This content is provided courtesy of USAA.
By June Lantz Walbert, CERTIFIED FINANCIAL PLANNER™
The term "life event" often conjures up images of wedding dresses, binkies and diapers or even sailboats that will carry you through the golden years to exotic locales. But here's another life event that may not be as obvious: swapping military boots for civilian shoes. That's a big change no matter when it happens but one that's manageable and full of exciting prospects. Being prepared is critical though, especially in this era of high unemployment.
Here are some things to think about.
Deliver the goods.
Many military retirees haven't interviewed for a civilian job in decades, if at all. Just like calling for fire, jumping from planes or piloting a jet, interviewing is a specialized skill. You have to learn the ropes and practice. Government programs such as the Transition Assistance Program and Transition Boot Camp are a must. Hiring a resume writing pro, enrolling in an interviewing skills class and using tools such as Military.com's skills translator can help you summarize your military skills and experiences that will make sense to a civilian hiring manager. Finally, don't underestimate the power of friends and acquaintances. Networking with them can produce wonderful tips and ideas, maybe even a job.
Know that all paychecks are not created equal.
In the military, stacked on top of base salary is an array of allowances including a generous tax-free housing benefit. So, as you compare civilian employment offers to life in the military, don't forget about those additions to your military base pay. As a retiree, you'll have access to TRICARE, but as a civilian you may now be paying for life, medical, dental and disability insurance expenses that could put a significant dent in your pay. Be sure to consider this as you negotiate your salary because pay in the civilian world is negotiable.
Build a transition fund.
If you're very lucky, you'll enjoy your hail and farewell on Friday and walk into your new civilian job on Monday. But in this economic environment, such a scenario may not be realistic. Your job hunt should start well before you retire from service. It's a wise idea to have nine to 12 months of living expense money saved to bridge any potential financial gaps.
Get it covered.
Life insurance is often overlooked during transition, likely because it's unpleasant to consider one's premature demise. But it should be evaluated as a component of a solid financial plan. The military offers a maximum of $400,000 Servicemembers' Group Life Insurance and $100,000 for spouses while serving. Veterans' Group Life insurance is an option upon leaving the service and if applied for within 120 days of retirement, no medical underwriting is required. But due to cost, VGLI is generally best only for tobacco users and the chronically ill or injured. Retirees in good health should consider a commercial life policy at least six months before retirement to ensure they can get the coverage they need to protect their family at a more affordable price. An added benefit of a non-employer provided policy is it goes wherever you go meaning if there's a lapse in employment your family is still covered. The life insurance calculator at va.gov can help you to determine your need for life insurance.
Take care of the one you love.
In addition to evaluating life insurance consider whether the Survivor's Benefit Plan makes sense for your situation. In many cases, it can provide a cost effective way to provide a monthly income from your retired pay for your spouse should something happen to you. The premiums are paid with pre-tax dollars, and the beneficiaries' benefits receive cost-of-living adjustments. The only true way to replace SBP is via permanent life insurance. After crunching the numbers countless times, I've determined there's no way to beat SBP's price and peace of mind. It's important to note that this is generally a permanent decision that has to be made on the spot as you sign retirement paperwork. If you decide to sign up for SBP, you can opt out between months 24 and 36. On the other hand, if you decide against SBP, you're likely out of luck. There have been rare occasions when a sign up "window" has opened, but you would then be required to pay all back premiums in after tax dollars while making current premium payments as well. It's best to make a well-thought-out decision from the get go.
Roll it over.
Many military members take advantage of the Thrift Savings Plan, a tax-advantaged way of saving for retirement, and wonder what to do with the investment account upon leaving the service. You have basically three tax-free courses of action to consider:
- Leave the funds within your TSP account.
- Roll your TSP into a traditional Individual Retirement Account.
- Roll your money over to your new employer's plan.
Again, all of these choices are tax-free and allow for the continuation of possible tax-deferred compounding. Any tax-free combat pay contributions included in your TSP balance can be rolled right into a Roth IRA to maintain their tax-free status and, over time, accumulate tax-free earnings. This would not generate any income taxes.
The third choice makes sense if your employer's plan offers a quality investment selection as your accounts would be streamlined and you would retain borrowing power from the TSP balance. You may be able to access your money at a younger age if you roll them over to a future employer's plan. An added benefit of many civilian retirement plans is you may be offered a "matching contribution." That means if you contribute a certain percentage of your salary, your employer will match it. There is a fourth choice, but one I reluctantly mention: cashing in your TSP. That is generally never a good choice particularly for those under age 59½ as income taxes would be due plus a possible 10% penalty. However, I generally suggest maintaining the account's tax-deferred status and the opportunity for continued growth.
This transition period also is an ideal time to take a retirement snapshot and assess your goals. Putting a financial plan in place will help you understand what your true retirement's lifestyle expenses will be. And you'll have a clearer picture regarding whether you need to pay down debt or save and invest more during your remaining work years. The good news is your military retirement paycheck could be effectively leveraged to do just that. Congratulations on ending one career and starting another. Good luck and thank you for your service.
Extra: Transition Checklist
Nearing Military Retirement
- Create an estimated "civilian" budget. Don't forget to add in costs for items like rent or your home mortgage payment.
- If needed, start saving funds to bridge any gaps that may occur during your job hunt.
- Research and determine your last PCS (check out www.usaa.com/BestPlaces for a few ideas).
- Determine the cost benefit of buying versus renting a home post-retirement.
- Evaluate your needs for life insurance.
- Research alternatives for a commercial life insurance plan and how to replace SGLI so there's no gap in coverage.
- Consider signing up for the Survivors Benefit Plan (SBP) as you exit the military.
Starting Your Civilian Job
- Research alternatives for medical and dental insurance provided through your new employer.
- Compare to TRICARE to find the best value.
- Evaluate your employer's offerings for disability insurance.
- If your new employer does not offer coverage, research additional alternatives.
- Evaluate your new employer's retirement plan and associated benefits against your TSP. Consider the benefits of rolling:
- Your TSP into your new employer's retirement plan.
- Your TSP into a separate IRA.
- Any tax-free combat pay into a Roth IRA.
- Update your budget and adjust your emergency fund savings, if necessary.
- Update or create a retirement plan based on your new earnings.
- Look for an advisor that can help you with your retirement planning such as a fee only CERTIFIED FINANCIAL PLANNER™ practioner.
- If you move to a new state, assess your estate planning documents for potential changes.