Variable Annuities in some cases can add value in retirement if they have some kind of floor like a Guaranteed Minimum Income Benefit or Guaranteed Minimum Value.  He also demonstrates that in most cases it is cheaper to purchase this kind of ‘hedge’ from an insurance/annuity issuer than by purchasing option contracts on your own through your brokerage account.

If you’re a govvie, you can scan through most of the stuff on annuities, because much  like the French Knights guarding the castle in Monty Python’s Holy Grail, you’ve “already got one, and it’s very nice”.  In some cases you might even have two guaranteed annuities if you are a government employee retired from the military.

In all, the book is a great read and will present you with new tactics to approach saving for your retirement.  Just be ready for a few equations along the way.  I give “Are you a Stock or a Bond?” four out of five GubMints.

Moneywatch link to interview with Moshe Milevsky.

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Surprise.

2013 Health Premiums are on the rise, even for those of us Feds with a ‘Buick’ health plan.

In my case, our family’s premium for the popular Blue Cross/Blue Shied (BCBS) Basic FFS/PPO (code 112) goes up 5% from $131.73 to $138.32 per bi-weekly pay period.

Junior GubMints needs braces this year.  His mouth full of metal could break the bank account when combined with the Obamacare 50% Medical FSA cut coming in 2013.

I was on the fence last year during Open Season in considering switching to an HSA… this may be the forceful shove I was waiting  for.

It looks like the Aetna HDHP/HSA is a bargain, plus it covers 100% preventative dental care.  We’ve been paying dental costs 100% out of pocket using DentalBenefitsPlus from Navy Federal Credit Union, since BCBS provides no coverage with the Basic Plan.

Stay Tuned for detailed analysis.  Would love to hear feedback from fellow Feds with HSA’s!


I live in California, where gas is pushing 5 bucks per gallon at present- Yikes!

I’m not going to let Gubmints become ‘one of those’ blogs where each weekly post is brought to you by the MegaBank Rewards Credit Card, showing you how to sign up for the latest reward bonus… blah blah blah.

That being said, I’ve had the PenFed Platinum Rewards Card for 3 months now, and I’m quite happy with what it has given me so far:

  • 25,000 point bonus ($250 cash equivalent)
  • 5 points/cents per dollar spent on Gas
  • No annual fee

At $4+ per gallon of gas, 5% back is 20 cents off of every gallon.  By simply using this card exclusively to buy gas (the family burns through about $400 bucks/month in fuel), we already have enough reward points to do a huge grocery run!  There are tons of other flexible reward options available, including a pre-paid Visa card.

You don’t even have to be government or military to join PenFed… just join the ‘National Military Family Association’ for $20.

You’re already buying gas, so why not get it for 20 cents per gallon cheaper?  Leverage this card with the GasBuddy app, and you’ll laugh each time you drive past the long gas lines at Costco!

The GubMints Gouge for Maximizing your Service Computation Date

* Trick Question – you actually have THREE Service Computation Dates (SCD’s).

The GubMints Gouge for Maximizing your Service Computation Date
Available on Amazon Kindle

Learn Much More and get a FULL understanding of your Service Computation Date – Download a copy of The GubMints Gouge for Maximizing Your Service Computation Date today!  It’s only $0.99!

Executive Summary:

The first Service Computation Date is your SCD Civilian. This date is very straightforward- it is the day you walked in to your department’s HR branch and commenced employment as a federal employee. This date will stay the same unless you have a break in employment in the federal civil service.  SCD Civilian is used to calculate benefits such as your FERS life insurance payout formula, which is a gratis life insurance benefit (NOT FEGLI) provided to all FERS employees. I will cover this benefit in a future post.

The second Service Computation Date is the one you are used to seeing once every pay period in the upper right hand corner of your Leave and Earnings Statement (LES) if you work for the Department of Defense. This is SCD Leave, used to calculate your accrual of Annual Leave. Accrual rates for annual leave increase based on years of service calculated from SCD Leave.   If you are former active military NOT drawing retired pay from active duty, SCD Leave will be ‘back dated’ based on the years and months of service shown on your DD-214.   There are special cases where SCD Leave CAN ALSO be back dated for former active duty who ARE drawing retired pay, and I will cover these in a future post.

The third Service Computation Date is SCD RIF. This is the date you will be eligible for early retirement from the FERS system if you are offered an early retirement package like VERA (Voluntary Early Retirement Authority) for an agency-wide reduction or RIF (Reduction if Force) if your employing agency decides to cut your individual position. Under either of these, if you meet the time-in-service requirements you may retire early with full benefits (FEHB health care and a FERS immediate annuity). If you are a veteran who performed a FERS ‘military buyback’ credit for your active duty service, your SCD RIF and SCD Leave should match. It is critical that you verify these dates match after you make a ‘military buyback’ deposit.

(There is technically a FOURTH Service Computation Date, but you’ll have to splurge and sacrifice the cost of a vending machine snack to learn about it…. download Maximize Your Service Computation Date today!)

To check your three Service Computation Dates, log in to your HR Database (DCPDS for DoD employees) and look at your ‘My Biz’ tab. You will see a printout that looks like this:

Action Plan:

  1. Make sure your SCD Civilian matches the day you commenced Federal Employment.
  2. Make sure your SCD Leave rolls the calendar backward based on the years and months of credit shown in your DD-214 (if you are former active duty NOT drawing retired pay).
  3. Make sure your SCD RIF matches SCD Leave if you bought back time. Else SCD RIF will match SCD Civilian.

 

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