The 3 stages of effective military financial planning

Leaving the military is a stressful time, and military financial planning is a key component of not only transitioning but everything that comes after. Military members will be bombarded with information intended to prepare you for a new phase of life and how to continue retirement planning. It all comes at a time when you will be concerned with one thing: financial security.

Everyone has their own financial story. Your goals, resources, and path will be unique to you. If you feel uncertainty regarding your financial future, it may be time to consider a more deliberate approach. And like any military operation, it requires planning. Here are three stages of military financial planning and how best to prepare for them.

1. Military financial planning to transition

Financial planning is far more than a budget and retirement portfolio. During the military-to-civilian transition, it lays the groundwork for achieving goals in every stage of life.

During military service, most finances require relatively little deliberate planning. Service members are provided housing and food stipends, inexpensive medical coverage, retirement planning tools, and pay incentives that require little management or planning to benefit. This means many will be lulled into a false sense of long-term security because of their current financial comfort. Unfortunately, military entitlements do not accompany us to our next career.

Those about to leave the military will want to begin nurturing their savings, identifying salary expectations in a post-military career, and researching healthcare needs as soon as possible.

Without proper planning, finances have a greater likelihood of dictating where, when, and what kind of role veterans will have to accept in their post-military lives, restricting their ability to pursue personal goals and—most importantly—personal happiness.

A financial plan for transition should include:

An accessible savings plan.

This should be a stable account (bitcoin and stocks are not savings) that should be accessible in a few days. Aim to save a minimum of three months of your recurring monthly responsibilities (think bills, groceries, debt payments, etc.). This is often referred to as an emergency fund, loss of income fund, or rainy-day fund.

Healthcare objectives.

Veterans should assess the healthcare needs of their entire family—including medication and frequency of care. Once you’ve established your family’s needs, you can plan for healthcare maintenance in the civilian world, including setting aside savings towards this goal. This can provide freedom to conduct your job search without financial obligations weighing on your decision.

For the majority of veterans, financial goals and current lifestyle will impact their compensation needs and how they can pursue potential career opportunities. When transitioning into a civilian career, it is crucial to understand that compensation is more than just salary. Some important elements of a compensation package are:

  • base salary
  • bonuses (percent of salary or incentive-based)
  • stock options
  • 401k contributions (match percentage)
  • health insurance (employer-sponsored or out-of-pocket)
  • paid time off policies
  • disability insurance

Even seemingly minimal perks are important when considering a compensation package.

Assessing a base salary in comparison to insurance benefits may also be beneficial. Healthcare premiums and deductibles can massively influence net income. Where one company may offer a higher salary with an insurance plan that can’t support someone’s needs, another may be able to provide healthcare for their whole family at a lower base salary.

When assessing hourly versus salaried positions, consider the time investment related to salary. A salaried position guarantees a certain pay regardless of time investment, whereas an hourly position provides additional compensation outside of 40 hours. Each system has its merits and should be assessed based on priorities and financial obligations.

3. Military financial planning for the future

Most people are aware that retirement is a key pillar of financial planning. With the relatively recent introduction of the blended retirement system, many veterans will need to consider what is next for their Thrift Savings Plans (TSP) accounts.

It’s important for everyone leaving the military to gather all relevant information related to their TSP before transitioning to ensure they can access their account once separated. If you haven’t examined your portfolio, take a moment to evaluate what your money is doing and ensure you are invested!

But where? Veterans should invest in a fund that supports their personal retirement goals. Many may not realize their TSP contributions used to be automatically allocated to the G fund (the most conservative, low-return option). More recently, contributions started to be automatically allocated to a lifecycle fund with a generalized retirement date (e.g. retirement in 2065 would be L2065).

Understand Your Options as a Veteran.

Transitioning service members have two options for their TSP: transfer holdings into a new retirement account or maintain the account. While there is no definitive answer on how to proceed, understanding what each option entails can help most effectively put a TSP to work.

Option 1: Maintain Your TSP. Maintaining a TSP involves minimal action. TSP has relatively restrictive withdrawal options, which means it may be difficult to adapt receivable payments in retirement should the economic landscape change.

Option 2: Transfer Your TSP. Transferring TSP holdings into an individual retirement account (IRA) or company 401(k) could provide greater simplicity and flexibility in managing retirement funds. An IRA would provide a far wider selection of investments, but these investment choices will be costlier on an ongoing basis than the relatively inexpensive TSP funds.

Plan to conduct research to determine which option best fits your needs. When consulting a financial advisor, ask about the options available. To ensure those options are beneficial, ask the advisor why they recommend certain options and find out how they are compensated for what clients choose.

Most important for dealing with an advisor is to understand the dollar figures in their recommendations, not just the percentages. Percentages can be deceptive with large balances; a one percent fee or commission sounds small, but on a balance of $500,000 it would be $5,000.

Remember: someone’s financial goals will be unique to their needs. This commentary covers general topics to consider, but there are many variables to keep in mind when preparing for your financial future. For financial planning specific to your goals and needs, consider consulting a financial advisor.

Like everything we did in the military, planning is crucial to mission success. Plan ahead to pave a smooth transition, financial stability, and a well-earned retirement.

TJ Binkowski is a U.S. Army veteran, Financial Advisor, and Candidate for CFP® certification.

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