3 Steps to Guarantee Your Financial Future When Transitioning From the Military
2) Build a Transition Fund - It’s important to build a transition fund with 3-12 months of living expenses in order to provide financial protection for any gaps in work as you transition. Keep the money in an easy to access, liquid place such as a money market fund or a high interest savings account.
a. Is transportation to your new home covered? - Make sure to factor in any moving expenses into your transition fund. For most service members, leaving the military is an authorized government expense. Allowances and benefits vary by service branch, type of discharge, and type of separation. You may be eligible for the following:
- Storage of your household goods, either temporary or non-temporary
- Travel allowances
- Personally Procured Move (PPM), a voluntary program that will reimburse you for the majority of your costs when you move yourself
- Mileage and per diem
3) Create a Comprehensive Retirement Plan - What do you do with your Thrift Savings Plan (TSP) account?
Many military members take advantage of the TSP account, which is a tax-advantaged way of saving for retirement. When you leave service, there are four options to consider:
a. Leave the funds in your TSP account: This can be an attractive option because expenses are very low.
b. Roll your money over to your new employer’s plan: Consider the investment choices and expenses of the new plan.
c. Roll your TSP into a traditional Individual Retirement Account: This option typically has a wider array of investment choices and lower fees than an employer program.
d. Cash in your TSP: I recommend avoiding this option if at all possible. You end up losing much of your savings in taxes and penalty fees.
Participate in your new employer’s retirement plan.
If your new employer offers a defined-benefit plan or pension, make sure to understand eligibility and vesting options. If you leave before it becomes fully vested you most likely will not receive full payments in retirement.
Defined-contribution plans such as a 401(k) plan are more common. Here are the two major types to consider:
Traditional 401(k): Contributions are pre-tax from your salary and lower your taxable income. These contributions plus any employer match will grow tax-deferred and then distributions are taxed.
Roth 401(k): More and more employers now offer a Roth 401(k) option, where employees make contributions with after-tax money. Neither investment earnings nor distributions are taxed.
A matching program is a benefit where an employer will contribute to your 401(k) to match what you contributed up to a certain percentage. This is essentially free money, so maximize it as soon as possible. If you qualify, you can also contribute to a traditional or Roth IRA (individual retirement account), to increase your tax-advantaged retirement savings even more. Use a retirement planning calculator to help you set goals for retirement and determine how much you should be contributing on an annual basis.
While a transition from the military to civilian life can seem overwhelming, if you create a civilian budget accounting for new costs, build a transition fund and make a comprehensive retirement plan, you can greatly increase the ease of your military transition as well as protect yourself and your family as you move into your new career.
Ashley Feinstein is a certified money coach and founder of Knowing Your Worth, where she empowers her clients to redefine success on their own terms by knowing their value and fearlessly going for it. Find out more, check out her blog at KnowingYourWorth.com and connect with her on Facebook and Twitter at The Fiscal Femme.
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