Category Archives: Uncategorized

Credit Cards: Evil or Good?

by in spending, Uncategorized and tagged , | 1 Comment

Summary: When used wisely, credit cards are an excellent financial tool and can actually pay you to use them.

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Credit cards have a bad reputation in financial circles, and for good reason. Lots of folks have used them to spend more than they can afford, and then end up paying exorbitant amounts of interest because they carry a balance. The problem, of course, is not with the credit cards themselves, but with the behavior of the person. If – and this is a big if – you have self-discipline and only buy what you truly need and can afford, then using credit cards is actually a very smart financial move. The rest of this post assumes that you can use them responsibly – if that’s not true, then stop reading now. If it is, then it turns out that the credit card companies will even pay you to use them.

There are many posts you can read that will dive into this much deeper than I will, particularly if you want to use credit cards to “travel hack.” I will just briefly describe the somewhat haphazard way I’ve gone about this to demonstrate that you don’t have to be an expert to take advantage of this (while acknowledging that it can be done better if you take the time to become an expert).

Until fairly recently we were a one credit card family. We’ve always been disciplined about our spending and we started using a credit card early on and pretty much charged everything we could simply for convenience reasons. Then credit card companies slowly started introducing “rewards” credit cards in different flavors, and we went ahead and changed our one credit card to a credit card that earned us 1% cash back that went directly into the 529 college savings plan we had started for our daughter (more on 529 plans in a future post). We still just stuck with one credit card and didn’t really see the need for more than one. Flash forward a few years and suddenly reward credit cards are everywhere, and we also happen to be financially secure, including owing no debt, so didn’t have to worry about possible impact on our credit score (if you do it right, opening multiple credit cards isn’t that much of a concern anyway).

Since some of the new reward credit cards offered more enticing deals than simply 1% back into the 529 plan, I started researching them a bit. I discovered that not only did many of them offer more than 1% cash back (at least on certain items), but they also frequently offered bonuses for signing up. At first that seemed too good to be true (I mean, really, they are going to pay me to get their credit card?), but after investigating it turns out that it was legitimate. Credit card companies make their money from merchants (who pay a fee for each transaction), and from credit card users who don’t pay off their balances each month. (Part of me feels ethically conflicted about this, so that might be a reason not to do this if you feel that same conflict strongly enough.)

For a while we were pretty content with just that one, but then in 2012 we added in a Chase Freedom Card (*referral link). This card also offers 1% back on everything, but then 5% off on categories that Chase chooses each quarter. Those categories can change from year to year, but for 2017 look like this (fourth quarter has often included Amazon):

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This then became our primary card and we eventually cancelled our earlier card. While it was a bit annoying that the categories changed each quarter, it was still better because we still got the 1% on everything and then got the 5% on some things each quarter. I don’t have an easy way to tell how much we earned with this card then, but it would’ve definitely been more than with the earlier card. Especially because this was also the first time we got a “sign-up bonus” and I’m pretty sure it was $200 (it’s currently $150 after a minimum spend).

We stuck with this card for quite a while, but then in 2014 we added in a second card, the U.S. Bank Cash Plus Card. At the time we still had our checking account at US Bank (more about our switch to Ally Bank in a future post) so it was nice and convenient, plus in addition to offering 1% cash back on everything, it offered 5% cash back in two categories and 2% in one other category that you can choose each quarter. While it’s a bit of a hassle to choose those categories each quarter, it only takes a minute or two and can definitely add up. Here are the current 2% and 5% categories you can choose from:

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Because we also had (pre-defined) categories for our Chase Card, each quarter I check for what those categories are and then choose complementary categories for the US Bank card. For example, I usually choose the 2% for the US Bank card to be for groceries, except for the quarter that Chase offers 5%, then I’d switch it to restaurants. For the two 5% categories, we really only take full advantage of one of them – cell phones. We have a family plan that includes myself, my wife and my daughter, but also my sister, my mother-in-law and my father-in-law. We pay the bill and then they reimburse us, so the bill is somewhat significant each month. By charging it to this credit card, we get 5% back each month on that. Because we really don’t buy that much, the other 5% category isn’t that important, but we usually choose department stores for when we occasionally buy some clothes. Over the life of this card (since July 2014), we’ve earned more than $1800 cash back. I think the sign-up bonus for this one was only $25 once we redeemed $100 in cash back, but I think that for a while it was a $25 bonus every time we redeemed at least $100 (that’s ended now). The sign-up bonus right now ups the 5% categories to 5.5%, 2% to 2.5%, and 1% to 1.5%, all for the first year, then it drops back down to the normal levels.

It was nice having two cards in case there was a problem with one, and it was nice being able to juice our cash back a bit, and of course we always paid off the balance each month. We were content for quite a while with just those two, but then I kept reading more and decided to add in a third card – the American Express Blue Cash Preferred Card (*referral link) in December of 2016. This is a card that I honestly thought we would never get because it has a $95 annual fee. With all the no-annual fee cards, why would you choose to pay a fee? Well, it turns out the cash back on this card is more than enough to cover the annual fee and still earn us more than some other cards.

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First, the sign-up bonus included $150 cash back after a minimum spend, so that more than took care of the $95 annual fee the first year. If we decide it isn’t worth it, we can always cancel the card before the year is up and avoid the $95 fee for the next year. An additional sign-up bonus was 10% back on Amazon purchases for the first 6 months. We got this card right before Christmas, and we also have quite a few family birthdays in the first 5 months of the year, so we took good advantage of this. The on-going rewards include 6% back on groceries (this is where we come out ahead even with the $95 annual fee, which is why at the moment we don’t intend to cancel it), 3% back on gas and department stores, and then 1% on everything else. There is a $6,000 annual limit on the groceries, but conveniently one quarter we can use the Chase Card and get 5% back on groceries and then use the Am Ex for the other three quarters of groceries and stay within that limit. We now put restaurants for the 2% category for the US Bank card instead of groceries (although during the 3rd quarter we use Chase for restaurants because it’s 5%).

Now that we had three cards, I was feeling that was plenty. But then I needed to book an airplane flight to visit my parents this summer and ended up on a different airline than usual. When I was about to book the flights, up popped an offer for a branded credit card that would give me $100 cash back on that very flight. The rest of the benefits weren’t that great, but I went ahead and got the credit card simply to pay for that one flight. Now that the flight has been completed, I’ll cancel the credit card. (Haven’t yet just in case I need to book an emergency flight on this carrier in the next few months.)

Then, funny enough, because we got that credit card (which happened to be offered by Citi), Citi then tried to upsell us on another credit card, the Citi ThankYou Premier Card. It also has a $95 yearly annual fee, but it’s waived for the first year, and you can earn $500 in bonus points with a minimum spend, plus additional points for travel purchases.

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As it so happened, we need to book several flights for later this year and those, combined with paying our annual house insurance on this card, met the minimum spend. So we got this card, put the flights and the yearly house insurance on it, and got slightly over $575 in points between the bonus and the 3% bonus on travel expenditures. The only thing I didn’t really like with this one is that if you wanted to use those points for cash back, they were only worth 50% of the value. If you booked travel through their site, they were actually worth more than 100%, but I didn’t want to deal with that going forward, so instead we converted them into $475 in Target gift cards plus $100 at Red Robin. It will take us a while, but we do eat at Red Robin and shop at Target occasionally, so again it was basically free money. We’ll keep this card until our travel is completed, then cancel before we have to pay the annual fee.

After this one I was ready to take a break for while (although still planning in about 12 months to explore options again for additional reward and sign-up bonus opportunities), but then for our next Amazon order an offer popped up to get an Amazon Credit Card. This was something I had been planning on eventually doing because it gives you 5% back on Amazon purchases (had to wait until after the 10% cash back from the Am Ex card was done), so went ahead and did it now because they also offered a bonus of $70 cash back.

Now, at this point, this may sound a bit crazy to you, but it’s all pretty straightforward. As I mentioned previously, I’m not an expert on this, and there are many blog posts that explain how you can systematically go about this to optimize your rewards (especially if you want to use them for travel). But even just doing it haphazardly like we have can easily earn you more than $1000 in bonuses, plus probably several thousand a year in cash back. (There are enough cards out there, and you can even get the same card again after not having it for a while, that you can probably keep rotating through them and continue to get bonuses for quite some time.)

This only works if you’re fairly secure financially (helps you qualify for all these cards), and if you don’t succumb to temptation and use these cards to spend money you otherwise wouldn’t. It really does end up being pretty much free money at the cost of a very small amount of time, for items you would be buying anyway. Even if you don’t want to get multiple cards at the same time, make sure the one card you do have is the optimal one for your spending habits, then periodically see if it makes sense to switch to a new one that also works for your spending and allows you to earn the bonus.

Now, what should you do with all this free money? Well, it depends on your circumstances, but most of the good options involve investing it. I’d be happy to work with you to figure out the best way to do that.

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PERA Transition Year (aka, 93/93 or 110/110)

by in PERA, retirement, Uncategorized and tagged , , , | Leave a comment

Summary: For many public school employees, a transition year is a fantastic benefit that can make a huge difference in your retirement finances. It’s definitely worth finding out if your school district offers it, under what conditions, and then investigating whether it might be right for you.

transition

The working after retirement rules for PERA specify that retires can work up to 110 days in a calendar year for a PERA-covered employer after they retire (there’s no limit on non-PERA covered employment). While any PERA-covered employee can possibly take advantage of this, it works especially well for public school employees because our contract year naturally occurs half in one calendar year and half in the next, meaning you won’t exceed the 110-day limit in either year. Some – but not all – school districts offer this transition year benefit (sometimes referred to as 93/93 or 110/110), but often with special conditions. For example, in Littleton Public Schools you must have been continuously employed by the district for the previous 10 years in order to qualify, and the district does not pay benefits during the transition year. Check with your district to see if it’s offered and what conditions there may be. (In Douglas County Public Schools it is also working in the district the previous 10 years plus the permission of your supervisor.)

Despite this being around for a while, lots of folks are a bit unclear on the details (or unaware of it altogether), so I thought I’d use my experience as an example. I officially retired on June 1, 2017 and am now working a transition year with LPS. I currently have 29 years of teaching experience under PERA, plus I purchased 6 years of service credit, giving me 35 years of service credit that my retirement benefit is based on. Thirty-five years translates to 87.5% of my Highest Average Salary (HAS) if I choose option 1 under PERA (full benefit comes to me, but when I die the benefit stops). Since I chose option 3 (I get a reduced benefit, but when I die my spouse gets the exact same benefit until she dies), I’m getting about 91.5% of that which comes out to about 80.1% of my HAS. It’s important to understand that the factor that determines that reduction percentage changes, both according to your age and your spouse’s age and due to PERA’s current actuarial assumptions, but the changes are relatively small from year to year.

What this means is that during this transition year, I’m effectively getting 180% of the pay I would normally get, minus the amount I have to pay for my own insurance coverage. I’m adding on to my wife’s insurance (as is our daughter) so that comes out to approximately 5% of my salary, so I’m making about 175% of what I normally would. (Also, in LPS your pay for the transition year is “frozen” at what you made the previous year, so I do not receive the small cost-of-living raise I would’ve normally received.)

The other thing to keep in mind is that in addition to losing benefits, I’m “giving up” the service credit I would earn with PERA by working this transition year. I (and LPS) still contribute to PERA during this year, but I do not earn any service credit, which is effectively giving up 2.5% of my HAS. Because I’m 75% “ahead” from getting the benefit during my transition year, that’s equivalent to roughly 30 years of retirement. (Not exactly because of the time-weighted value of money, it is actually much longer than that because I can earn money by investing that 75% over those thirty years, but good enough for our purposes). So, with that back-of-the-envelope calculation, the “break-even” point is 30 years. If I live longer than that (which I have decent chance of), then theoretically not taking the transition year would work out better. In reality, because of the compounded investment returns that I can make on that 75%, it’s likely to be 40 years to break-even or perhaps a lot more, so for me the (financial) decision was pretty easy. (The fewer years of service credit you have, however, the closer you need to look at that calculation.)

There are other things to consider in addition to the “break-even” point when looking at the transition year option.

  • Because you have to retire from PERA and keep working for your employer, you have to know you are going to retire (and commit to it) about 16 months before you will actually stop working for your current employer. For some folks, that’s difficult to do.
  • As mentioned above, in many districts you’ll lose your benefits, which includes not only health, dental and vision, but things like life insurance and sick days (in LPS you get 5 sicks days for use during the transition year). So you have to figure out where you are going to get coverage (from a spouse, from LPS via COBRA where you pay the full premium, from PERACare, or on the individual market).
  • During the two calendar years that the transition year affects, your taxable income will increase (both your regular income and your PERA distribution are taxable), and there’s a decent chance it will move you into a higher tax bracket. (In LPS you get two “paychecks” – one from LPS, one from PERA – for a total of 14 months, 7 in each calendar year.) This is especially true in LPS if you have a lot of accrued sick days, as LPS gives you a payout on those as well, for me that’s over $9000 additional taxable dollars for 2017 (this is not PERA-includable salary). This is why many folks increase their contributions to 401k/403b/457 plans during these two years.
  • And it depends a lot, of course, on your personal financial circumstances and needs. There’s no one-size-fits-all when it comes to retirement planning.

So, should you take a transition year (assuming your district offers it and you’re eligible)? It depends, and if you choose to work with me we will look at this very carefully, but it’s definitely something to know about, investigate, and perhaps even make some financial decisions prior to retiring based on the knowledge that you will be receiving this benefit.

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