Retiring from the military changes far more than where a paycheck comes from. After years of receiving military compensation and participating in programs built specifically for servicemembers, retirees may suddenly have to coordinate military retired pay, investments, the Thrift Savings Plan, taxes, health care costs and perhaps income from a second career. The transition can create new opportunities, but it also changes the numbers behind a household’s financial plan. Understanding those changes before retirement makes it easier to see how much income will be available, where taxes may increase and which financial decisions deserve attention first.
Your Income Structure Changes
One of the first priorities in military wealth management is understanding what will replace active-duty compensation. Military retired pay can provide a valuable source of recurring income for eligible retirees, but comparing it directly with active-duty base pay does not tell the full story. Active-duty compensation can include allowances and tax advantages that do not continue in exactly the same form after retirement.
Retirees should calculate expected income using actual after-tax figures whenever possible. That calculation may include military retired pay, a civilian salary, investment income and other applicable sources. Someone beginning a second career may initially see household income increase, particularly when a civilian salary arrives alongside military retired pay. That increase can make retirement feel financially effortless during the early years.
The first few years are also an important time to resist unnecessary lifestyle inflation. A household that immediately expands recurring expenses based on its highest earning years could face a harder adjustment when civilian employment eventually ends. Building a budget around both current income and future retirement needs provides a more realistic view.
Taxes Need Another Look
Military retirement can also change a household’s tax situation. Military retired pay based on age or length of service is generally taxable as federal income, although certain disability-related payments may receive different federal tax treatment. State taxation varies considerably, with some states excluding military retirement income entirely and others offering partial exclusions or different rules.
Accounting for those differences becomes especially important when retirement coincides with relocation or a second career. A servicemember who retires in one state and accepts employment in another may encounter a substantially different tax picture. Civilian wages can also move the household into a different tax bracket or affect decisions involving investment income and retirement-account distributions.
This is where military financial planning should include tax projections rather than relying solely on the previous year’s return. Estimating future taxable income can help retirees evaluate withholding, anticipated tax payments and the timing of certain financial moves. Taxes should also factor into decisions involving retirement accounts. A transaction that appears beneficial based on investment considerations alone may look very different after its tax consequences are calculated.
Your TSP Needs a Purpose
Military retirement does not mean a retiree must immediately empty or move a Thrift Savings Plan account. Former servicemembers can generally keep eligible money in the TSP after separating from service, subject to program rules. Depending on individual circumstances, other possibilities can include transferring eligible assets to an IRA or an eligible employer retirement plan.
Before choosing among those options, retirees should decide what they expect the money to accomplish. Someone entering another career may not need TSP assets for many years. Another retiree may eventually expect those savings to supplement military retired pay and Social Security. Investment choices, fees, withdrawal options and tax treatment all deserve consideration.
A useful step in your financial analysis is to map out retirement income by time period. The first phase might include military retired pay and civilian earnings. A later phase could add Social Security while eliminating employment income. Required distributions from certain retirement accounts may eventually become another factor.
Looking at retirement in stages can expose future income gaps that are easy to miss when today’s salary dominates the calculation. It can also help determine whether current investments are positioned for near-term withdrawals, decades of additional growth or a combination of both.
Benefits Affect the Numbers
Health care, insurance and survivor protection can have a substantial financial impact after military retirement. Eligible retirees may have access to TRICARE options, but coverage, enrollment requirements and out-of-pocket expenses can change from what they experienced on active duty. Dental and vision coverage may also require separate decisions.
Life insurance deserves similar attention. Servicemembers accustomed to Servicemembers’ Group Life Insurance may need to evaluate available coverage after leaving service and determine how much protection their family still requires. The right amount can change as mortgages decline, children become financially independent and investment assets grow.
The Survivor Benefit Plan presents another major decision for eligible military retirees. It can provide eligible beneficiaries with continuing income after the retiree’s death, but participation involves costs and elections that deserve careful review.
These choices should not be made independently of the rest of the household finances. Insurance needs, survivor income, retirement assets and estate plans affect one another. Beneficiary designations should also be reviewed across retirement accounts, insurance policies and other financial assets, particularly after marriage, divorce, births, deaths or other major family changes.
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Janine Smith is a Consulting CFO with TGG. She has a wealth of experience in accounting process development and management, supervising both TGG staff and client’s internal staff (banking, AR, AP, inventory management, payroll), and working with many different types of accounting software. She has worked with clients to develop KPIs that fit their current needs and coached them to support the goals of the business. One of her favorite tasks is budget development and using that as a tool to help organizations meet their goals.