Financial Planning For Veterans

Many financial advisors choose to focus on one or demographic segments of the population from which they build their clientele. One important group that often gets overlooked is members of the U.S. military who retire or separate from service. In many cases, these service members have been targeted by predatory lenders and salespeople who often manage to put them deep in debt and destroy their credit scores. Even those who manage their money well are often unprepared for the financial transition that they will face when they enter civilian life.

Two Categories

Although there are of course exceptions, probably the majority of departing service members can be divided into two general groups. The first group consists of the junior enlisteds who joined the military after high school and are just now entering civilian life for the first time as adults. This group has often racked up substantial debt, such as car loans, credit card balances, emergency relief loans from the Army Community Service Department and other consumer loans. Many of those in this category never received more than a cursory financial education of any kind while they were in the service (or else paid little or no attention to what was given). They are often unaware of what their credit scores are or how this will impact them when they begin looking for a job, particularly one that requires a security clearance. Many of them have no savings of any kind and have given little thought as to what their monthly living expenses will be after they leave. Advisors who encounter clients in this category are probably wise to focus chiefly on educating them in how to create and maintain a budget, use their GI Bill and other veterans’ benefits wisely and perhaps refer them to a local credit counseling service if necessary. (For related reading, see: Franchise Opportunities for U.S. Service Members.)

Survivor’s Benefits: Opting Out?

Of course, there are some officers and senior enlisted personnel who also struggle financially due to divorce or financial mismanagement, but a large percentage of them face a very different set of issues than their lower-ranking counterparts. Those who receive a retirement pension will automatically be assigned the Survivor Benefit Rider (SBP) if they are married, which reduces the amount of their monthly pension by 6.5%. Their surviving spouse will then receive 55% of the amount that the veteran previously received each month until he or she dies. However, this rider is extremely expensive for higher-ranking officers who typically receive pensions of several thousand dollars per month, and it is also considered taxable income by the IRS and many states.

Furthermore, the longer the veteran lives, the less the survivor will get paid. For example, couples where the vet lives to be 85 with a spouse who dies two years later did not get much for their money. In most cases, those who receive retirement pensions will be better off having their spouse sign off to waive this rider and using the additional income to purchase a life insurance policy. This has several advantages over the SBP, as it will often be cheaper and pay out a tax-free, lump-sum death benefit which will either remain constant or grow as long as the policy is in force, depending upon the type of coverage that is chosen. Of course, the right choice here is not the same for everyone, and this is very good opportunity for advisors to create a comprehensive plan for clients facing this dilemma, because this can allow clients to see how various scenarios here could play out. For example, the plan could show what would happen if the couple elects to carry the SBP and the veteran dies in 5, 15 and 30 years from now and then compare that to what would happen if the vet died at those times with term or permanent life insurance coverage instead. In many cases, the best choice if the vet dies very soon will not be the best choice if he or she dies from old age, so a probability factor should be taken into account for this.

Retirement Planning

Service members who have participated in the Thrift Savings Plan (TSP) are often unaware of what their options are once they separate from service, and many of them don’t realize that there can be advantages to rolling their plans over into an IRA or the retirement plan of the company they go to work for in the private sector after they leave. Although many of them want to take a stream of income from their plans after they stop working, the military has only recently begun to explain the advantages of strategies such as stretch IRAs and Roth conversions to those for whom it applies. Veterans who want to get a guaranteed stream of income from their plans after they stop working also need to understand that the qualified annuity that they can purchase inside the TSP does not offer many of the benefits of modern annuity contracts. Most commercial carriers now provide features such as income riders, a doubled payout for managed care or an up-front bonus that is paid into the contract upon purchase.

Those who receive retirement pensions may also find themselves unable to make direct contributions to a Roth IRA because their incomes are too high when they combine their retirement income with what they now make as civilians. Advisers need to show them how to use the Roth conversion loophole to make Roth contributions by opening traditional IRAs and making nondeductible contributions, then converting them to Roth IRAs. This has been used as a backdoor strategy since 2010, when Congress lifted the $100,000 AGI limit for Roth conversions. (For more, see: Converting an IRA Annuity to a Roth: Know the Rules.)

Tax Planning

Tax withholding can also be a major adjustment in some cases, because most service members receive one or more tax-free allowances in addition to their basic pay while they are in the service. As with Roth IRA contributions, this issue can also be compounded by the additional income from a retirement pension. (For related reading, see: An Introduction to Government Loans.)

Insurance and Other Benefits

Although the pay that military service members receive is often below that of civilian pay for an equivalent job, the benefits that they receive while they serve are second to none. Of course, this is not always the case in the private sector, so be sure that your clients who are about to enter civilian life are prepared for this change. Those who are receiving retirement pensions may want to devote a few months of this pay into a savings account to cover all applicable deductibles and other out-of-pocket expenses that won’t be covered by their new health, dental, vision or disability policies. Advisors also need to make certain that vets thoroughly understand their Veteran’s Administration benefits and what they can get with them. (For more, see: The Unique Advantages of VA Mortgages.)

The Bottom Line

Many veterans who have served our country are not prepared for the economic reality that await them after they separate or retire. Some of them need education in basic finance, while others face more complex issues. But advisors who take the time to service them effectively can count on having them as clients for a long time to come.


This article was originally posted on Investopedia by Mark P. Cussen, CFP®, CMFC, AFC