Transition Funds Vital for Exit from Military, Financial Adviser Says

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The Department of Veterans Affairs estimates 200,000 men and women exit the military annually. Like most career shifts, this decision requires additional logistics to make the move as smooth as possible -- especially if a relocation is in play.

One important tool for financial planning and preparation is a transition fund. A transition fund is a portion of money set aside to bridge the financial gap between a spending plan based on military pay to a spending plan based on whatever comes next. Transition funds may be required to pay bills while you look for a new job, make up a shortfall in income while attending college or other training, cover expenses of setting up a new household, or even just pay for a new work wardrobe.

How much money should you save in a transition fund? Every situation is different.

A young, single service member who is debt free, moving home, and plans to use the GI Bill will have different needs than a family with children and debt. Someone with skills that are easily transferable to the civilian sector will need a different level of financial support than someone who is qualified for a very specific and rare job. A veteran earning military retirement pay and/or disability compensation will have instant income when compared to someone leaving after just one enlistment.

A transition fund should be established the same way any other project is approached: one step at a time. Start saving now, with a small amount from each paycheck deposited into a separate account -- at a separate financial institution, if that helps eliminate accessing it. With each promotion, pay raise or change in finances, increase that amount incrementally. If the window of transition is now, buckle down and make this a priority, socking away as much money as possible.

Sean Gillespie is a co-founder of Redeployment Wealth Strategies -- a fee-only registered investment adviser firm in Virginia Beach, Virginia, that serves military families. He said "the most important thing about a transition fund is just that you have one."

Once the money has been saved, it can be tempting to use it for other purposes. Resist the temptation. Transition funds are less flexible if it's tied up in investments or have been used to make fixed payments.

"The second most important thing about it is understanding how much of it should be on savings footing, typically in cash, and how much you could maybe have earmarked from an investment account. If you don't have much margin for error inside the two years immediately after you take the uniform off for the last time, cash is good. That's not the best time to be worrying about how much everyone else thinks you should be feeding into your investments," Gillespie said.

In a perfect world, the transition fund wouldn't have to be touched during the move from military to civilian life. If that happens the funds can be used to pay down debt, beef up emergency funds or save for retirement. But if things get tough, the stash of cash can help smooth out the ride and ultimately reduce stress.

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