facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Navigating the Financial Landscape of Military Transition: 4 Critical Considerations Thumbnail

Navigating the Financial Landscape of Military Transition: 4 Critical Considerations

Retirement Funding Transition

By Joseph Brown, PhD, CFP®, MQFP®

As you approach the end of your military career, you're facing a significant life change – one that I would encourage you to refer to as a "transition" rather than retirement. Why? Because "transition" better reflects the reality that many service members are moving into new careers, not hanging up their hats entirely. This distinction is crucial when communicating with potential employers who might otherwise assume you're not interested in new opportunities.

Let's dive into four critical financial considerations you need to address as you plan your transition:

1. The Income Timeline Rollercoaster

Transitioning out of the military can create a complex income scenario. Here's what you need to be prepared for:

  • Your last month of active duty may only have one paycheck (depending on service), and it won't include TSP contributions.
  • Your final paycheck may be delayed by up to 60 days for an audit.
  • Retirement pay is paid in arrears, meaning you won't receive your first check until the end of your first full month of retirement.
  • VA disability pay, if you qualify, may take 6 months or more to start (though it will include backpay).

This means you could face a gap of up to 60 days between your second-to-last active-duty paycheck and your first retirement check. Planning for this gap is crucial to avoid financial stress during your transition.

2. Qualifying for a Mortgage: New Job, New Challenges

If you're planning to buy a home after the transition, be aware that lenders typically require two years of employment history. Leaving active duty before closing on a loan could jeopardize your mortgage or change its terms. Here's how to navigate this:

  • Be upfront with your lender about your transition.
  • Expect to provide extra documentation to verify your pension.
  • Remember that VA disability pay often won't be counted due to its uncertain nature for the first six months (or more) of retirement.
  • Consider renting for a few months in your new location. This allows you to familiarize yourself with the area and ensure your new job is a good fit – especially important given that over 80% of veterans change jobs within the first two years after transition.

3. Retirement Accounts: Don't Overfill Your Cups

In your transition year, you'll need to juggle contributions between your TSP and potentially a new 401(k). Keep these points in mind:

  •  TSP and 401(k) share the same combined contribution limit ($23,000 in 2024 for those under 50).
  • Your new employer won't know about your TSP contributions, so it's your responsibility to avoid exceeding the limit.
  • Be aware of income limits for IRA contributions. If you're unsure, wait until year-end to contribute or consider a backdoor Roth contribution if eligible.

4. Taxes: Avoid a Surprise Bill

Your transition year can create some tax complexities:

  • You may need to file tax returns in multiple states if you are changing what state you are a resident of.
  • Each income source (military pay, retirement pay, new job) will withhold taxes as if it's your only income, potentially leading to under-withholding.
  • To adjust withholding, we recommend changing the additional withholding on your military pension. It's monthly and allows for precise adjustments.
  • Either do a tax estimate and adjust your withholdings or build a tax cushion into your transition fund. It's not uncommon for retiring officers to face unexpected tax bills exceeding $10,000 when filing.

Plan Your Burn Rate and Refuel Rate

Think of your transition like piloting an aircraft: your spending is your burn rate, and your paychecks are refueling tankers. Calculate these rates month by month while your income is in flux – normally about 3-4 months.  You will then be able to see if you are burning (spending) more than you are refueling (income) in any month.   This will determine how much fuel you need in your tanks to start – or in financial terms – how large your transition fund needs to be. This approach helps ensure you don't run out of fuel (money) during your transition.

Military Finances are Different

Transitioning from military service presents unique financial challenges that civilian job changes don't typically involve. From navigating the complexities of military pensions and VA benefits to understanding the tax implications of your transition, your financial landscape requires specialized knowledge. That's why it's crucial to work with financial advisors who understand the nuances of military benefits and can help you navigate this significant life change.

Ready to create a smooth financial plan for your military transition? We're here to help you navigate these important decisions. Use the button below to schedule a free initial consultation and take the first step towards a successful transition.

If you found this article useful, you might like the following blog posts:

Retired Military Career Tracks. So, You Want to Be a Consultant


Using Informational Interviews to Plan Your Career After Your Military Retirement


Retired Military Finances 301: Walking the Roth IRA - AGI Tightrope



Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.