We don’t realize how indoctrinated we are in the Service culture until we are out and living on the other side. Leaving the Service can be a rough transition and you want to be as prepared as possible when you walk through that dark doorway into the unknown. Plan ahead with your finances to prevent some grief.
Life insurance. Servicemembers Group Life Insurance (SGLI) is temporary since it’s based on your employment in the Service. You need some form of life insurance to protect your family’s financial future if the bread winner dies. You should have life insurance that is not based on your employment. You never know if a death may occur between jobs. “Between jobs” is a new concept for you to get used to. Your future employer’s group term life insurance will not be enough. Employer group term life insurance typically covers only 1- to 2-times your salary amount.
Retirement accounts. Simplify and consolidate. Just as you leave the Service and your TSP behind, you will change future jobs and leave 401ks behind. Have a plan to use one retirement account as your ‘base camp’ to consolidate accounts as employers change. Your base camp options are: your TSP, your IRA or your future employer’s 401k. Yes, you can transfer retirement account assets back to your TSP. Check with www.TSP.gov for the procedures.
Transition account. Do you have accessible money to tide you over should you find yourself unemployed for a period? Better have money for 3 to 6 months of expenses. Mortgages, utilities and living expenses don’t wait.
Survivor Benefit Plan (SBP). The SBP is the only way to ensure a portion of the retired pay continues to a beneficiary after your death. While some people balk at the premium (6.5% of retired pay for max coverage), you pay 6.5% to give a beneficiary 55% with cost of living adjustments for their lifetime. Do you have a disabled child? SBP benefits paid to a Special Needs Trust won’t risk other state or federal assistance programs and can provide critical income for your child’s lifetime.
College. Have you transferred some Post 9-11 GI Bill benefits to the spouse or each of your kids? Is other funding in place? You can still manage the P9-11GIB monthly benefits among your beneficiaries after you leave the Service.
Disability insurance. What if you don’t die but you can’t work due to illness or disability? Corporate jobs don’t tend to paid if you aren’t working. How will your family get by without your source of income? Most jobs provide disability insurance for their employees but if you don’t get this insurance as an employee, look into it for your financial security.
Taxes. Your favorable tax status, caused by only being taxed on base pay and you claiming residency in a low tax state, is bye-bye. Now every dime you make will be taxed and you may pay state income tax. Better have a tax plan. Besides the home mortgage interest deduction, retirement accounts offer your best tax advantages—especially employer 401ks and TSPs. Unlike IRAs that have income restrictions on their tax benefits, 401ks and TSPs do not have income restrictions. Be sure to tell DFAS how much withholding tax you want deducted from your retired pay for both state and federal taxes.