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Preparing for the military transition income gap

Whether you plan to serve for 4 years or 30 years, you will transition from the military at some point. No matter how long you’re in uniform, certain aspects of the transition back to the civilian world are universal. We all have to (re)learn that using someone’s first name is not only acceptable, but preferable in most areas of the country. You will have to pick out your own clothes. You will be stressed out about the uncertainty of transition and much of the anxiety and uncertainty is related to finances.


If you wait until you “drop your papers” at either 12 months or 6 months out, you are behind in preparing yourself/ your family for your transition. If you’re already inside these windows then start today. If you are 2-3 years from transition, start today. If you are 15 years from transition, put a reminder in your calendar for 12 years from now to start preparing financially for your military transition (seriously).


What does “prepare financially” mean


The military transition process is complex and finances can be complex, but fundamentally there are three things you need to do to get a handle on your transition finances:


  1. Know your expenses and spending habits

  2. Estimate your post-military income and when the income begins

  3. Calculate the amount you need in your “Transition Fund”


Expenses and Spending Habits


While you’re in the military your paycheck is reliable and predictable. The same amount of money hits your bank account on the 1st and the 15th every month. By habit, you’re spending roughly the same amount on the things you need, the things you like, and the things you want each month.


When you leave the military, it’s likely you will experience at least a short period of either no income or much less income. If you continue spending by habit, you’re going to have a shortfall. That’s absolutely fine as long as you plan for it and save the expected shortfall ahead of time.


If you hate the idea of tracking your spending, just do some quick math to get to a rough estimate. Let’s say your family’s monthly income is about $15,000 per month (your base pay, BAS, and BAH, plus your spouse’s income). Let’s say you’re saving about 5% of that total income. And everyone has to pay taxes so let’s say you pay roughly 15% for all taxes. So 20% (15% + 5%) of your income is being saved or earmarked for taxes. That last 80% of your $15,000 per month is what you’re spending. In this example, the family is probably spending about $12,000 per month.


It really doesn’t matter where the money is going at the moment. Let’s just use $12,000 as the amount of money your family spends each month.


Post-Military Income and Timing


There are a few different income streams that may exist for your family after leaving the military. 1) your next career salary; 2) VA disability; 3) your pension if you are retiring from the military. In some cases, you may be able to collect unemployment income while you search for a job. Don’t forget to determine whether your transition is going to impact your spouse’s income as well.


Encore Career Income


The majority of service members plan a career after the military but, depending on a variety of factors, the timing for when you start your next job could be immediate or up to a year or more. In general, you should plan to be without a paycheck for AT LEAST 3 months. If you are planning to work for the government, you should plan to be without a paycheck for at least 6-12 months. If you are starting a business, you should plan to have no income for at least 12 months (plus you have to plan for the cost of running the business without revenue).


You can adjust these timelines as you approach your transition date and the next step becomes more clear. If you’re 2-3 years from transition, it’s best to assume a longer timeline than to hope for the perfect transition. I’ve never met someone who was stressed out because they had EXTRA money available.


VA Disability


Everyone…yes. Everyone…should work with a Veterans Service Organization (VSO) representative to prepare and file a VA disability claim beginning about 6 months before separation. It costs nothing and it's critical to document issues right away. If the VA finds that you have one or more service connected disabilities you may receive VA compensation. It’s not guaranteed. And, in some cases, the compensation simply offsets your pension (meaning your pension is reduced and replaced by tax free VA compensation so the net effect is that you receive no more money above your pension but you will have less taxable income). If your claim results in additional benefit, you should assume that you will not receive that first payment for at least 2-3 months after separation.


Although there’s a chance you may receive some income from VA Disability compensation, you should generally not count on it, especially if you are 2-3 years out. I mention it here because you should definitely work with a VSO rep to file a claim before you transition. That’s the first step to determining whether this will eventually be an income stream. But, in terms of anticipating the income stream, assume you will receive nothing at first.


Pension


If you are retiring with at least 20 years of service under the legacy system (not Blended Retirement System), you will have a pension in relatively short order.


Estimating your pension is usually straightforward. If you are retiring under the legacy system, then your pension is at least 50% of the average of the three years of your highest compensation. Add 2.5% for each year over 20 years. If you had a break in service, prior service, or Guard/ Reserve time, work with your local finance/ personnel office NOW to ensure you are getting proper credit for all of your years of service.


Once you know how many years of service you will have, there are many calculators available to help with an estimate. A simple internet search will help you find a number of them.


Assuming all goes smoothly, your pension should begin the month after your official retirement date. For example, if your official retirement date is 1 OCT 23 then your last active duty pay check occurs on/about 30 SEP 23. You will not receive mid-month pay in October. You will receive your first monthly pension payment on/about 31 OCT 23.


Of course we know that things don’t always go smoothly when military finance/ personnel is involved, so planning an extra month or two without your pension may be a comforting move for you.


Calculate your Transition Fund


Let’s assume you want to get a government job after the military. For simplicity let’s assume you are not retiring from the military and let’s ignore VA disability since there are no guarantees. We’ll use the monthly expense estimate from our example above ($12,000). Since you plan to get a government job after the military, you should plan to be without any income streams (except your spouses) for at least 6 months. Let’s pretend your spouse’s income is roughly $3000.


$12,000 minus your spouse’s income of $3000 leaves a monthly shortfall of $9,000. Multiply by 6 months to get a total of $54,000. $54,000!!!


If you weren’t anxious about transition, you probably are now. And if you thought starting to plan at least 2-3 years out was over the top, you probably think 2-3 years isn’t long enough to prepare. Saving $54k is quite an undertaking - especially if you only have 2-3 years!


Bargaining with yourself


This is where people usually start to reconsider their spending habits and start using “mental” math to reduce their monthly expenses. Reducing spending is not a bad strategy but the reality is that adjusting spending habits for an entire family takes commitment and time. This is where digging into the details becomes important.


If you and your family are willing to give expense-cutting a try, it’s a good idea to do a test run for at least 2-3 months now. This will accomplish two things: 1) you’ll discover whether you can manage an enjoyable lifestyle on what you mentally envision as your leaner transition budget and 2) you can use any savings to get a head start on your transition fund.


Transition Fund vs Emergency Fund


You should not include your emergency fund as part of your transition fund. If you exhaust your transition fund just as you're beginning your new career, you'll still have your emergency fund intact. Between your emergency fund and your transition fund, you might have a substantial chunk of cash. It may seem daunting for some. It may seem silly to hold so much cash to others. In either case, the entire reason for holding cash is to provide security and stability for your family while you complete a successful military transition. During a military transition is not the time to be fancy with your cash or to add additional uncertainty to your finances. Cash can be boring but boring is beautiful in this case.


Where should you save transition fund money


If you are within 2-3 years of transition, it’s likely best that you keep your transition fund money in a relatively safe place such as a high yield savings account (FDIC insured), a money market fund (usually not FDIC insured but still considered relatively safe), or Treasury bills or notes (backed by the full faith and credit of the US Government). If you aren’t familiar with these options, you should discuss the pros and cons of each with a knowledgeable financial advisor who practices as a fiduciary.


Generally, you should not save your transition fund money in any kind of retirement account. If you end up not needing some of your transition fund, you can increase your retirement savings after your income stabilizes. For example, if you normally contribute 5% to your 401k you could max out your contributions and then use your leftover transition fund to cover the shortfall in your paycheck from the increased 401k contributions. And/ or you could transfer some of the money from your leftover transition fund to an Individual Retirement Account (IRA).


Conclusion


This is a relatively simple way to anticipate expenses and income shortfalls after military transition so that you can begin planning and preparing now for the inevitable. Your situation may have much more complexity. If that’s the case, a fiduciary, fee-only financial advisor can help you develop a financial transition plan that’s appropriate for your situation.


Transition is a lot like every mission you’ve ever executed in the military. It’s complex and full of uncertainty. Planning can help reduce the risk of a bad outcome. And, having a team of experts around you can improve the chances of a better outcome. There are hundreds of thousands who have taken this journey. Surround yourself with battle buddies who will help with your job search, experts in resume and interview prep and financial planning, and all the other challenges that come with military transition. You are not alone. You only need to ask for help. The sooner the better.






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