Each year, approximately 200,000 men and women transition from the U.S. military to civilian life. It can be a dramatic life change with financial implications that many people don’t realize or plan for. Much attention is given to accessing healthcare, transitioning careers and pursuing educational opportunities, but the adjustments to your personal finance situation may be overlooked.
To help prepare U.S. service members for their next mission, it’s helpful to think about a “transition plan” about three years before your anticipated discharge date. This gives you time to research, ask questions and create a plan to help achieve the civilian life you want.
“Like most things in life, having a plan to get you from where you are to where you want to go is a key to success,” said Russell Simmons, Certified Financial Planner at Charles Schwab and Army Reservist. “A military transition plan is no different.”
Simmons suggests taking time to think about and plan for these five key personal finance matters to help you find solid financial footing going into your new career:
• Determine your profession: Will you stay in your current profession or look for a job in a different field? Start learning and networking now so you have a foundation from which to start your job search. Research salaries in the areas where you want to live. There are a number of online tools available, as well as resources available through the VA to help you create a resume, write a cover letter and find career opportunities. The Small Business Administration (SBA) offers special programs for veterans interested in starting a new business.
• Calculate income: Military vs. civilian pay are very different. According to a Charles Schwab survey, only 37% of current servicemembers say they know enough about how much money they should save each month. In order to budget accordingly, it’s crucial to understand the differences between military and civilian pay. With civilian pay, there are more taxes and deductions that you likely didn’t have to pay in the military, and there are not the allowances and incentives that you may be accustomed to with military pay. To help you figure out how much money you need to make in a civilian job, add up all your allowances, incentives and base salary to get a full view of your military compensation. Consider negotiating these items with your future employer.
• Consider supplemental income: Once you’ve calculated your estimated civilian income, you may find you have a gap to fill. Going from active duty to Reservist or National Guard may be a good option to consider. By remaining committed to the military in a different capacity, you can maintain certain low-cost benefits and reduce your time commitment so you have time to focus on your civilian career. Continuing to serve may also include eligibility for more affordable life insurance options.
• Prepare for potential changes in healthcare benefits: Similar to income, health benefits can also change when you leave the military. A Schwab survey found that more than half of veterans say they’ve felt unprepared to handle a financial emergency like unexpected medical expenses because they live paycheck to paycheck, so it’s important to understand how your benefits might change to safeguard against this. TRICARE is a low-deductible plan, meaning you do not have many out-of-pocket healthcare expenses. Many companies offer high-deductible health insurance plans with a Health Savings Account (HSA). That generally means your out-of-pocket expenses will be higher than they had been with TRICARE, but you can help plan for that by contributing to an HSA, which is a triple tax-advantaged savings account that can be used in the future for healthcare expenses, including healthcare deductibles. Health insurance through employer plans, Medicare and policies through the Affordable Care Act typically have specific enrollment periods, so research those dates. It is critical to make sure there are no gaps in coverage for you and your family.
• Prepare for changes in location: Housing costs are one of the biggest expenses for most people. Whether you stay in place, move off base, rent or buy a new home, make sure you have a plan in place. Run the numbers to see if it makes more sense to rent or buy, and consider lifestyle factors such as school districts and commute time.
“The transition to civilian life is a disruption to life in many ways,” Schwab’s Simmons said. “But taking the time now to prepare for the life that you want in the future can help you make smart financial decisions that will have both immediate and long-term benefits.”