Help Retiring Military Clients Transition to Civilian Life
July 14, 2021 | Stacy J. Miller, CFP® | Rethinking65
Stacy Miller, CFP® recently wrote an article titled Help Retiring Military Clients Transition to Civilian Life for Rethhinking65; for advisors helping clients live well with purpose.
Financial planning for the retiring military client can be quite different than your other clients. There are several vulnerabilities that can make this military to civilian transition challenging.
It is important that planners understand the landscape for this population. Retiring service members can be as young as late-30’s or early 40’s (think enlisting at 18 and retiring after 20-years), but most are in their 40’s and 50’s. If they are married, it is likely that their spouses have been the financial managers in the family due to so many deployments. Also, veterans and service members are a targeted demographic so they may have seen the worst that our industry has to offer (fraud, non-best interest, bad advice). Finally, the military loves acronyms. You will note that I include the acronyms throughout so you will understand what they are talking about when they speak in all letter combinations.
Note that the military does prepare transitioning service members through the Transition Assistance Program (TAP). This is a one-size-fits-all program that all retiring service members must go through. There are many opportunities for planning beyond this program, however.
Cash flow during the transition is the most important concern. Some retirees will have a pension and possibly non-taxed disability payments. However, the Department of Defense, like most industries, is moving away from the defined benefit plans (what they call the Legacy Retirement System or Uniformed Services Retirement System) into defined contribution plans. Retiring service members at this point might have the Blended Retirement System (BRS), which is a combination of the pension and Thrift Savings Plan (more on this shortly). The point is cash flow after retiring is becoming less secure. Add to that, their final military paycheck may not arrive on the day they expect it, because the military audits it to be sure it is correct. This can take days, weeks, or months! Also, these relatively young retirees are looking for another job, but despite their incredible soft skills such as leadership, teamwork, resilience, loyalty, and grit, they have a hard time communicating their value to civilian hiring managers. Therefore, the next paycheck could take months and even years! I have a client that took 18-months to find his first civilian job despite doing all the right things to prepare. Finally, there will likely be additional expenses during this transition such as new civilian clothes for the new civilian roles and new home expenses if they move. So, with an uncertain final military paycheck, additional expenses and an uncertain next paycheck, the value of an emergency fund (or transition fund) cannot be over emphasized.
Retiring service members have the option to continue health, dental and vision insurance through TriCare (health) and others. This is very good insurance and generally less expensive than the civilian plans that may be offered through their next job. They also have the option to continue their military life insurance, called Servicemember’s Group Life Insurance (SGLI) before retiring and Veteran’s Group Life Insurance (VGLI) after retiring. Generally speaking, term life policies are going to be less expensive than VGLI, however, a retiring service member may have service-connected health issues that puts a term policy out of reach. In this case, VGLI is an excellent alternative because there is no medical exam required. A client who was 49 years old and 90% disabled when he retired did not have life insurance outside of SGLI, so he chose VGLI because the health issues that warranted a 90% disability rating prevented him from qualifying for a term policy.
One of the most important decisions that a retiring military service member must make is whether to sign up for the Survivor Benefit Program (SBP). This is an annuity that will pay a benefit to the surviving spouse should the retiree die first. This is such an important decision that if the service member choses not to do it, the spouse must sign a document acknowledging this, in the presence of an official witness. Generally speaking, the SBP is less expensive than an equivalent civilian annuity, so the decision revolves around future expectations for the life and health of the service member and his or her spouse. It is a tough decision for some, in part because understanding the value of the program is challenging, and in part because their crystal ball is foggy when they try to see their future. Most of my clients have chosen to accept the SBP.
Investments and the Thrift Savings Plan
The Thrift Savings Plan (TSP) is a workplace retirement plan that is very similar to a 401(k) with matching up to five percent. In the Blended Retirement System discussed earlier, the reduced pension is offset with contributions to the TSP. This shifts the risk of having enough for retirement from the Department of Defense to the service member. The contributions are pre-tax unless the contributions were made while deployed to a combat zone. In that case, those contributions are considered tax-free. Once the service member retires (or separates) from the military, the Thrift Savings Plan can be rolled into an IRA. It can also stay where it is. In making the decision to move it or leave it, the considerations are (1) the TSP is limited to five funds plus a few lifecycle (target-date) funds that are composed of those five funds, (2), level of service and/or investment management (not much help and certainly no active management with the TSP), and (3) fees, of course.
As noted earlier, the pension is taxed. Taxes are withheld, just like a regular salary. Disability income is not taxed as an additional benefit for the disabled veteran. Taxes after retirement is another important vulnerability because tax withheld from the pension and any post-retirement civilian jobs (as well as any spouse’s income) are calculated based on the level of income for each, separately. When you add up all the income, it will likely bump them into a new tax bracket. This can surprise the un-prepared retiree. Unfortunately, I see this repeatedly. Pages three and four of the W-4 form that you have to fill out when you start a new job is a really useful tool to calculate any additional withholding required, and the IRS has an online Tax Withholding Estimator (https://apps.irs.gov/app/tax-withholding-estimator/) as well.
The retiring service member and his or her spouse are very concerned about their future financial security. Preparation and planning are the keys to success to avoid the vulnerabilities highlighted here. Cash flow, SBP and taxes are where I see the most problems, but of course, estate planning, investment planning, and risk management are always important. I hope that you will use what I have shared to serve our newest veterans with integrity, empathy, and pride.
Stacy J. Miller, CFP®
Partner | VP | Wealth Advisor
Stacy Miller is a Certified Financial Planner™ professional and Partner with Bright Investments, LLC. She is a fee-only fiduciary wealth advisor and member of the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA). Stacy is also a U.S. Army military spouse to her retiree husband of 27-years.