military retirement finances

Planning for Finances after Retirement

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by Andrea Downing Peck

A military pension is a financial blessing, but for most career military and Reserve/National Guard members, it falls short of providing financial independence because family bills don’t simply disappear the day you leave the military.

Car loans, credit card balances, mortgage payment and other expenses will transition with you into civilian life, but these smart money moves can help reduce financial stress:

Don’t be surprised

Know how much your retirement pay will be, realizing that 50% of your base pay will be equal to less than half your military take home income, which is boosted by tax-free housing and food allowances as well as special duty pays. “I still find people getting close to the 20-year mark and they don’t understand the math and how much they are going to be paid in retirement,” says Marine Corps veteran Rob Aeschbach, a Certified Financial Planner in Norfolk, Va. Retirement pay calculators at http://militarypay.defense.gov/Calculators/ can predict retiree pay for active duty and Reservists.

Count every dollar

Before saying “Yes” to a civilian job, determine whether your combined income — civilian salary plus retirement check — will equal or exceed your final military compensation package, which included up to $400,000 of low-cost life insurance, medical and dental coverage and a chunk of lifestyle-boosting tax-free income. State income taxes and the cost of living in your military retirement city also can alter your bottom line. “There are multiple states that don’t tax [military] retirement income,” explains military veteran and current Air National Guard member Ryan Guina, who writes the personal finance blog The Military Wallet. “You could be in a state that has a very high income tax and then move to a state where your retirement pay is no longer taxed, or the situation could be flipped.” A Civilian-to-Military Take Home Pay calculator can be found at http://www.moaa.org/calculators/MilitaryPay.html.

Prepare for a single payday

Your retirement pay will be deposited on the first of the month, but your expenses will be spread over all four weeks. For that reason, Guina recommends retirees begin budgeting and build a transition fund as they prepare for a single monthly retirement check. “I would strongly suggest having one to six months living expenses saved and set aside, depending on how far you are in the transition process,” he states. “Even someone who is retiring and starts a job the next day isn’t going to get paid for two weeks and your retirement check won’t hit until the first of the next month.”

Replace Service members Group Life Insurance (SGLI)

Most career service members reach retirement age in their early 40s, which means life insurance remains an important part of their financial plan. “Unless your children have already graduated from college and your spouse is firmly in a great career, which is pretty unlikely for most service members, you are going to have a life insurance need,” Aeschbach says. After leaving the military, veterans have 240 days to sign up for Veterans Group Life Insurance (VGLI) without needing a medical exam. However, purchasing commercial term life insurance may be less expensive for military retirees with no pre-existing health conditions. If opting for private insurance, Guina suggests “locking in” a plan prior to leaving the military since a service-connected disability rating can affect rates.

Don’t touch your Thrift Savings Plan (TSP)

While cashing out some of your TSP account in the event of an emergency or to cover transition expenses may seem like a good option, Guina recommends retirees “leave their money in the TSP for as long as they can.” Doing so, allows you to continue to benefit from the plan’s low administrative costs and tax-deferred earnings. Not only will federal income taxes (and possibly state income taxes) be due on an early withdrawal, but withdrawals prior to age 59.5 also will be subject to a 10% penalty on the taxable portion of the distribution. “Most people are going to be giving up one-third of what they take out in taxes and penalties, and they are missing out on all the future [investment] earnings,” Guina says. “They are hamstringing their future self.”

Say “Yes” to Survivor Benefit Plan (SBP)?

SBP provides a spouse (or other designated beneficiary] with 55% of the selected base amount of your retirement pay. Premiums are equal to 6.5% of the base amount and are paid with pre-tax dollars. As the base amount increases with cost-of-living adjustments (COLA), the monthly premium also rises. SBP participants who reach 70 years of age or older and have made 30 years of payments are considered “paid-up” and pay no additional premiums. While a level-term life insurance policy with a large lump sum payout may be a better option for some families, Aeschbach states, “SBP is almost always a very good deal. People that tell you otherwise are usually in the business of selling insurance.”

Apply for a VA Mortgage

If your retirement plans include a home purchase, consider a VA loan, which may have lower closing costs and does not require a down payment or private mortgage insurance. In addition, veterans with a service-connected disability rating are exempt from paying the VA Funding Fee.