Civilian financial strategy aids veterans
As more troops leave the military and return to civilian life, they face a financial transition that could be rough if they haven't prepared for it.
The Department of Veterans Affairs projects that more than 1 million military members will leave the service between 2011 and 2016.
“Transitioning to civilian life is a cultural transition which can be made much more difficult if the service member has not financially prepared,” said Tom Murphy, a certified financial planner at Murphy & Sylvest LLC in Dallas.
“Many items taken for granted, or available at little charge in the military, are either hard to get or expensive in civilian life.”
For example, once a family becomes accustomed to receiving many untaxed allowances such as housing and food, as well as untaxed pay for serving in a combat zone, “adjusting the budget to paying ordinary civilian taxes can be painful,” he said.
“The main thing is just having a plan,” said Scott Church, 27, a McKinney, Texas, resident who left the Army in May as a captain after serving in Qatar.
Here's what you need to know:
Build a transition fund: This is a savings account that will tide you over while you're searching for a civilian job.
“Plan early and know in advance that you're going to be transitioning out of the military,” said Church, a graduate of the U.S. Military Academy at West Point who joined the military in 2007.
“Have an emergency fund of as much as you can so that when you do transition out, you can borrow from yourself and pay yourself back.”
Army pay ranges from $17,892 for a private with less than two years of service to more than $184,809 for a general with more than 20 years of service, said Murphy, an Army veteran. “It would be fair to say the majority of those transitioning had pay of less than $30,000.”
But as Church notes, a lot of expenses are covered in the service.
“You can make a lot of money while you're deployed,” he said. “You get combat pay, and your overhead isn't that much. Try to take full advantage of money you can save while you're deployed.”
Church, a field sales representative in Plano, Texas, for Insight, a global technology firm, built up a savings account during his deployment.
That planning paid off for him.
And he was fortunate to go to work immediately after he left active duty.
“We'd love for everybody to be able to just move right from their military job to a civilian career,” said J.J. Montanaro, a certified financial planner at USAA. “That would be ideal, but that's not a reality for most, so having a robust transition fund is critical.”
GI Bill and budgeting: “Many service members return to the United States and immediately attend college, thinking the GI Bill will take care of their finances; and it will, but perhaps not exactly the way they think,” Murphy said.
“The GI Bill contains a stipend designed to cover living costs while enrolled in college. However, that stipend doesn't start until the semester does, leaving many service members with an income gap.”
Therefore, “it is very important for the service member to save while on active duty ... in order to have money to pay living expenses until the GI Bill kicks in,” Murphy said.
“Savings are also important for down payments and security deposits on utility bills, apartments and other up-front expenses not usually required while on active duty,” he said.
Factor in lost benefits: “Make sure when you're evaluating your budget and your income needs that you're considering the money you'll have to pay for the benefits in the civilian sector that were provided for you at little or no cost in the military,” said Joe Morrin, senior vice president, financial planning, First Command Financial Services Inc.
Medical expenses, housing and food are either provided or subsidized, he said.
What's more, service members receive low-cost group life insurance through Servicemembers' Group Life Insurance.
“If you have a service member with a family who still needs to provide protection for his family, he now has to evaluate what are his life insurance needs, how much do his survivors need in the event of his untimely death.”
Resist temptation: “As your income goes up, resist the temptation to increase your standard of living,” Murphy said.
“Many former military report working half as hard to make three times as much money as they did in the military. Save the difference. Allocate at least half of each year's increase toward long-term goals and the other half toward short-term goals.”