When financial advisors focus on a demographic to build their clientele, they often overlook one important group: 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 frequently unprepared for the financial transition they face when they enter civilian life. 

If you’re leaving the military, whether you have a financial advisor or are trying to do this on your own, don’t let yourself fall into the traps that await those returning to the less organized universe outside the services. Veteran financial planning is crucial, and this advice can help you forge a stable financial future.

Key Takeaways

  • When military veterans separate from service, they are often the target of predatory lenders and salespeople.
  • The three major categories of retired military are junior service members, officers and senior enlisted personnel, and disabled members.
  • Retirement, tax, and insurance planning are three important areas in which vets are likely to need help.

Three Categories of Veterans

Although there are exceptions, the majority of departing service members can likely be divided into three general groups. The first group consists of the junior enlisted, who joined the military after high school and are now just entering civilian life for the first time as adults. Many of those in this category never received more than a cursory financial education of any kind while they were in the service.

The second group are officers and senior enlisted personnel who are leaving after a career in the military. After 20 years of active duty service, members of the military can retire with a lifetime pension; regulations differ for the Army, Air Force, Navy, and Marine Corps.

The third group leaving the military are disabled service members, who receive various levels of payment depending on their disability. This category is known as “disability retirement.” Receiving it depends on the service member’s years of active service and, for those with less than 20 years, their disability rating. 

Help for Young Enlistees Returning to Civilian Life

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. They are often unaware of what their credit scores are and how this will impact them when they begin looking for a job, particularly one that requires a security clearance.

Many enlistees leaving the service have no savings of any kind and have given little thought to what their monthly living expenses will be when they return to civilian life. Service members in this category and their advisors are probably wise to focus chiefly on learning how to create and maintain a budget, using their G.I. Bill and other veterans’ benefits wisely and perhaps going to a local credit counseling service.

The military’s Survivor Benefit Plan (SFB) may not pay out dividends equal to a good life insurance policy, so the benefits should be compared carefully before deciding on which to use.

Survivor’s Benefits: Should You Opt Out?

Those who receive a retirement pension will automatically be assigned the Survivor Benefit Plan (SBP) if they are married. The rider pays out 55% of the deceased veteran’s monthly pension to the surviving spouse throughout their lifetime. However, opting into the rider reduces the veteran’s monthly pension by 6.5%, which can be an expensive cost. The SBP is also considered taxable income by the Internal Revenue Service (IRS) and many states.

Furthermore, the longer the veteran lives, the less the surviving spouse will receive. A vet who lives to age 85, for example, and whose spouse passes two years later would not benefit much with the SBP when compared with the cost. In most cases those who receive retirement pensions will be better off having their spouse waive the rider and use the additional income to purchase a life insurance policy.

This has several advantages over the SBP. For one, it will often be cheaper. And for another, it will pay out a tax-free, lump-sum death benefit. This 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 an opportunity for an advisor to create a comprehensive plan for a client facing this dilemma to see how different scenarios could play out. The plan could show, for example, what would happen if the couple elects to carry the SBP and the veteran dies in the next 5, 15, or 30 years. The results could then be compared with what would happen if the vet dies in one of those same time frames with term or permanent life insurance coverage instead.

Retirement Planning

Service members who have participated in a thrift savings plan (TSP) are often unaware of what their options are once they separate from service. Many don’t realize that there can be advantages to rolling their plan over into an individual retirement account (IRA) or the retirement plan of the company they work for in the private sector after they leave the service.

Veterans who want to receive a guaranteed stream of income from their plans after they stop working also need to understand that the qualified annuity 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 family 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. A veterans retirement advisor can show them how to use the Roth conversion loophole.

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. 

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 contribute 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 Veterans Administration benefits and what they can get with them, such as VA mortgages. 

The Bottom Line

Many veterans who have served our country are not prepared for the economic reality that awaits them after they retire from service. Some of them need education in basic finance, while others face more-complex issues. Advisors who take the time to serve their clients effectively can improve a veteran’s financial situation and count on having that individual as a client for a long time. 

Below is a comprehensive list of online financial planning resources to help provide the best financial advice for new vets—and, for that matter, civilians too.

Budgeting/Financial Planning Websites

Credit Score/Report Websites

General Financial Education Websites

Healthcare/Mortgage Websites

Student Loan/Financial Aid Websites

Survivor Benefit Plan

Cost of Living Comparisons

Thrift Savings Plan

Armed Forces IRS Tax Guide

Social Security Website