Protect and Defend: How Senior Military Personnel Can Achieve Financial Freedom
Military members face unique financial challenges as they approach retirement, but these 4 strategies can help them secure their future.
Curtis Sheldon had two missions while serving in the U.S. Air Force: protecting his country and planning a smooth transition to civilian life.
Military members face financial planning challenges as they approach retirement. They could be facing major life changes, such as second careers, relocations and changes to their benefits. Certain tax breaks and potentially free housing, for instance, end when service members exit the military, which makes planning ahead key to a successful next stage.
Long before retiring from his 27-year career as a fighter pilot, Sheldon started networking, saving and investing. By the time he retired, he’d earned a master’s degree in financial planning and decided to launch his own financial planning firm.
“This is a time to set yourself up for your ultimate retirement and make sure nothing sneaks up on you,” says Sheldon, a certified financial planner and president of C.L. Sheldon & Co.
Here are four tips to help senior service members fortify their finances.
1. Establish a Transition Fund
“Finding a civilian job takes time,” says Jonathan Wilson, 38, a national accounts manager at Capital Group who served 16 years as a Navy SEAL. “You need a rainy day fund.”
Wilson, who co-founded the SEAL Future Fund, a nonprofit that helps Navy SEALs successfully transition to civilian life, says it can take SEALs about six months to find civilian employment.
A Department of Veterans Affairs study found that 53% of transitioning veterans applied for unemployment benefits and received, on average, 20 weeks of unemployment pay.
“Transitioning service members never have been in the civilian job market, so they learn as they go through it,” says Christopher Plamp, interim CEO of Hire Heroes USA, a nonprofit organization that helps U.S. military members, veterans and military spouses find quality careers in the civilian workforce. “This is a major barrier to employment and can delay getting a job.” A substantial savings account can provide a cushion during that time.
- Experts recommend accumulating six to nine months’ worth of expenses.
- “Save as much as you can, as early as you can,” Wilson says. Put at least 10% of your pay into a liquid account, such as a high-yield savings account or a money market account. Use an investment calculator to see how your savings could grow over time.
2. Amp Up Retirement Savings
Many in the military look forward to collecting their well-earned pension. Those who serve for 20 years are entitled to pension pay that equals about 50% of their final salary. The payout can be even greater for those who serve longer.
In reality, however, fewer than 20% of service members have careers of more than 20 years, so most are not eligible for a pension. Even those who expect to receive a pension might want to boost their retirement savings to cover their future expenses.
- Max out a thrift savings plan (TSP). Offered by the federal government, a TSP is a tax-advantaged retirement account that works much like a 401(k). Traditional or Roth contributions are made via payroll deductions. The TSP has very low costs, making it a good option for military savers. “The thrift savings plan is the best option while you’re still in the service,” says George Reilly, a certified financial planner at Safe Harbor Financial Advisors who served for 22 years in the Navy.
- Consider opening a Roth individual retirement account (IRA). For those who expect to be in a higher tax bracket later on in life, contributing to a Roth IRA could make sense. A Roth IRA can be a particularly advantageous option for service members who receive combat zone pay. That tax-free income can be invested in a Roth IRA tax-free, and your earnings likewise are not taxed. “It doesn’t get much better than that,” says Sheldon, who wrote the book Well & Faithfully Discharged: Financial TTP for Military Retirement.
- Assess your retirement readiness. A retirement planning calculator can give you a sense of whether your current retirement savings plan is on track and can help you calculate how much you will need to earn from a post-military job to meet your goals.
3. Get a Handle on Future Tax Obligations
Tax bills generally increase for military personnel after they retire from service because they lose access to lucrative federal income tax breaks such as tax-free housing allowances.
The state income tax bill could be higher as well. From a tax perspective, active service members remain residents of the states they came from when they enlisted, regardless of where they are stationed. That can be beneficial for those who come from states that have no income tax. However, that special provision to avoid state taxes is not available to civilians.
“Expect total tax bills to be double what you’re paying now,” Sheldon says. “This is the No. 1 pain point that brings people to my office.”
- Adjust your post-military budget. It’s important to factor in higher tax bills. “Review your spending plan and see what changes you will need to make,” Reilly says.
- Keep taxes in mind during job searches. Understand that you will have to earn much more as a civilian to equal the after-tax dollars earned in the military.
4. Make Sure Loved Ones Are Protected
- Start thinking about life insurance. When you’re no longer covered by the military’s group life insurance plan, you’ll have two options: Convert to a veterans’ group life insurance policy or shop for a private plan. Veterans insurance might be the better choice if you have health issues, since a physical is not required. If you’re in good health, however, you might want to shop around for a (likely less expensive) private life insurance policy.
- Double-check that you’re auto-enrolled in the survivor benefit plan. Your pension pay will end when you die. One way to protect your loved ones from financial setbacks when you’re gone is to ensure you're enrolled in the survivor benefit plan. In exchange for a lower pension payout for yourself, your beneficiaries will continue receiving up to 55% of your pension pay.
Those who serve their country need to take care of themselves as well. With planning and discipline, they can look forward to a more secure financial future.