Many financial advisors choose to focus on one demographic of the population from which they build their clientele. One important group that often gets overlooked are 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. 

If you're leaving the military, whether you have an 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. This advice can help.

Three Categories

Although there are of course exceptions, probably the majority of departing service members can 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 or 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 as 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 GI Bill and other veterans’ benefits wisely, and perhaps going to a local credit counseling service.

Survivor's Benefits: Opting 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 his or her lifetime. However, opting into the rider reduces the veteran's monthly pension by 6.5%, which can be seen as an expensive cost. It is also considered taxable income by the IRS and many states.

Furthermore, the longer the veteran lives, the less the surviving spouse will receive. For example, a couple where the vet lives to be 85 with a spouse who passes two years later did not benefit much with the SBP when compared to 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, 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 an opportunity for advisors to create a comprehensive plan for clients facing this dilemma to see how different scenarios could play out. For example, the plan could show what would happen if the couple elects to carry the SBP and the veteran dies five, 15, or 30 years from now, and compare that to what would happen if the vet died at those times with term or permanent life insurance coverage instead.

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. Many don’t realize that there can be advantages to rolling their plans over into an 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 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 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 Veteran's 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. But advisors who take the time to service them effectively can improve the veteran's financial situation and count on having them as clients for a long time. 

Below, you'll find a comprehensive list of online financial planning resources for both veterans and civilians.

Budgeting/Financial Planning Websites (managing finances) (also offers asset management for wealthy customers) (a new one that has been endorsed by and the Wall Street Journal) (a good general website for saving and managing money) (a website to help you achieve specific savings goals)

Credit Score/Report Websites (one free credit report from each major bureau each year) (the alternative credit score) (come here for info and answers about your credit score) (free TransUnion and Equifax scores and more, much easier to use) (to opt-out of prescreened credit offers) (educational and practical credit card resources) (convenient website to get free score and report)

General Financial Education Websites (you're on the site now) (consumer finance education) (a group of organizations focused on the financial education and consumer protection of veterans) (government site covering general financial education)

Healthcare/Mortgage Websites (general benefits information) (getting on the Affordable Care Act exchanges) (basic information on many things)

Navy Federal Credit Union (mortgages)

Student Loan/Financial Aid Websites

FinAid (student financial aid guide)

Sallie Mae (student loan provider) (federal student aid resources)

Federal Student Aid - FAFSA (via the U.S. Department of Education)

Survivor Benefit Plan Link (overview of survivor benefits)

Cost of Living Comparisons (one of the best sites for this topic, from real estate to taxes) (detailed cost-of-living tool)

Thrift Savings Plan (the official TSP site)

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 (information and calculators on when to claim benefits)