I am not going to tell you which stocks, bonds or mutual funds to buy. But, I will hopefully stimulate some thoughts as you make a significant financial transition in your life. A very small number of military retirees truly retire when they leave the service. However, for most military retirees, retirement means starting a second career when they are not financially secure enough to stop working. In most cases, this second career will provide you with a significant increase in discretionary income and an excellent opportunity to save for your eventual full retirement. It is a great time to plan and a good time to seek the services of a professional financial planner. Most planners will tell you pretty much the same thing: When you get ready to retire you will need to establish an income stream of about 80 percent of your final working income to sustain your lifestyle. This income will come from three sources: a pension, Social Security, and private savings. The good news is that as a military retiree, the first two already provide you with a solid foundation.
Your military pension is one of the best, if not the best, pensions that exists in America today — Cost of Living Allowances (COLA) protected, income for life starting the month following your retirement. It is so valuable that there are companies willing to "buy" your pension from you. Do not be tempted, these schemes are egregious rip-offs. Your pension is the first element of your financial plan. Another piece of advice is to use the "myPay Account" feature available on-line with DFAS (https://mypay.dfas.mil) to monitor and make changes to your retirement account. Remember in almost all cases your active-duty allotments will carry right over to your retired pay account.
Social Security is probably something to which you have not paid much attention. You should because it is the second important element of your plan. Review your most recent Social Security statement carefully with your spouse. If your spouse has a work history, review his/hers as well. Pay particular attention to the retirement estimates. You need to consider several things: How long do you want to work? When do you want to start drawing retirement benefits? What effect does earned income have on Social Security benefits? How does your military pension affect Social Security benefits? (I'll answer that one now — it has no effect!) Do you understand that special Military Service Credits may be available to you? Is it better for your spouse to draw retirement based on their Social Security Account or your account? Why would you want to wait until age 70 to start drawing benefits? Answers to these types of questions will be important inputs to your financial plan. To learn more about Social Security explore their exceptional website at www.socialsecurity.gov.
Private Savings is for many, the most important element of their plan. How much savings you have now? How much do you need to fund a comfortable retirement? How do you get there from here? Answer those three questions and you have your plan. You may be able to go it alone, but most retirees would probably benefit from some professional help. Navy Mutual's Personal Financial Management Guide pamphlet can provide you some very generic Education in this area. A few things to consider:
Individual Retirement Accounts (IRA). You probably have an IRA established for both yourself and your spouse. You may have ROTH IRAs that are superb vehicles for retirement savings since you never pay taxes on any money that comes out of them. However, when you start your second career, you may no longer be able to contribute to your ROTH because your Adjusted Gross Income (AGI) will exceed the allowable limits. You may need to shift to a conventional IRA. How much can you contribute each year? If you are over age 50, are you taking advantage of the "catch up" provision? When can you withdraw funds without penalty? When do you have to start withdrawing funds? These are important questions.
Taxes. Most retirees are shocked by the big jump in their tax brackets. Military compensation has many tax benefits that will no longer exist in your civilian career. Most retirees will receive a straight salary instead of the more complicated system of military pay and allowances. Maybe you avoided state income tax during your military career and that may factor into where you live in retirement. You should note that just because a state does not have a state income tax does not mean it has a low-tax burden. How will your military retired pay be taxed? One thing to remember is that there is no FICA tax taken from your military retired paycheck. Be prepared for your first tax return to be a little more complicated than it was in the past, and expect to see a larger tax bill. You may get into the business of paying estimated taxes for the first time in your life. You may also get caught up in Alternative Minimum Tax (AMT) provisions. You may feel it necessary to visit a tax professional. There are a few things that you may be able to take advantage of in the tax area. First, you may be able to defer tax on some income by contributing to a qualified retirement plan as discussed above. Your employer may offer a Flexible Spending Account (FSA) that allows you to use some of your salary on a pre-tax basis for qualified medical expenses and childcare. There may be some other areas where tax breaks are allowed that you had not considered. Be prepared to do some tax planning.
A prominent financial planning firm notes the following nine big mistakes that people should avoid when saving for retirement. They are provided here for you consideration as begin, review, or refine your financial plan:
In summary, retiring from the military and beginning a second career offers enormous opportunities for securing a very comfortable, financially secure and full retirement. Do not waste these opportunities by failing to plan.
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As you probably know, there are a handful of people who write almost exclusively about military families and their money. One of these writers, Rob Aeschbach, is also a Certified Financial Planner™ candidate. I wanted to see what nuggets of wisdom Rob could share, and learn more about how a financial planner can help military […]