If you serve in the military for at least 20 years, you can receive a valuable pension for life. But most people don’t stay that long, and they end up making the transition from military to civilian jobs in the middle of their careers. And because military retirement pay at 20 years is just 50% of your base pay (or 40% if you’re in the blended retirement system), many people who retire from the military spend several years in other jobs before they ultimately stop working — especially since they may retire from the military in their 40s and 50s.
You’ll experience some significant changes in your finances when you shift from a military to a civilian job – you’ll have more flexibility to decide where you live and what you do, but you’ll also lose some valuable benefits and tax breaks, and you’re likely to have less job stability. The following steps can help you make a smooth transition to your post-military career.
Take Advantage of Transition Resources in Advance
Start to plan for this next phase years in advance. Think about how your military career can translate into civilian work, start networking, and take advantage of the resources and counseling from the Department of Defense’s Transition Assistance Program 18 to 24 months before you plan to leave the military. Each branch of the military also has its own transition assistance program. If you’re planning to go back to school, find out how you can use military education benefits to gain skills for your new career. If you’re planning to go to work, you should start searching for a new job at least six months before you plan to leave the military. The Department of Labor Veterans’ Employment and Training Service and Veterans.gov can help you find job search and training resources in every state. The U.S. Small Business Administration can also help veterans who want to start businesses after they leave the military.
Build Up a Transition Fund
In addition to a regular emergency fund, build up a transition fund that can cover at least six months of expenses in case it takes a while to find a new job. “Having cash reserves goes a long way towards insulating the family against worry and fear,” says Patrick Beagle, a retired Marines helicopter pilot and now a certified financial planner in Springfield, Va. “A cash reserve is a security blanket for the family.” Keep the money in a safe and accessible account that you can tap easily if needed to pay your bills.
It also helps to pay down high-interest credit card debt while you’re still in the military, so you have fewer expenses to worry about after you leave.
Calculate Your Target Civilian Salary
Calculate how much you’ll need to earn in the new job to maintain the same standard of living. Your income from a civilian job will need to be higher because you’ll no longer receive a tax-free housing allowance, and you may have to pay for health insurance, life insurance, and other benefits.
“Evaluating the impact of a transition from the military to civilian life should be part of every transition checklist,” says Beagle. “Understanding how your pay will change, post-military tax issues, health care, education for your children, and integrating into a non-military community all need to be considered.”
You may have new state income taxes after you leave the military: You’ll have to pay income taxes in the state where you live, even if you had established a domicile in a lower-tax state while you were in the military. Some states also tax military pensions while other do not, but that doesn’t necessarily mean your overall taxes will be lower . Some states that don’t tax military pensions, for example may have higher property taxes.
Replace Your Benefits
Health insurance could become a big expense after you leave the military. You may be used to getting coverage for free, and if you do stay for at least 20 years you can get low-cost coverage under TRICARE. But if you don’t retire from the military, you usually need to budget for much larger healthcare costs. You may be able to find a new job with health insurance benefits, or you may need to shop for health insurance on your state marketplace (find links at Healthcare.gov) to provide coverage until you qualify for Medicare at 65. Depending on your income, you may be eligible for a subsidy to help pay your premiums. You should also find out if you qualify for VA health care benefits.
You may also need to replace your life insurance. Active duty service members can get low-cost life insurance through the Servicemembers Group Life Insurance Program, but that coverage stops when they leave the military. They’ll have a limited amount of time to convert the policy to Veterans Group Life Insurance with no medical exam, but the premiums are much higher and can rise with age. If you don’t have health issues, you may find a better life insurance deal on your own. Apply for new coverage before you leave the military so you know whether or not you qualify while you’re still eligible for VGLI.
Keep Your TSP or Roll It Over
Decide what to do with your Thrift Savings Plan after you leave the military. You can keep it where it is and benefit from the low costs, or you can roll it over into an IRA that has more investing options. If you start a new job, you may be able to roll over the balance to a new 401(k) or other plan at work. Either way, the money continues to grow tax-deferred for the future as long as it remains in a retirement-savings plan.
Any of those options are better than cashing out the TSP, which could leave you with a tax bill and a 10% early-withdrawal penalty for TSP distributions before age 59 ½ (unless you leave the military at age 55 or older). See Tax information About Payments From Your TSP Account for more information.
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