Military Financial Guide to Transitioning to Civilian Life

Updated: November 8, 2023

Updated: November 8, 2023

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Getting a head start is critical - at a minimum, the process should start a year before your expiration of time-in-service (ETS) date, but many people start planning even before that.

“Nobody should be leaving the military without having a job or solid education plan lined up,” advises Carl Castro, the director of the Center for Innovation and Research on Veterans and Military Families at the University of Southern California, and a retired colonel in the U.S. Army. But the center’s statistics show that 75% of departing military members do not have solid employment or school plans when they punch out of the service. And that’s a number we should be changing, he says.

Timeline For Transitioning To Civilian Life

The time to start planning is when you’re at least 12 months away from your known EAS (end active service) or retirement date. Retirees should actively begin the process between 18 and 24 months out, if possible.

12 to 18 Months Out

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9 Months

By nine months out, you should be applying for any civilian education programs, colleges or universities you wish to attend. Just planning generically to “go to school” after you get out isn’t enough, Castro says.

Step 1: Know what you’re studying, what programs you’ll be applying to and in what cities.

Step 2: You should also be applying for any scholarships you can qualify for. Many of these scholarships involve a cash award or stipend. Just because you expect to receive GI Bill education benefits doesn’t mean you won’t qualify, especially for scholarships that are based on merit, rather than financial need.

6 Months

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3 Months

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2 Months

Moving to a new state poses challenges for departing veterans. You need to insure your car and register it with a new DMV, for example, and enroll children in new schools.

When you plan your final PCS (permanent change of station) move, you should consider a variety of different factors:

STEP 1: DECIDE ON HOUSING

If you are involuntarily separated under honorable conditions or retiring, you may be able to get permissive temporary duty to do job searching and house hunting before you ETS.

Most readers are no doubt aware of the VA home loan program, which allows qualifying veterans to purchase a home with no down payment. The home loan program for veterans is a terrific military benefit. In addition to the zero down payment requirement, VA home loans offer the following benefits:

No private mortgage insurance (PMI). Not having to pay for PMI can save you hundreds of dollars per month. More flexible credit underwriting compared to conventional loans. Generally lower interest rates. The VA home loan doesn’t have a formal minimum credit score requirement. But participating VA mortgage lenders usually do, with floors of about 620 being common. The higher your credit score, the better terms for which you are likely to qualify. You should start working to improve your credit score early.

If you want to remain near your current duty station, you don’t have to wait to purchase a home. You can buy a home while you’re still in, and use a VA mortgage — as long as you live in the property. You can’t use a VA loan for a home you plan to rent out.

To get a VA loan, however, you do need to get your monthly debt payments down to a reasonable level. Your debt-to-income ratio — your monthly debt payments divided by your monthly income — typically needs to be at 41% or below.

STEP 2: TAKE ADVANTAGE OF HOUSING BENEFITS

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In addition to the Veterans Affairs Mortgage Guaranty program, there are several other veteran housing benefits and programs you may qualify for after leaving the service. For example, disabled veterans may be eligible for grants to help with housing accessibility, to include remodeling costs or even the cost of building a new custom home from scratch.

The VA also works with local agencies to assist veterans who have become homeless or are at risk of becoming homeless. You may qualify for subsidized housing or a voucher you can use to rent a home or apartment.

The Military Housing Assistance Fund may also help with some of the up-front closing costs of buying a home.

1 Month

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2 Weeks to ETS

While you’re still technically in the military at this point, it’s time to start thinking a bit further into the future. While most of your moves so far have been based on transitioning to civilian life, now is the time to consider how life may look like one or five years down the road.

STEP 1: UNDERSTAND YOUR CURRENT EXPENSES

a woman and man work on their budget from their kitchen table.

Castro cites everyday costs of living that are generally hidden to many service members on active duty. For example, the basic tax-free allowance for your housing subsidy disappears. Veterans will have to pay housing costs with after-tax dollars. You’ll have to come up with a deposit just to move in many cases, which can run as high as the first and last months’ rent, which you’d have to provide upfront.

“Service members don’t understand the cost savings that the commissary or the exchange provides them,” says Castro.

To really get a handle on your current and future expenses as you transition out of the military, you should make use of the newest budgeting tools.

STEP 2: PLAN FOR INCREASED INSURANCE EXPENSES Military_Transition_to_Civilian_Life_Finance_Guide_image_10_xvoirn-min.png

In the military, the vast majority of all your medical care costs are taken care of for you. That changes when you leave the service. Without a government or employer subsidy, the average cost of health insurance can easily cost more than a thousand dollars per month. And you will still likely have significant copays and deductibles.

You’ll also have some other insurance expenses to consider — expenses you didn’t have living in the barracks or on post housing:

Long-term care insurance. Disability income insurance. Renters or homeowner’s insurance. Disability Insurance

In the military, if you get sick or injured, your paycheck keeps coming. That's not always the case in the civilian world. If you get sick or hurt and can no longer work, your income could stop. This can put an enormous financial strain on you and your family and can even lead to eviction, foreclosure and bankruptcy.

That's where disability insurance comes in. Disability insurance replaces a fraction of your pre-disabled pay, up to the limits of the policy.

Workers’ compensation covers injuries on the job, of course. But 95% of disabling injuries and illnesses are not work-related and don't qualify for workers’ compensation.

Some employers offer short-term disability insurance, long-term disability insurance, or both, but it's not portable. That means you can't take it with you if you leave your job.

Disability insurance is medically underwritten. Carriers can and will turn you down for significant pre-existing conditions. But you can buy your own from a health insurance broker who sells disability insurance or directly from the carrier.

The most valuable policies are "own occupation" policies. That means that the language in the contract obligates the insurance carrier to pay benefits if you cannot work in your own occupation.

These policies are much more likely to pay benefits than an "any occupation" policy, which will not pay benefits if you are still capable of working in any occupation for which you are reasonably suited by education and training.

The best time to shop around for disability insurance is when you are still in good health, with no pre-existing conditions and a clean medical record.

STEP 3: PLAN FOR OTHER INCREASED EXPENSES

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“The vast majority of young servicemembers do not understand how much it costs to live in the real world,” Castro says. “They don’t understand how much rent costs. They don’t understand how much utilities cost. Water. Electricity. Gas. Trash collection. Dental and health — all these things that will now have to come out of their own pocket. And if they have kids, and if you want to have good schools, and live in a safe neighborhood, that’s even more money,” says Castro.

“If you want to live in a major city, like Los Angeles, New York or Chicago, you need to have $20,000 to $30,000 saved.” he says.

Start putting together a good-sized stash of cash, so you can quickly pay first and last month’s rent in your chosen city.

STEP 4: PLAN TO PAY MORE TAXES AS A CIVILIAN

A lot of service members don't realize how much of their compensation from the military is tax-exempt, says Castro. For example, the basic allowance for housing (BAH) is tax-exempt. But when you leave the military, you have to pay your rent or mortgage principal payments with after-tax dollars.

The same goes for moving allowances, family allowances and some educational benefits for dependents. All these things were tax-free while you were in uniform but will have to be paid for with after-tax dollars in the civilian world. And there's no chance to earn tax-free combat-zone pay.

The difference can amount to hundreds of dollars per month.

There are a few tax breaks that veterans receive at both the federal and state/local tax levels. For example, many states exempt all or part of military retirement pay from state income tax. Some states also provide property tax breaks to veterans.

Savings and Retirement Planning for Veterans

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IRAs

The term IRA stands for “Individual Retirement Account.” As of 2020, you can contribute up to $6,000 to all your IRAs combined in any tax year. If you’re age 60 or older, you’re allowed another $1,000 per year in allowable contributions. Contributions are generally tax-deferred, depending on your income. Withdrawals are taxed at ordinary income rates. Higher-income earners will see their ability to deduct contributions reduced. You must begin to take withdrawals (required minimum distributions), or RMDs, by April 1st of the year in which you turn 72.

Roth IRAs

Roth IRAs are similar to IRAs, except there’s no tax deduction on contributions, and no tax on withdrawals. There are also no required minimum distributions (RMD)s on Roth IRAs.

A 10% penalty applies to all IRA amounts withdrawn before age 59½, except in certain hardship circumstances. With Roth IRAs, the penalty applies only to the earnings (assuming the 5-year rule has been met.)

Your eligibility to contribute to a Roth IRA begins to phase out with an income of $124,000 for single/head of household filers, and phases out completely when your income reaches $139,000.

For married couples, your eligibility to contribute to a Roth IRA begins to phase out when your income reaches $196,000, and phases out completely when your household income reaches $206,000.

Thrift Savings Plan

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Civilian Employer Retirement Plans

Most established civilian employers offer at least some kind of retirement plan to full-time workers. In most cases, these plans allow you to contribute pre-tax dollars (e.g., contributions are tax-deductible).

The most popular of these plans is the 401(k). Contributions are made via payroll deduction, pre-tax (except for Roth accounts). Employers may make a matching contribution.

The SIMPLE IRA is another similar plan popular among smaller employers.

The 403(b) is a similar type of plan for employees of non-profits, such as schools and hospitals.

The Section 457 plan is a salary deferral plan for certain public employees, such as police and firefighters.

These plans are defined contribution plans, not traditional pension plans. There’s no guaranteed retirement income from a workplace pension, except for government employees and a vanishingly few private sector employers.

In the civilian world, your retirement income security is likely to be almost entirely dependent on how much you save, how soon, and how well your investments perform.

No one’s going to do it for you, says Castro. You’ve got to take responsibility and contribute as much as you can to these tax-advantaged retirement accounts, as early as you can.

You can contribute to IRAs and employer retirement accounts at the same time, though contribution and income limits apply.

It’s a good idea to check the full program overview of the federal Thrift Savings Program to get a clear understanding of what your options are.

Military Retirement

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Life Insurance Considerations

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Health Savings Accounts

A health savings account lets you save for medical expenses using pre-tax dollars. You can only use these accounts if you are enrolled in a high deductible health plan. As of 2020, you can contribute up to $3,550 for an individual plan covering only yourself, and $7,100 for a family plan. Many employers offer a combination HSA/HDHP as an option among their health plans. They may make contributions to the plan on your behalf.

For tax year 2020, these plans have to have a minimum deductible of $1,400 for an individual, or $2,800 for a family plan. Out of pocket costs, including deductibles, coinsurance and copays, are limited to $6,900 for an individual and $13,888 for a family.

You can use the account to pay qualified medical expenses. Amounts you don’t need for medical expenses accumulate tax-deferred. At age 65, they are available to supplement your retirement income.

High deductible health plans and their attendant HSAs can be a good option for those who are in good health, whose family members are in good health, or for those whose employers contribute to their HSAs.

If you or a family member have health challenges that will require you to purchase significant health care products and services and/or prescription drugs, you may be better off with a lower-deductible plan, even though premiums will likely be higher.

Expert Advice on Transitioning to Civilian Life

Carl Castro, PhD, joined the USC Suzanne Dworak-Peck School of Social Work faculty in 2013 after serving 33 years in the Army, where he obtained the rank of colonel, as the research director for the USC Center for Innovation and Research on Veterans & Military Families. Castro began his military career as an infantryman in 1981. Castro has authored more than 150 scientific articles and reports in numerous research areas. His current research efforts focus on assessing the effects of combat and operations tempo (OPTEMPO) on soldier, family and unit readiness, and evaluating the process of service members’ transitions from military to civilian life.

Castro has been recognized for his contributions in the field, most recently as a recipient of the 2017 Charles S. Gersoni Military Psychology Award from the American Psychological Association.

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Checklist for Before (And Just After) You Leave the Military

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Military Transition to Civilian Life Resources

  • DoD SkillBridge: A partnership that connects transitioning service members with job training opportunities, internships and work experience over their final 180 days of service.

  • Veterans Employment and Training Services (VETS): A U.S. Department of Labor program to promote veterans and military spouses in the work force and protect veterans’ employment rights. They administer state grants for the Jobs for Veterans program, which supports state workforce agencies, enabling them to hire dedicated staff to provide career transitioning and training services to veterans.

  • Veteran Jobs Mission: A consortium of more than 200 major private sector companies who have committed to hire 1 million veterans. (At press time, they’re at 594,006.)

  • VetJobs: An online job board with hundreds of thousands of listings. All listings are from employers who are specifically interested in hiring veterans.

  • ClearanceJobs.com: A job board specifically for those holding secret or top-secret clearances. If you already hold a clearance from the military, you are very attractive to many employers, because you've already been vetted, and the employer can potentially save significant amounts of money paying for a clearance investigation for another applicant who doesn't already have one.

  • Military Skills Translator: A web resource that helps transitioning service members and veterans translate job skills acquired in the military to civilian skill sets.

  • Department of Veterans Affairs - Montgomery GI Bill: The VA’s home page for Montgomery GI Bill and Post 9/11 GI Bill benefits for education, trade or vocational school and apprenticeship programs.

  • Wounded Warrior Resources: The MilitaryOneSource.com page listing a variety of programs and support organizations for wounded or disabled veterans

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