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6 key financial strategies for life after military service

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Before leaving active duty, there are several things that military service members should do to get ready for civilian life.

Top of the list is being financially prepared for the transition and beyond.

"It's not just about changing your job, it's about changing your way of life," said certified financial planner Bill Sweet, chief financial officer of Ritholtz Wealth Management in New York.

Sweet understands those challenges. He served in the U.S. Army, rising to the rank of captain before leaving in 2007. During his service, he was stationed in Iraq during the Iraq War and earned a Bronze Star.

"The military gives you this identity," he added. "You know where you fit in and the role you play. The civilian world is very murky."

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Each year, almost 200,000 service members return to civilian communities. Because the military is very structured, they'll need to learn to be more proactive in civilian life and take more control over their career and financial well being, Sweet said.

"Uncle Sam isn't going to do it for you anymore."

The most important thing is to make a plan ahead of time, because the separation process is going to be stressful enough, said Tara Falcone, a CFP and founder of financial education company ReisUP. She is also a former hedge fund analyst and is married to an officer in the U.S. Navy.

You have to continue saving. If you don't save, you are setting yourself up for failure.
Bill Sweet
certified financial planner

For one, there are a number of deadlines to meet when it comes to making various decisions about your financial life, such as what to do with your military life insurance.

"A lot of times, when you are in a transition or stressful life experience, those deadlines creep up very quickly," she said. "You don't want to be in a position where you make a rash decision."

Here are six financial strategies for life after military service.

Start saving before you leave

The first step of any financial foundation is building a savings account.

If service members start socking away money before they leave the military, they'll have a nice cushion during their transition period, Sweet said.

If it isn't something you have already started, at least begin about six months to a year before you are discharged.

"Having cash in the bank gives you options to move to a different city, maybe take a pause and pursue a new degree or new training opportunity or wait for the right role open to open up," he said.

Take advantage of the GI Bill

The Montgomery GI Bill Active Duty, which is a Department of Veterans Affairs education benefit that active duty members earn, can be a "fantastic" resource for veterans, Sweet said.

There is also the Post-9/11 GI Bill for those who served on active duty for at least 90 days after Sept. 10, 2001, as well as a Montgomery GI Bill Selected Reserve for reservists with a six-year obligation who are actively drilling.

For those who feel they need further education to get their next job, the GI Bill can help foot the costs for things like tuition, books and housing.

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Members can sign up while in the service and get up to three years of education benefits when they leave. The amount of the benefit depends on the length of service.

For example, someone who was enlisted for at least three years and goes back to college full time is eligible for $2,050 a month under the Montgomery GI Bill.

The Post-9/11 GI Bill pays all tuition and fees for in-state students attending public colleges or up to $24,476.79 a year at a private or foreign school — if the person was enlisted for at least three years.

There is a sliding scale for those who were active for less than three years.

Save for retirement

When you leave active duty, you'll have to find a new way to put away money for retirement.

"You have to continue saving," said Sweet. "If you don't save, you are setting yourself up for failure."

That means opening up an individual retirement account — either traditional or Roth — or contributing to a 401(k) or 403(b) plan with your new employer.

You also have to decide what to do with your military retirement funds.

Unless you have more than 13 years in active duty, you are likely a part of the U.S. military's new program, called the "Blended Retirement System." It combines a traditional pension with a defined contribution plan, similar to a private sector 401(k). That defined contribution plan is the federal government's Thrift Savings Plan (TSP).

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The military gave members who have served less than 12 years the option to move into this plan on January 1, 2018, instead of sticking with the legacy pension, which is only earned if the person served for 20 years. Most people never stay that long. People with 12 years or more of service at that date were grandfathered into the legacy pension plan.

You can either keep the TSP funds in place or you can roll them over into your IRA or 401(k) or 402(b).

It comes down to what works best for you. The TSP has "very low fees" and is much simpler than a 401(k), with fewer investment options, Falcone said.

"If you want low fees and continued simplicity, then maybe keeping some of it in the TSP is the way to go, and then open another account," she said.

However, if you'd rather keep everything in one account so it is easier to track, roll the TSP into your new retirement account, as long as the fees are still reasonable and the investment options are good, Falcone added.

Protect your health

Without health insurance, you could be one hospital visit away from financial disaster.

If you retired after 20 years of active duty service, you are eligible for insurance through Tricare, which also provides coverage while on active duty. You also may get Veteran Affairs health care coverage for any condition related to your service.

If that's not the case, you'll have to look into getting insurance outside of the military.

To start, Sweet recommends extending your active-duty coverage temporarily through the Continued Health Care Benefit Program while sorting out your next move.

It provides health-care coverage for 18 months to 36 months post-service.

"It helps you buy time," Sweet said. "There is an education that needs to happen for someone who has to choose a health-care plan."

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Use the time to sort through your options — whether you eventually get coverage through a new job or have to find a plan through the Affordable Care Act.

Also, educate yourself on what you need to be financially responsible for, Falcone said.

While you don't have to worry about terms such as deductibles, copays, coinsurance, out-of-pocket maximums or coverage limits under the military's plan, it's another story when you transition to a new health plan.

Be aware of tax changes

You should be ready for a bigger tax bill, which is probably the "most abrupt change for many service members," Falcone said.

When in the service, members get different types of tax benefits, like the tax-exempt basic allowance for housing. Deployment pay in combat zones isn't taxed federally and many states do not tax military member's income.

"You will ultimately receive less take home pay even though it looks like you are earning the same gross income," she said.

Unless you get a big bump in pay, you may need to consider lifestyle changes and budgeting adjustments to make up for the reduced income.

Decide on life insurance

Like health insurance, you'll eventually lose your life insurance coverage once you leave active duty. You can only keep it for 120 days post-separation, Falcone said.

If you want to continue holding a life insurance policy, you can convert the Servicemembers Group Life Insurance (SGLI) to the Veterans policy (VGLI) without proof of good health or after a physical.

You can also roll it into a whole life insurance policy, which like the name implies covers you for life. Falcone doesn't recommend this for most people due to the expense.

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The other option is to take out a term life insurance policy, which covers you for a specific period of time. For most people, this makes sense.

"If people are relying on you financially, that is when you need to have life insurance coverage," she said.

"Otherwise, it is sort of an expensive, unnecessary expense."

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