As servicemembers (SMs) in the Army, Navy, Air Force, Marines, Coast Guard, National Guard, and now Space Force, your service likely involved a lot of hard work, discipline, and deployments. Your transition out, whether it is after a few years or retiring after decades, can be filled with complicated decisions. These challenges are vastly different from the challenges you faced throughout your time in the military. You may not have focused your time or attention on developing expertise in financial matters and delegated these responsibilities to a spouse or family member.
The military helps transitioning SMs be aware of money matters in the Transition Assistance Program (TAP). However, this is a one-size-fits-all program. There are many opportunities for learning beyond this program. The four areas that are most important to understand are cash flow, insurance, investments, and taxes.
Cash flow
The most important thing for you to understand is that your final paycheck may not arrive on the final pay day as expected. The military audits that final paycheck to be sure it is correct. This may include verifying you turned in all your equipment, for example. This can take days, weeks, or months. Add to this, depending on your role in the military, finding a new civilian job can be a challenge, as communicating your experience and soft skills such as leadership, teamwork, resilience, loyalty, and grit to a hiring manager is harder than you may think. There could be a significant gap in cash flow during this transition. There could also be many new expenses, such as new civilian clothes and new home expenses. Funding an emergency fund (or a transition fund) cannot be over emphasized.
Insurance
Military health (including dental and vision) insurance is pretty good but separating from the military can yield big changes. As a veteran, you have access to veteran healthcare facilities (through the Veterans Administration (VA)), but your family does not usually continue to have access to healthcare after separation. Retirees are an exception to this rule as their families may be eligible for continued healthcare coverage through TriCare.
Military life insurance (Servicemember’s Group Life Insurance (SGLI)) is a term policy up to $500,000, and as a new veteran, you have the option to convert that policy to a veteran policy within a year+, or a civilian policy within 120 days of separation.
One of the most important decisions that you must make as a retiring SM is whether to sign up for the Survivor Benefit Program (SBP). This is an annuity that will pay a portion of your monthly pension payment to your surviving spouse should you die first. This is such an important decision that if you choose not to do it, your spouse must sign a document acknowledging this, in the presence of an official witness. Generally speaking, the SBP is less expensive than an equivalent civilian annuity, so the decision revolves around future expectations for the health and longevity for you and your spouse. It is a tough decision in part because understanding the financial value of the program is challenging, and in part because your crystal ball is foggy when you try to see your future.
Investments
The Thrift Savings Plan (TSP) is the workplace retirement plan that the military uses, with matching up to five percent. The contributions are pre-tax unless the contributions were made while deployed to a combat zone or into the Roth TSP. Once you transition out of the military, you are eligible to rollover the TSP into a Traditional and/or Roth IRA, though this can be complicated, especially if there are combat zone contributions. I wrote a very in-depth article on the TSP for fellow financial planners, and my summary of the pros and cons of a rollover are below.
Taxes
Taxes after retirement is an important vulnerability that I have seen affect new retirees many times. Retirees are relatively young and often find themselves in an encore career. This allows you to have multiple streams of income. Your pension is taxed. Your disability income is not taxed at the federal level (check your states on this). Your encore civilian career income is taxed. Your spouse’s income is taxed. The withholding on each, however, is based only on the tax bracket for each individual source’s expected annual income. When you add it all up, however, it will likely bump you into a new tax bracket. You may find that the withholding for each was insufficient, and could end up with a big tax bill your first year of retirement. This can really surprise the un-prepared retiree. The IRS has an online Tax Withholding Estimator that is a useful tool for this purpose.
Conclusion
Change is always hard. Transitioning out of the military into a civilian world that does not always understand what that service was like, even if we all value and appreciate it, is even harder. We consider setting you up for future financial success our fiduciary duty. Schedule a complimentary call with us today.