Financial planning for military members varies slightly, but the general idea remains the same: make a plan and start saving early. The benefits differ depending on the type of job, whether it’s active duty or civilian, there are three different types of military retired pay, and there are the important survivor benefit plans and life insurance to consider. With so many options available, it’s important to be aware and think through all of your decisions. To ensure that you have all of the information necessary to lead a financially secure retired life, contact a financial advisor who knows the retirement planning field backward and forwards.
Active Duty and Civilian Jobs
When making the switch from an active duty position to a civilian position, there are things to consider that will make an impact on your income and therefore, your retirement planning. A big difference between these positions is that government will commonly only tax base pay and other benefits such as housing allowances, combat pay, and cost of living adjustments aren’t taxed. Civilians will see a large part of their income go to taxes. With a civilian position, you will also be paying for health care coverage, which is rare for active duty members.
The three types of military retirement pay systems are:
- Final Pay: A member joined active duty before September 8, 1980.
- High-3: A member who joined active duty between September 8, 1980, and August 1, 1986, and turned down the CSB/REDUX.
- CSB/REDUX: A member who joined active duty after August 1, 1986, and accepted the CSB (Career Status Bonus).
All of these plans allow an eligible member who has served for 20 years or more to receive a pension, which is a percentage of your base pay. Each system determines the amount of your pension differently, adding to the confusion. There are three ways in which your earnings are determined: the multiplier, the cost of living adjustment, and the career status bonus. To learn more about retired pay systems, contact a financial consultant.
The Survivor Benefit Plan (SBP)
SBP was created in 1972 and provides a source of income for your family after you die. Electing this plan will ensure your family has a source of income when your military retirement pay stops. This plan by itself is not enough to live on, but it can be a significant part of your retirement plan. Unless declined, you are automatically enrolled in this plan, which provides a maximum of 55 percent of the retiree’s base annuity. For example, if a member has a $2,000 military retired pay a month, his or her spouse will receive $1,100.
While SBP provides a source of income, it is rarely enough for the surviving family to live on. Eligible members will receive Servicemembers Group Life Insurance (SGLI) and are automatically enrolled. This plan is also available 120 days after the date of separation or when retirement begins, which allows for time to shop around for the best life insurance policy. The plan offers a maximum of $400,000 coverage.
Retirement options for military members are available, but there are a lot of decisions to be made and planning to be done to ensure a secure retirement for you and your family. Having plans available is not a substitute for saving and creating a plan that allows for various sources of income. Contact a financial advisor for estate planning, retirement advice, and more. Together we can create a plan and a strategy that will protect your assets and your family.