Military veterans approach “retirement” in a unique way, since many will retire from the military in their 40’s, then go on to pursue another career. They also benefit from military pensions and sometimes disability pay to supplement their income. Therefore, retirement plans written for civilians in their 60’s don’t always make sense for veterans. With those unique factors in mind, we interviewed Jason Meyer of Northwestern Mutual to discuss how active duty service members can plan and prepare for military retirement. He’s a professional financial advisor, who served in the Army for eight years with deployments overseas. So he has a unique perspective on the financial choices facing military families near retirement.

What steps can a service member take while they are still active duty to set themselves up for financial success after military retirement? 

I think the long-term saving strategies that I revert back to when I’m meeting with military–active duty, reserve, or retirees–is a Four-Bucket strategy. The “buckets” work like this:

  1. You have an emergency fund, to make sure you can cover 3-6 months of household bills in a savings account.
  2. Once you have that in place, any dollars you would put into savings should go into a brokerage account, with the primary goal of keeping up with inflation.
  3. Next, long-term savings strategies: either real estate properties or permanent life insurance. There are tax benefits and they are safer assets.
  4. The 4th bucket is your retirement fund. This means putting money away on top of your military pension and not relying on that money, to make it work for you and get some growth. The service member should contribute to their TSP. The rule is to offer 7-10% of their income, because this gives your money a chance to grow enough that you won’t outlive your money. Most people are comfortable living on about 60% of the income they made while they were working. Because the military offers a pension, you don’t have to do as much up front as a civilian does. So contributing 10% of your income over a 40-year period makes your nest egg significant enough. If you aren’t comfortable contributing 10%, then don’t. But contribute something!

In 2017 they rolled out the Roth TSP. If a person is making less than $150,000 household income per year, they should invest in the Roth TSP, because that is tax-free growth. You have already paid taxes on the money when contributing it. You can pull this money out during “2nd retirement” at age 59.5 without paying any penalties on it. The Traditional TSP will be taxed as income tax every time you withdraw it. So if you are in a higher income bracket during retirement than you were in while you were serving, then you aren’t making as much. 

We did a comparison to a 25-year old and a 35-year old each contributing $6,000 per year into an IRA. By retirement age, the man who started later had about 800,000 in the account, versus the younger man who reached 1.3 million! This is with the same percentages of growth. 10 years of additional contribution makes a huge difference. The earlier you begin, the better you are set up for retirement.

Do you think most service members are currently taking these steps?

No, I don’t. I would estimate less than 5% of people actually put any long-term savings into place because many rely on the military pension as their primary method of retirement planning. Many service members getting out don’t even attend a financial planning seminar or actively participate in financial planning. It’s almost as if the military retirement classes are “death by Powerpoint” and just done to check a box.

Is there a one-size-fits-all financial strategy plan that you would recommend for veterans? 

The only generic advice I can give is to work with someone who does financial planning for a living, because no situation is the same. There is no one-size-fits all plan. Every person’s situation is different. A single soldier retiring without spouse or children will have a different situation from a married soldier with four kids.

When I’m counseling veterans for retirement, I ask them to first consider, where are you going to live post-retirement? Every state has different benefits and tax discounts. There are five states with no property tax for over 75% disability. There are other benefits some states have like not taxing the military pension. State-specific benefits should be taken into consideration when planning your budget and long-term plans.

When I’m working with military personnel, life insurance is usually one of their first questions. Life insurance decisions are best discussed before you get out of the service. There is a huge difference between SGLI (Servicemembers Group Life Insurance), which they pay into while active duty, and VGLI (Veterans Group Life Insurance), which becomes available at retirement. The VGLI has a maximum payout of $400,000 and a rising premium cost. By the time you get to age 55, for $400,000 benefits, you are paying about $800 monthly in premiums. It’s very affordable in your 20’s, but becomes costly by the age you actually need it. That premium almost makes the VGLI not worthwhile. The alternative depends on their budget, their family, and their needs. There are different types of life insurance, but it’s worth it to lock it in while you are still young. Once you are approved, it can’t be taken from you unless the term ends or you want to renew or increase the premium. But it can’t be revoked for new health conditions. A $400,000 premium really doesn’t do much if you have a family. It may pay off a mortgage or cover some additional bills, but it is not the legacy that some people expect from life insurance.

Some veterans become first-time home buyers after retiring from the military. What financial advice do you have for veterans trying to enter the home market after retirement?

My number one recommendation is to work with a lender who does a lot of VA Loans. The VA Loan process can be challenging for a lender who isn’t familiar with it, and there are a lot of nuances. There is usually a VA funding fee, but it can be waived if the veteran has a disability. And you are allowed to do 100% financing with the VA Loan. From a rate perspective, there isn’t much difference between the VA Loan and conventional loans. There isn’t much of a down side to the VA Loan, because it allows you flexibility to put money down, or apply savings toward your investments instead of into a home. You may net more by investing in the market and gaining every year instead of reducing your mortgage rate by such a small amount each month. A mortgage is financially considered “good debt” as long as it is less than a 5% rate. Many loans are under 3% right now. 

If you were involved in retirement or transition classes for veterans, what information would you want to discuss?

The number one thing I would want to talk through with someone coming out of the military would be budgeting. In the military, a lot of things are paid for you.  I would want to sit with individuals and figure out how much they would need to make as a civilian to be comfortable and maintain their current lifestyle. You can research information in different states, and research the average electric bill and heating bill for a zip code, for example. You can get an idea of how much you’ll have to spend each month in different locations. This will let you know whether your military pension is enough, whether you have to go back to work. 

The other part of that is how to maximize your civilian retirement with your military retirement. The military pension is guaranteed income for life. That allows the person to be more strategic with their civilian retirement. They can be more aggressive with their 401k at age 40, because they aren’t relying on it any time soon. If you know you have $4,000 coming per month (in pension and disability pay), and you need $6,000 monthly to live, then you’re only planning for an additional $2,000 per month and the rest can go towards savings strategies.

Disability pay is hard to plan for, so it shouldn’t be included in your retirement budget until it is determined officially through the VA. The rating time depends on documentation, but you should plan ahead and get things documented while you are still active duty, and begin the claim process several months before your retirement date. The service member should have an estimate of their level of disability and look up various charts and state benefits as they are preparing for retirement.

When you retire, you can keep your TSP or roll it into an IRA, which is managed differently with more options for funds and can be kept in any of your financial institutions. Once you retire, you cannot contribute more to your TSP unless you leave active duty and go into the National Guard or Reserves.

What if a service member has not spent time on financial planning, and is about to retire from the military. What financial advice would you give them?

It all starts by putting together their financial plan–putting together their budget, looking at their needs and their goals. Once we have those future goals in place for their 2nd retirement, we can backtrack and put things into place now that will help them achieve those goals. I’ve seen both sides of retirement planning. There’s a lot of work on the front end, but if you understand the plan and understand the future benefit, then you need to start early. Financial planning is not an event, it’s a process. We take baby steps. It’s an ongoing annual check-in process, but certainly worthwhile.

Work with someone who does this professionally. I never charge to have a conversation with a service member and have a conversation about a plan. If they decide to make certain decisions, they can work with me on future things, but if they make decisions that benefit their family, that’s all that matters. There is such a stigma that “all financial advisors want is your money,” but not everyone is the same. Work with someone who can look out for your best interests, and someone you are comfortable with. It’s going to be a long relationship, and you want to have someone in your corner that is truly looking out for you. It’s so powerful to have someone in your corner!