How Advisors Can Help Military Retirees Navigate Post-Service Life

Another key factor about military families: We're naturally inclined to be do-it-yourself types and somewhat averse to paying for professional services. Modest pay requires DIY economizing, and free services such as medical care, legal advice and limited financial advice habituate service members into either expecting those services for free or being allergic to paying for them.

Retirement Planning

Common contingencies, gaps and seams for military retirees include:

— Tax planning. Officer families often find that their income spikes upon military retirement because their pension and encore career salary can push them into the 24% or higher bracket. They may also be paying state income taxes for the first time. This opens the door to backdoor Roth IRA planning, Roth conversion planning and a need for closer scrutiny of withholdings or estimated tax payments to avoid penalties.

— Retirement accounts. Military families can contribute to the Thrift Savings Plan and IRAs, but they're rarely tracking that they may no longer be able to use regular Roth IRAs at higher income, nor the need to integrate TSP contributions in their final year of service with the contribution limits of their new employer's 401(k). Many military families will also need help determining whether to remain with the TSP or roll funds over to IRAs or new employer plans.

— Cash flow and emergency funds. Military families often hold smaller cash reserves because of a sense of job security and paycheck regularity. Yet, bridging careers, establishing a permanent home and weathering lower job and income security requires more available cash. And they may need convincing on this topic: Military retirees are like the general population in that some are inclined to frugality and others find new levels of income burning the same holes in their pockets. It's important to help them find a budgeting method they'll use to make sure every dollar goes on the right mission.

— Life insurance. Military families usually have $500K of Servicemembers' Group Life Insurance that, at the end of their service, can be converted to a non-level group policy sponsored by the VA called Veterans' Group Life Insurance. That amount is rarely enough, and while many servicemembers are savvy to the pitfalls of permanent insurance, they may be reluctant to buy enough needed term life insurance. Soon-to-be veterans or retirees may be more comfortable with one of the major military-focused carriers, such as USAA, Navy Mutual or AAFMAA, until they're no longer deployable.

Benefits and Cost of Living

Military retiree and veteran families will also experience challenges deciding on benefits and determining how they square up with their costs of living.

Retirees can choose to pay 6.5% of their pension pre-tax in a Survivor Benefit Plan in exchange for a 55% inflation-adjusted survivor benefit annuity for their spouse and/or children. The program details add complexity to the option:

— Without SBP, the retirement pension dies with the servicemember. In most cases, there is no survivor benefit for VA disability pay.

— At 6.5%, retirees are committing to potentially decades of a substantial monthly payment. Many retirees can't see parting with so much of their monthly pension for what feels like an expensive insurance policy.

— Retirees often consider life insurance in lieu of SBP without realizing that they might need both life insurance and SBP to protect their family.

Both military retirement pay and VA disability pay track with the annual Social Security cost-of-living increase, although retired pay has a different first-year formula. Yet housing, food, energy and education costs often increase much more than the Social Security boost.

This can lead to planning shortfalls when families assume that their retired pay and VA disability pay will help them keep up with rising costs. When this planning merges with an investing strategy priorirtizing fixed income or mismatched target date funds, families can find themselves behind the expense curve.

Market Volatility and Policy Uncertainty

The effects of market volatility and policy uncertainty may not have felt so relevant while serving because of the sense of job and income certainty that military life creates.

Yet since many military retirees are in their 40s (or younger) when they start receiving retired pay, they may still have two or more decades of earnings before flipping the paycheck switch to the off mode. It's not uncommon to find retirees with a TSP asset allocation that's too conservative for someone with 20 years in the workforce.

Military members also tend to want to buy a "forever home" after moving every few years during their careers. While they can use a zero-down VA loan, this often results in feeling house poor with today's prices. Those saving for a large down payment need to choose a proper asset allocation for the time horizon of their purchase.

Saving in cash for too long allows inflation to shrink the down payment fund, but too much time in volatile assets risks shrinking the down payment with a bear market at closing time. Military retirees and veterans may need help thinking through asset allocations for such time horizons as actual retirement, college funding, and large purchases.

Finally, servicemembers are used to limited benefits erosions. Retirees and veterans have good lobbying power, but the reality is that healthcare, retired pay, VA disability pay and other benefits cost the government enormous sums every year. As the United States reckons with its deficit and debt, retirees and veterans should not assume that their benefits are sacrosanct.

Project 2025 and other policy frameworks have hinted that there's an appetite for cost savings that would require greater out-of-pocket spending for veteran and retiree families. Advisors can help veterans develop projections that stress test for lower future benefits, among other options, such as delaying retirement.

While only a fraction of our nation serves and a smaller portion retires, most advisors will come across military retiree and veteran clients. In addition to such resources as the Military Financial Advisors Association, Cerifi's Certified Military Financial Advisor credential and the Military Qualified Financial Planner mark, the sooner that advisors of all stripes can help them, the more likely they'll plan and navigate the contingencies, gaps and seams they'll face as civilians.

Brian O'Neill is the founder of Winged Wealth Management and Financial Planning, an RIA serving military families that is part of the XY Planning Network. He spent more than 23 years in the Air Force.