I read a startling figure recently. Roughly a quarter of a million servicemembers — the equivalent of a medium-size city — leave the military each year. You or your spouse may decide to retire after 20-plus years or separate after six or eight, but one thing’s for sure —at some point you will make the move to the civilian world. Planning well in advance can make the difference between a smooth move and a train wreck.
In this two-part series, I’ll look at six financial aspects of this transition— what you should expect and the moves you should consider making.
Expectations: The harsh reality is that lots of people in the military are living paycheck-to-paycheck. The move to civilian life could make things better . . . or worse. Different types of compensation, the ability to negotiate benefit packages, child care, increased health care costs and the disappearance of housing and subsistence allowances all could be part of the experience.
Execution: Before you transition out of the military, calculate your monthly expenses and start building a cash stash to cover those outlays for at least six to 12 months. This money could be used to fill the gap if you can’t find a job right away. That cushion gives you some breathing room to be choosy about where you want to work and might even help cover a down payment on a new home if you must move. Clearly, this isn’t an overnight task. The best way to do ensure success is to set up a transition fund when you first join the military and systematically add to it over time. Projecting a civilian budget is a closely related task and can be an eye opener. If you’re separating (as opposed to retiring), you might have to add a four-figure sum into your expenses to pay for health care. Unlike life in the military, you’ll be able to decide where you want to live. But you’ll also have to foot the bill for higher cost areas and a larger tax bill.
Expectations: Speaking of taxes, I’m not sure there’s an expense I like less, except maybe getting a new roof. But like paying for a roof, you can’t avoid doling out the dough to Uncle Sam. The sad truth is that joining the civilian world will probably make your tax situation worse. Think about it. How much of your total income is tax free? At the very least, there are tax-free housing and subsistence allowances that can equate to a third or more of your gross income in the military. That will change.
Execution: Taxes are a factor to consider as you evaluate civilian job opportunities, calculate cost of living or just try to determine what it’s going to take to maintain an equivalent lifestyle. USAA’s Separation Assessment Tool allows you to compare civilian and military income and accounts for cost of living in different locations as well as the loss of tax advantages offered in the service.
Next time I’ll focus on insurance, retirement and other areas important to your financial transition from the military.