For servicemen and women, transitioning to civilian life can be challenging. While they may not need to worry about their next deployment, they do need to shift their focus to their financial wellbeing at home. And while those who have served have many resources at their disposal, navigating benefits, wealth planning and government-sponsored programs can become complicated.
When working with members of the military it is important to understand they are transitioning from a place where things like housing, food and family are taken care of to a capitalist business world where they need to make a profit and take care of necessities themselves, says Patrick Vaughan, director of the RBC Wealth Management-U.S. East Division and executive sponsor of the firm’s veteran-focused employee resource group.
Veteran Marcus Hull, a financial advisor with RBC Wealth Management-U.S. in Westminster, Md., says that members of the military, just like other groups, have varying levels of need when it comes to wealth planning.
“Sometimes we need to start from scratch and sometimes we just need to build on their knowledge base,” says Hull. “Some of the people I work with ... have hit rock bottom in their lives. Often, financial concerns are a contributing factor to their problems.”
Transitioning to civilian life
Moving from active duty to a civilian lifestyle can mean moving to a new location and starting a new career. Hull says servicemen and women receive a “terminal leave” package that provides a paycheck for 30 to 90 days during that transition to civilian life. He says the military typically pays for the first post-military move, too.
“Use your time and your pay effectively,” says Hull. “You should focus on getting all your VA paperwork in order. VA education benefits can be more than $100,000 from the Post 9/11 GI Bill, so it's smart to take advantage of that and make the required school arrangements. If you need to make a disability claim, don't wait to start moving forward on your life, because getting those funds can take years.”
If you start a new job right away and are getting a paycheck as well as your terminal leave payment, Hull says this would be a good time to build up a robust emergency fund and investment account with the extra income rather than spend it.
Military retirement benefits
While servicemembers who stay in the military for 20 years or more earn a pension based on their years of service, the retirement plan for active duty members of the military recently changed in recognition of the fact that 83 percent of servicemen and women don't stay for the full 20 years.
“Active duty and reserve members of the military now have a six-month window to decide if they want to stay in their current retirement plan or switch to the new Blended Retirement System (BRS) that includes a defined benefit pension as well as a defined contribution plan with contributions to the government's Thrift Savings Plan (TSP) and continuation pay after 12 years of service,” says Hull.
While members of the military have been able to contribute to the TSP since 2001, the new option, which started in 2018, includes a government match of up to five percent of a member's contribution. In addition, all servicemembers will get at least one percent of their base pay contributed to their TSP by the government.
Servicemembers also can opt for a Survivor Benefit Plan, which Vaughan says is critical to protect your family. The Survivor Benefit Plan, which allows your pension to continue to be paid to your beneficiaries after you die, such as your spouse and your children, is free during your active duty service. As a vet, you must pay a fee for the Survivor Benefit Plan, capped at a maximum of 6.5 percent of your gross retirement pay.
“Sometimes people don't want to pay the fee on their retirement income because they would rather have all the money to spend,” says Vaughan. “But if you don't take the Survivor Benefit, you need to make sure you have a really good life insurance policy to provide for your family.”
Vaughan says the best plan for veterans, who typically begin a career in civilian life after 20 or 30 years in the military, is to invest their entire pension and live on their civilian income so that they can have a robust retirement fund.
Foundations for financial success
The pillars of financial security, including savings, insurance and planning for future expenses, are just as necessary for members of the military as for civilians. However, veterans have some choices and available programs that are a little different from civilian options.
“It helps for people in the military to work with a financial advisor who is familiar with the vernacular of the military,” says Hull. “There are countless nonprofit organizations to help military members and veterans with everything, so it's smart to avail yourself of the information that's out there and get financial advice from someone experienced with the military.”
Wealth planning topics to address include:
1. Emergency savings
The first thing everyone should do is to pay yourself first, says Vaughan, who says it can be hard but necessary when a veteran gets a first civilian job to build up cash reserves. Hull suggests aiming for three months of expenses in an emergency fund if you have a stable job or six months of expenses if you work on contract. The higher amount also makes sense if you have dependent children or a spouse without a career.
2. Life insurance
The U.S. military offers a group life insurance plan for families, which Vaughan says is valuable for veterans with disabilities or with conditions that make it difficult to qualify for civilian life insurance. However, he recommends that a regular term life insurance policy is often less expensive for those who qualify. Vaughan says that many members of the military apply for some form of disability income when they make the transition to civilian life. He suggests applying for life insurance first, before requesting a disability rating.
3. Avoiding debt
Keep all your fixed payments, such as your housing costs and your car payment, as low as possible to give you flexibility and to allow you to build up your savings, says Vaughan. Building up credit card debt and spending money you don't have can lead you on an unsustainable path, so Vaughan recommends avoiding the use of credit other than in a true emergency.
4. Housing choices
The VA mortgage program offers great rates and can allow veterans to buy a home without a down payment, but Vaughan warns veterans should wait to buy a home until they are certain about where they plan to live for the next seven years. Buying ties you to a geographic location and restricts your ability to change jobs, says Vaughan.
5. Retirement savings
Even though veterans have a pension, that doesn't mean they can skip retirement planning, says Hull. First, veterans who have money in a TSP account need to decide whether to roll those funds over into an IRA. In addition, Hull recommends maximizing your contributions to your new employer's retirement account, particularly if the employer matches your contributions.
“People in the military need to watch out for a false sense of security,” says Hull. “They assume because they stayed in for 20 years and will get a pension that they're set for life, especially if they get a disability pension. They forget that their disability pension shrinks slightly when their kids turn 18 and that the disability pension isn't part of the Survivor Benefit Plan.”
Planning for the future and taking advantage of all the resources and programs available will make the transition to civilian life that much smoother.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.