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Financial Planning

Managing Your Money During Your Military Transition

2021-04-23

Making the decision to return to civilian life is a significant one. It can affect virtually every aspect of your finances. According to a recent survey, 63% of Americans with a written financial plan say they feel financially stable, while only 28% of those without a plan feel the same level of security. 

As you transition back to civilian life, a sound and thoughtful financial plan that addresses the changes in your income, taxes and retirement can help you feel more confident as you enter this new phase.

Military Retirement Income Can Be Complex 

Most long-term servicemembers are well aware of the financial benefits provided by a full military career, but a pension is only one component of your overall retirement plan. 

Multiple retirement accounts, various benefits, and tax-efficient strategies for income streams make it important to work with a professional who understands military income throughout your lifetime.

A financial plan that incorporates accumulation and distribution strategies can help you bring your future into focus and protect your legacy. 

Financial Concerns to Keep in Mind During Your Military Transition 

Your financial plan during and after your military transition should include these major components: tax-efficient planning, insurance coverage, pension and Social Security needs, and your retirement savings drawdown strategy. 

Here are few key questions to consider: 

  • How do you balance the needs of your current income and tax strategy with saving effectively? 

  • Do you have appropriate insurance coverage and asset protection planning to fill any gaps in your financial plan and ensure that your family is protected? 

  • How will you create a solid retirement plan with military pension benefits, private savings, and Social Security funds working together? 

  • How will your retirement funds be impacted by taxes? 

  • How will you make smart investment choices now to help you accomplish the goals you identified by answering the above questions? 

A military financial planner can help you answer these questions and work with you to be sure you stay on track to meet your goals. 

Retirement & Taxes: Basics for Veterans 

If your retirement plan income strategy is based on a set amount you intend to draw down each month or year, calculating the taxes is critical to ensure you have enough to support you through retirement. Not all savings plans are created equal when it comes to tax implications. 

Here’s a brief overview of how each kind of retirement savings account is influenced by taxes: 

  • Military retirement benefits are taxed as a pension, meaning taxes are paid based on your individual income bracket. (Note: Military retirement disability pay and Veterans’ benefits can be excluded from your taxable income, and not all states tax military retirement benefits the same way.) 

  • 401(k) and TSP accounts are pre- and post-tax savings vehicles, which means the money is taxed differently at the time you withdraw it. 

  • Individual Retirement Accounts (IRAs) are tax-advantaged vehicles designed to help you save for retirement; the two most common are the Traditional and Roth IRA. Though they share similarities, Traditional IRAs provide tax-free growth on investments while Roth IRAs allow for tax-free withdrawals in retirement. Income, age and eligibility standards differ, so it’s important to get the advice of a professional to help determine whether a Traditional or Roth IRA is best suited to you. 

Military members who retire with full service and then step into civilian employment for their next career can be surprised by how their tax picture changes. This is because of a possible upgrade to a new tax bracket based on two income sources: your military pension and your civilian income. 

At a minimum, those who retire and start new employment should review their withholding and their retirement savings strategies and be sure to check in with their tax professional. Your financial advisor — preferably one familiar with military life — should also be engaged as soon as possible to discuss tactics for tax-efficiency as well as your withdrawal game plan.

The Bottom Line

Regardless of your age or financial status, you can benefit from a financial plan. Establishing a financial plan is the first step, but then you must update your plan as your financial situation changes over time. A military transition is just one of several life events that should prompt a review or update of your financial plan. It’s critical to update it to create an exit-from-the-workforce strategy as well as a tax-efficient strategy. Working with a military financial advisor can help. 

The team at AWM&T is here to help you and your family establish or adapt your financial plan when transitioning out of the military. Contact us today to set up an appointment with a Relationship Manager, who will discuss your situation and give you a personalized action plan to help protect your financial future.