Many financial advisors choose to focus on one or demographic segments of the population from which they build their clientele. One important group that often gets overlooked is members of the U.S. military who retire or separate from service. In many cases, these service members have been targeted by predatory lenders and salespeople who often manage to put them deep in debt and destroy their credit scores. Even those who manage their money well are often unprepared for the financial transition that they will face when they enter civilian life.
Two Categories
Although there are of course exceptions, probably the majority of departing service members can be divided into two general groups. The first group consists of the junior enlisteds who joined the military after high school and are just now entering civilian life for the first time as adults. This group has often racked up substantial debt, such as car loans, credit card balances, emergency relief loans from the Army Community Service Department and other consumer loans. Many of those in this category never received more than a cursory financial education of any kind while they were in the service (or else paid little or no attention to what was given). They are often unaware of what their credit scores are or how this will impact them when they begin looking for a job, particularly one that requires a security clearance. Many of them have no savings of any kind and have given little thought as to what their monthly living expenses will be after they leave. Advisors who encounter clients in this category are probably wise to focus chiefly on educating them in how to create and maintain a budget, use their GI Bill and other veterans’ benefits wisely and perhaps refer them to a local credit counseling service if necessary. (For related reading, see: Franchise Opportunities for U.S. Service Members.)
Survivor's Benefits: Opting Out?
Of course, there are some officers and senior enlisted personnel who also struggle financially due to divorce or financial mismanagement, but a large percentage of them face a very different set of issues than their lower-ranking counterparts. Those who receive a retirement pension will automatically be assigned the Survivor Benefit Rider (SBP) if they are married, which reduces the amount of their monthly pension by 6.5%. Their surviving spouse will then receive 55% of the amount that the veteran previously received each month until he or she dies. However, this rider is extremely expensive for higher-ranking officers who typically receive pensions of several thousand dollars per month, and it is also considered taxable income by the IRS and many states.
Furthermore, the longer the veteran lives, the less the survivor will get paid. For example, couples where the vet lives to be 85 with a spouse who dies two years later did not get much for their money. In most cases, those who receive retirement pensions will be better off having their spouse sign off to waive this rider and using the additional income to purchase a life insurance policy. This has several advantages over the SBP, as it will often be cheaper and pay out a tax-free, lump-sum death benefit which will either remain constant or grow as long as the policy is in force, depending upon the type of coverage that is chosen. Of course, the right choice here is not the same for everyone, and this is very good opportunity for advisors to create a comprehensive plan for clients facing this dilemma, because this can allow clients to see how various scenarios here could play out. For example, the plan could show what would happen if the couple elects to carry the SBP and the veteran dies in 5, 15 and 30 years from now and then compare that to what would happen if the vet died at those times with term or permanent life insurance coverage instead. In many cases, the best choice if the vet dies very soon will not be the best choice if he or she dies from old age, so a probability factor should be taken into account for this.
Retirement Planning
Service members who have participated in the Thrift Savings Plan (TSP) are often unaware of what their options are once they separate from service, and many of them don’t realize that there can be advantages to rolling their plans over into an IRA or the retirement plan of the company they go to work for in the private sector after they leave. Although many of them want to take a stream of income from their plans after they stop working, the military has only recently begun to explain the advantages of strategies such as stretch IRAs and Roth conversions to those for whom it applies. Veterans who want to get a guaranteed stream of income from their plans after they stop working also need to understand that the qualified annuity that they can purchase inside the TSP does not offer many of the benefits of modern annuity contracts. Most commercial carriers now provide features such as income riders, a doubled payout for managed care or an up-front bonus that is paid into the contract upon purchase.
Those who receive retirement pensions may also find themselves unable to make direct contributions to a Roth IRA because their incomes are too high when they combine their retirement income with what they now make as civilians. Advisers need to show them how to use the Roth conversion loophole to make Roth contributions by opening traditional IRAs and making nondeductible contributions, then converting them to Roth IRAs. This has been used as a backdoor strategy since 2010, when Congress lifted the $100,000 AGI limit for Roth conversions. (For more, see: Converting an IRA Annuity to a Roth: Know the Rules.)
Tax Planning
Tax withholding can also be a major adjustment in some cases, because most service members receive one or more tax-free allowances in addition to their basic pay while they are in the service. As with Roth IRA contributions, this issue can also be compounded by the additional income from a retirement pension. (For related reading, see: An Introduction to Government Loans.)
Insurance and Other Benefits
Although the pay that military service members receive is often below that of civilian pay for an equivalent job, the benefits that they receive while they serve are second to none. Of course, this is not always the case in the private sector, so be sure that your clients who are about to enter civilian life are prepared for this change. Those who are receiving retirement pensions may want to devote a few months of this pay into a savings account to cover all applicable deductibles and other out-of-pocket expenses that won’t be covered by their new health, dental, vision or disability policies. Advisors also need to make certain that vets thoroughly understand their Veteran's Administration benefits and what they can get with them. (For more, see: The Unique Advantages of VA Mortgages.)
The Bottom Line
Many veterans who have served our country are not prepared for the economic reality that await them after they separate or retire. Some of them need education in basic finance, while others face more complex issues. But advisors who take the time to service them effectively can count on having them as clients for a long time to come. (For related reading, see: How Much Does it Pay to Be a Hero?)
Below, you'll find a comprehensive list of online financial planning resources for both veterans and civilians.
Budgeting/Financial Planning Websites
www.mint.com (free, just have to put up with the ads)
www.yodlee.com (a bit more user-friendly than mint)
www.learnvest.com (also offers remote financial planning)
www.personalcapital.com (also offers asset management for wealthy customers)
www.futureadvisor.com (a new one that has been endorsed by mint.com and the Wall Street Journal)
www.frugalsoldier.com (a good source of tips for saving money)
www.feedthepig.org (a good general website for saving and managing money)
www.smartypig.com (a website to help you achieve specific savings goals)
Credit Score/Report websites
www.annualcreditreport.com (one free credit report from each major bureau each year)
www.vantagescore.com (the alternative credit score)
www.myfico.com (come here for info and answers about your credit score)
www.quizzle.com (free credit score and report, not very user-friendly)
www.creditkarma.com (Free Transunion score and report, much easier to use)
www.optoutprescreen.com (to opt out of prescreened credit offers)
www.creditcardeducation.com (educational and practical credit card resources)
http://www.usa.gov/topics/money/credit/credit-cards.shtml (credit card education)
http://www.federalreserve.gov/creditcard (more credit card education)
www.militarysaves.org (convenient website to get free score and report)
General Financial Education Website
www.investopedia.com (one of the best finance education websites online)
www.mymoney.gov (from your friends with Uncle Sam)
www.consumerfinance.gov (consumer finance education)
www.retirementplans.org (Basic information on IRAs and retirement plans)
www.veteransfinancialcoalition.org (a group of organizations focused on the financial education and consumer protection of veterans)
www.moneychimp.com (Covers some useful concepts about rate of return on investments)
www.mymoney.gov (Government site covering general financial education)
Healthcare/Mortgage Websites
Navy Federal Credit Union - mortgages
Freddie Mac - home-buying resources
Student Loan/Financial Aid Websites
FinAid (student financial aid guide)
Sallie Mae (student loan provider)
www.studentloans.gov (federal student aid resources)
Federal Student Aid - FAFSA (via the U.S Department of Education)
Survivor Benefit Plan Link
Military Compensation information - survivor benefits (via The Office of the Secretary of Defense)
Cost of Living Comparisons
www.bankrate.com (lots of great tools and resources)
www.bestplaces.net (one of the best sites for this topic, from real estate to taxes)
Thrift Savings Plan
www.tsp.gov (the official TSP site)
www.tsptalk.com (for those seeking higher returns for higher risks)
YouTube channel featuring educational videos on various aspects of the TSP
Armed Forces IRS Tax Guide
IRS page for members of the armed services
Social Security Websites
Social Security Administration homepage
Social Security Timing (information and calculator on when to claim benefits)
TICKER SYMBOLS FOR TSP FUND EQUIVALENTS:
G FUND – IEF – iShares 7-10 YEAR TREASURY NOTE FUND
F FUND – AGG – iShares BARCLAY CAPITAL AGGREGATE BOND FUND
C FUND – IVV – iShares S&P 500 FUND
S FUND – IWR – iShares RUSSELL MID-CAP FUND
IWM – iShares RUSSELL 2000 FUND
ITOT – iShares S&P TOTAL U S STOCK MARKET FUND
IWV – iShares RUSSELL 3000 FUND
I FUND – EFA – iShares MORGAN STANLEY CAPITAL INDEX EUROPE, AUSTRAILASIA AND FAR EAST FUND
