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Military Transition

Preparing for Military Retirement


It’s not the employer who pays the wages. Employers only handle the money. It’s the customer who pays the wages. — Henry Ford

These are words to live by when handling your military family’s finances, especially when preparing for military retirement.

Serving in the military is an experience unlike any other. Dissimilar from other jobs, serving in the military is more than a career — it’s also a way of life. Transitioning from military life into the civilian world is a big change. Preparing for retirement can help you ease into the transition. Wondering when your family should start planning for this transition? The answer is as early as possible! Here’s some insight into the process to help you get started.

How to Calculate Military Retirement Pay

An important step to take when preparing for military retirement is determining what your new income will be. Retirement pay is different than active-duty pay. The difference in your income will impact many areas of your life, especially if you are not transitioning into a civilian job or career. Your first step in preparing for your military retirement is to organize your finances and prepare for the transition.

Financial planning will help you manage your finances both before and after you retire from the military. A financial plan will help you identify your income, assets, and deficits. An important calculation for someone preparing to retire is the amount of your retirement.

If you do not know how to calculate your retirement pay, the Department of Defense has a tool to calculate your retirement pay. The longer you serve, the more retirement pay you will be qualified to receive.

Is Military Retirement Taxable?

Individual states have different laws concerning military retirement pay. When searching for your retirement location, check to find out if the state you are considering residing in taxes military retirement income.

Which States Don’t Tax Military Retirement?

The following states do not tax military retirement: Alabama, Arizona, Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Utah, West Virginia, and Wisconsin.

Preparing for Military Retirement Checklist

Get Out of Debt

First things first: Focus your attention on getting out of debt. This should be a top priority. Once you’ve broken even on your finances, you’ll be more prepared, motivated, and optimistic about saving for the future.

Pay Yourself First

A great goal to set for yourself is to set aside 20% of your family’s disposable income (the money your family has available after income taxes). Put 10% toward retirement and 10% toward your emergency fund. You can add or subtract from these amounts based on your financial situation and goals.

Allotments are AAFMAA‘s recommended approach for setting aside this money. That way, you know it’s being handled responsibly and it’s also out of sight and out of mind, removing that temptation to spend it!

Take advantage of the Thrift Savings Plan (TSP), which allows military members to contribute to retirement savings and investment plans. Make the most of the money you make by investing early and often so that you can earn more over a period of time.

Set aside money regularly if you plan to contribute or fully fund your child’s education. Expenses to consider include private school, study abroad opportunities, college tuition, books, room and board, etc. Talk with your family about their educational goals so you can determine how much you’ll need to save. Then make a plan and contribute to that plan regularly.

Examine Your Goals

Once you have saved at least 6 months of income for your emergency fund, you can start saving for new goals. When you and/or your spouse retire from the military, what do you want to do?

Common goals are:

  • Invest in a boat
  • Buy an RV
  • Plan a vacation abroad
  • Purchase a new home or vacation home
  • Fund a new hobby such as golfing, biking, gardening, etc.

Working with a Military Financial Planning Professional

Financial planning and management is always important, but especially so when preparing for military retirement. AAFMAA Wealth Management & Trust is here to guide you.

Our team of licensed professionals — who have extensive experience assisting military members — will be happy to answer any questions you have. Contact us today to get started on securing a bright financial future.

This article was originally published February 23, 2015.