A drawdown is looming. You're separating at the end of active service. You've decided to retire after a long career. No matter why you're leaving the military, a big part of preparing for your civilian life is taking steps to proactively address the financial issues you might face. Here are some tips to help ease the transition.
Get your road map ready
An impending separation from service may be both exciting and anxiety-provoking for you and your family. Your lifestyle, income sources, and benefits will be changing. Major decisions that may affect your finances include:
• Where you decide to live
• Whether you'll be selling or purchasing a home
• Whether you and/or your spouse will need to find new employment
• Your plans to return to school
• Your eligibility for benefits (e.g., from the military or a future employer)
To help you prepare for your transition to civilian life, the Department of Defense, along with other agencies, has developed a program called Transition GPS. All servicemembers who are retiring, separating, or being released from a period of at least 180 days of active duty must participate in this program. Transition GPS includes preseparation counseling, briefings, and workshops that cover topics such as education and training, employment and career goals, financial management, and VA benefits. You'll also prepare an Individual Transition Plan.
Prepare a realistic budget
Having a realistic budget is important. Once you leave the military, it's likely that your living expenses will increase because you won't be receiving tax-free allowances, and costs for insurance, housing, groceries, and other day-to-day expenses may be higher. Preparing a budget that reflects your new sources of income and expenses, and adjusting it when necessary, can help you stay on track as you adapt to your new financial circumstances. Here are some questions to consider as you prepare
your working budget:
• Will you be eligible for separation pay or cashing in unused leave? These can be sources of short-term income if necessary.
• What about retirement pay? Make sure you understand how much you'll receive, if applicable, and what other sources of retirement income you'll be eligible for.
• What salary can you expect from your new career?
• Will your spouse be working?
• Will you be eligible for any veterans benefits that will provide ongoing income?
Here's a tip: If you're unable to find a job right away, you may qualify for unemployment compensation, but your eligibility may be affected by any retirement or separation pay you receive. Unemployment benefits vary from state to state, so for more information you'll need to contact your local unemployment office.
• Will the general cost of living (for example, gas, food, and utilities) be higher in your new location?
• How will your health expenses change? Will you have access to employer-sponsored health insurance?
• What will your housing costs include (e.g., rent or mortgage payment, property taxes, and insurance)?
• Will you need to purchase and insure a vehicle?
• What about other expenses, such as commuting costs, clothing, and child care?
Here's a tip: Have a plan in place to reduce your expenses if necessary. Identify items in your budget that you consider discretionary and would be willing to cut at least temporarily. It will likely be much easier to pay off debt now while you have a steady paycheck from the military rather than later when your job situation might be uncertain
Save for transition expenses
Some of your costs will be covered through transition assistance (for example, storage and shipment of household goods), but it's likely that you'll have expenses for which you won't be reimbursed, such as housing deposits. Having some savings set aside in a transition fund that you can easily access may help you avoid having to dip into your long-term savings and investments to cover unexpected expenses. It will also decrease the odds that you'll rack up credit-card debt that you'll have to pay off down the road.
Here's a tip: Don't wait until the last minute. Make saving for your transition a priority, and start as far ahead of time as possible to ensure that you have several months of savings set aside to cover transition expenses.
Review and revisit
After your transition is complete and your income and expenses have stabilized, update your budget to reflect your new circumstances. It's also a good time to review your financial goals. Now that your focus has shifted from your short-term priorities, you can refocus on pursuing your long-term goals to prepare for your next stage in life.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
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