Retirement Planning for Military Members with Second Careers

By: Brian Seay, CFA

Understanding the Unique Retirement Considerations for Former Military Personnel

This comprehensive guide explores essential aspects of retirement planning, focusing on the distinctive elements that apply to former military personnel and government employees with second careers in the government or defense industry.

Introduction: Defining Your Ideal“Retirement”

The Employee Benefit Research Institute surveys Americans annually about retirement and only 28% are “very confident” in their retirement plan. That means the vast majority…72%...have questions. You are not alone trying to solve the retirement puzzle. In this guide we cover some of the most important issues to consider as you plan for retirement.

Before we dive into how much you might need to save or how to buy health insurance, it is important to step back. Think about the big picture. Retirement is different for everyone. The first question to ask is “What is my ideal retirement.”

Retirement is increasing about “making work optional” instead of no work at all. Many of our clients continue to work during retirement. Retirees typically take a step back, work less hours and gain flexibility to spend time doing what they love. For some, that means no work at all. But others love continuing to be engaged in some form of work. They continue to consult, teach, serve in the national guard, join a non-profit or work at a local church. According to the Bureau of Labor and Statistics, workforce participation among adults over age 55 has risen in each of the last three decades. This trend is expected to continue. Also, most continue working because they enjoy being engaged, learning new things and find purpose in work; not because they “need the money.” Consider how you want to spend your most precious resource, your time, as you plan for retirement.

Understanding Military Retirement Benefits

Understanding Military Pension Benefits

One of the most significant benefits for retired military members is the military pension. Your pension is calculated based on years of service and rank at the time of retirement. The pension system includes the Final Pay, High-36 Month Average, and Blended Retirement System (BRS) plans. The majority of current retirees will be in the newer Blended Retirement System plan but understanding which plan you fall under is crucial.

Leveraging Veterans Affairs (VA) Benefits for Financial Security

The Department of Veterans Affairs offers various benefits, including disability compensation, VA healthcare, and educational benefits. Retired military members should leverage these benefits to maximize their financial security and well-being in retirement. It is also essential to stay informed about updates and changes in VA policies and benefits.

A major part of retirement planning is long-term tax optimization. Veterans Affairs (VA) benefits, such as disability compensation and VA healthcare benefits, are generally not taxable. These benefits are excluded from your gross income so it’s important to treat them appropriately as you build your retirement plan.

Managing Multiple Income Streams and Retirement Tax Planning

Retired military members often have multiple income streams, including military pensions, second career pensions, income from real estate and income from investment accounts. This makes retirement tax planning for retired service members unique because you have a combination of guaranteed income (with guaranteed taxes) and discretionary income from other retirement accounts.

Without the right planning, all that income may unnecessarily increase your taxes in retirement. This is especially true once you are in your 70s and your 401(k) and IRA accounts begin Required Minimum Distributions. By planning early, you can project your future income taxes and then strategize which accounts to withdraw from annually. Early planning also may uncover opportunities like ROTH conversions or direct charitable distribution strategies to reduce your taxable income in retirement.

Military Retirement Investing Starts with a Plan, Not a “Number”

Many retired service members have TSP accounts, 401ks or IRAs, either from their military service or their second career. Your investment plan should start by defining clear investment goals. How much pension income do you have from your other retirement sources? How much will you need in retirement? What would you like to pass on to the next generation? Answering these questions will help construct a portfolio that maximizes your chances of achieving your goals. This is not a static “number.” It’s about looking at your lifestyle goals, risk tolerance and assets to determine how to fund your expenses net of taxes. Projections are dynamic and may change as the market evolves. The “number” that works today, may not work tomorrow.

We often find that prospective clients are taking too much or too little risk in their investment accounts. Either error may result in not having enough income later in life. This happens when you don’t have clearly defined investment objectives, and a portfolio designed to achieve those objectives. Often portfolios are full of investments recommended by a former employer, whatever has been “hot” in the past or recommendations from friends. I often refer to this as the “invest and hope” method, which may not end well.

Lastly, regularly monitor and rebalance your portfolio to stay aligned with your plan. Often, I see prospective clients with multiple investment accounts from prior jobs that have had little attention for months or years! You should be investing, not day-trading, but not paying any attention can be detrimental to your returns long-term.

Consider your State of Residency

While you are serving on active duty, service members often maintain a state of residency in prior stations. Many service members choose to declare residency in states with no income tax when stationed there. Once you retire, you will pay state income taxes again if you reside in a state that has an income tax.

Health Insurance: Tricare for Life, Private Insurance and Medicare

Retired military members and their families are eligible for Tricare, the healthcare program for military personnel. It is important to understand the different plans available, such as Tricare Prime, Tricare Select, and Tricare for Life. Each plan has different costs, coverage, and benefits which can significantly impact retirement planning and healthcare costs.

While you are working, you will likely have private sector health insurance offerings through your industry employer. It is rare for private industry to offer retirement health care, but you should review the offerings if they are available. Employer provided private health insurance may be more flexible than Tricare, but that flexibility will come at a higher price.

One of the major benefits of retiring with Tricare for Life is that you have full health insurance once you retire. Medicare does not kick in until you turn 65 and many individuals are forced to wait until 65 to retire so that they can obtain insurance through Medicare. Without Tricare, retirees would need to buy private health insurance on an exchange until they are 65, which can cost upwards of $10,000 per year per person, or $20,000 per couple. Yikes! So as a retired service member with Tricare, you can shift to full retirement or to work without benefits sooner than many other people.

Once you turn 65, Medicare will become your “primary” source of insurance. Once Medicare pays for an expense, Tricare will then cover remaining eligible expenses. So Tricare does not disappear at 65, but it becomes the “secondary” payer.

Estate Planning for Veterans

Creating an estate plan with a will and possibly a trust is essential to ensure your assets are distributed according to your wishes. Do you have children? Will they all be treated the same or do any have unique considerations? Planning might take care of special needs family members, deal with difficult marriages, empower your grandchildren or reduce taxes.

However, estate planning for Veterans is not just about your death! Frequently, Powers of Attorney and Healthcare Directives established during the estate planning process are utilized well before your death. They may have a significant impact on how you live out and enjoy your final decade. So don’t skip this very important part of your retirement plan.

Conclusion: Crafting a Secure and Fulfilling Retirement

Retirement planning for retired military members, particularly those who embark on second careers in military contracting or the aerospace industry, involves unique considerations and opportunities. By understanding and leveraging military benefits, effectively managing multiple income streams, understanding your healthcare and investing wisely retired military personnel can craft a secure and fulfilling retirement.