When Forrest Baumhover passed the halfway point in his military career, the Navy Supply Corps officer began planning for a second career — a decision that is setting the stage for a smooth financial transition to civilian life. Baumhover will retire from the military in 2017 and move seamlessly into a new career as a financial planner. He completed the coursework and exam to become a Certified Financial Planner while on active duty and began executing a personal two-year transition checklist, which included boosting his emergency savings, after deciding Tampa would be his family’s final duty station. Bauhover acknowledges his level of preparation is not the norm for most transitioning service members. “A lot of people take a break [from working toward a follow-on career] or they are focused on their military career — right, wrong or indifferent — until they realize they should have started planning for their next career a lot sooner,” he notes.
For many service members, the transition from the military to civilian world is filled with financial challenges, especially if a second career is not yet on the horizon. Here are ways to prepare financially for post-military life:
Build a Transition Fund
Whether you are separating or retiring from military service, you will need to stash extra cash to cover unexpected expenses and new bills, such as higher health care costs and unreimbursed moving expenses. While a typical emergency fund should be equal to three to six months of living expenses, a transition fund may need to cover six to 12 months of monthly bills. “Transition is one of those things you have to save for,” says Rob Aeschbach, a Norfolk, Va.-based financial planner and retired Marine Corps officer.
“You could go one month, three months or six months without a job. If transition is less than five years away, you need to save. You need some cash.”
Track Your Expenses
One way to find money to build a transition fund is to begin tracking your spending, looking for surprises, such as monthly payments to subscription music or gaming services, which could be redirected into an account earmarked for post-military life. “Whether you just finished boot camp or are approaching retirement after 20 or 30 years — unless you live a particularly frugal lifestyle, you need to know where your money is going,”
Aeschbach explains. “It will probably take 90 days to track where you spend your money. How many times did you go to 7-Eleven to get an energy drink?”
Recognize the Impact of Taxes
While military pay has built-in tax advantages, your civilian and military retired paychecks may shrink under the weight of federal and state taxes. Since most of your income now will be subject to taxation, your tax bill also may be bigger than expected. Cherie Stueve was taken aback by the tax bill her family received for 2008, the year her husband Tim retired from the Coast Guard. He had received his final active duty paycheck in August and had begun in late June a federal service career, meaning the family received a combination that year of active duty, military retired and civilian pay as well as Cherie’s income. “I’m an accountant, yet I did not fully understand how all of these income sources would work together,” Stueve said. “We kept our usual W4 withholding status that had served us so well for many years in the Coast Guard… The total tax bill was nearly five figures.” Taxes need to be in the forefront of transitioning service members’ minds when negotiating salaries and setting up tax withholdings.
“The impact of taxes is one of the biggest things you have to be aware of when transitioning,” Aeschbach notes. “I’ve seen O-4s get out and get good-paying jobs and not be better off because of taxes. It affects families the most.”
Understand Unemployment Benefits
Military members may be eligible for unemployment benefits after leaving active duty service, receiving compensation under the Unemployment Compensation for Ex-service members program. Benefits are based on military wages, but receipt of military retirement pay or separation pay will affect the amount of compensation you will receive.
Because each state manages unemployment benefits for its residents, applications are made through your state employment office. If you move to a new state after separating or retiring, filing will be in the state where you now live.
Replace Your Life Insurance
Servicemembers Group Life Insurance (SGLI) is an under-theradar-military benefit, supplying $400,000 worth of life insurance coverage for a $29 monthly premium, including Traumatic Injury Protection. Transitioning military have the option to transfer their coverage to Veterans Group Life Insurance (VGLI). However, doing so is not always a financially sound move. “So many people have the misconception SGLI will automatically convert to VGLI or they think they will go ahead and get VGLI because that’s the natural follow on,” said retired Marine Corps Lt. Col. Shane Ostrom, Deputy Director, Financial and Benefits Information for the Military Officers Association of America. “But it’s probably not what you want because it gets expensive over time. It goes up in price every five years.”
Because VGLI premiums are based only on age, commercial-level, premium-term life insurance policies may offer higher coverage for a lower price, especially for older veterans. On the other hand, VGLI may be the right choice for veterans with pre-existing health conditions who may not pass an insurance company health physical. If you apply for VGLI within 240 days after separation, there is no requirement to answer questions about your health.
Opt in to SBP?
One of the biggest decisions military One retirees make is whether to opt in to the Survivor Benefit Plan (SBP). It also is one of the most highly debated. The SBP is annuity that insures a surviving spouse continues to receive up to 55 percent of a military retiree’s gross retired pay. The monthly premium — paid with pretax dollars — is 6.5 percent of your base amount, so as the base amount increases with cost of living adjustments, so does the premium. Premiums end at age 70 if a retiree has made 360 monthly payments. If a spouse dies, premiums are suspended, but may be resumed if a retiree remarries.
The Stueves decided not to participate in the SBP because of the dent it would make in Tim’s retired pay, electing instead to purchase a large term-life insurance policy. Cherie said they decided a large lump sum payout would be more valuable than SBP’s monthly payments because it would enable her to relocate, contribute toward her children’s college costs and invest the balance to generate on-going income.
While every family must weigh the pros and cons of SBP, Ostrom notes SBP provides a level of simplicity that can’t be beat. It eliminates the challenge of estimating how much insurance will be needed to keep pace with inflation and does not burden the surviving spouse with making proceeds last a lifetime. “You may be able to go cheaper on insurance but you are adding layers of complexity you don’t have with SBP,” Ostrom says. “With SBP, you are getting simplicity, a guaranteed income with COLA and peace of mind on the part of the survivor.”
Take Care of Your Health
Health care coverage typically ends the day you leave the military. However, the Continued Health Care Benefit Program (CHCBP) can provide temporary health coverage for 18 to 36 months and act as a bridge between military health benefits and a civilian health plan. It also meets the minimum essential coverage required by the Affordable Care Act. The premium-based coverage provides the same coverage as TRICARE Standard, including prescriptions.
Separating full-time National Guard members, Selected Reserve members and retired Reserve members also may be eligible for CHCBP, as are spouses and children up to age 26. For information, go to www.humanamilitary.com
Now more than two years into military retired life, Navy spouse Kellie Stobie can outline a list of mistakes her family made when transitioning, beginning with their decision to spend several months living in military housing in Hawaii after her husband’s retirement.
Though the couple had built a five-figure transition fund, they spent $15,000 in rent and utilities because they choose to job-hunt from Hawaii. “That was probably our biggest mistake,” Stobie says. “We should have left as soon as he retired and figured out the job
thing somewhere cheaper.”
Stobie also did not anticipate the multitude of new expenses they would face as civilians, ranging from a $790 car registration bill to $190 per season fees for youth sports leagues. The loss of several active-duty military discounts added to the money drain.
“Save as much as you can,” she advises. “Whatever you think you need, save double.”
—Andrea Downing Peck is a freelance writer who is married to a retired service member. They currently live in Washington state.