When you separate from the military, your income will change – and not just in the sense that your paycheck is coming from a different employer. There are benefits afforded to active duty servicemembers that do not follow you after your transition, and it’s best to know what is coming so you have time to prepare your budget.
When you leave the military, you will lose your housing allowance.
The military provides most servicemembers with a Basic Allowance for Housing and a Basic Allowance for Subsistence to help cover the costs associated with buying or renting a home or apartment (if they do not live in government housing) and the costs associated with meals. These allowances are paid out with a servicemember’s salary – and they are not taxed.
After you separate from the military, you are responsible for your own housing costs and grocery bills; these are not covered by civilian employers. While this may seem obvious, it’s important to realize that the portion of your salary that covers housing and food will be taxed – at least on the federal level – so you will need a correspondingly higher salary to maintain the standard of living that you became used to while serving.
You will need to get health insurance.
There are no TRICARE enrollment fees or quarterly premiums charged for active duty servicemembers and their families. This makes health care coverage a valuable benefit of military service. Upon separation, however, new veterans and their loved ones lose access to active duty TRICARE benefits and must select an alternative form of health insurance to cover the cost of medical care.
Retirees, Reserve and National Guard members, and some survivors may be able to enroll in other TRICARE programs and pay the fees associated with coverage. Those who are separating under specific circumstances or joining the Reserves may be eligible for 180 days of health care benefits after their TRICARE benefits end through the Transitional Assistance Management Program (TAMP). However, this assistance is temporary and servicemembers need to find other coverage following its expiration. Some disabled veterans may be eligible for VA Health Care.
Unfortunately, health care is expensive. For recently separated servicemembers who are not used to paying for these services, the transition can come with sticker shock. If you have another job lined up, you may be eligible for health insurance benefits through your new employer; otherwise, you can explore plans that are available in your area through the Health Insurance Marketplace. You may also want to consider dental insurance for yourself and your family.
You will need to make decisions about life insurance.
Servicemembers’ Group Life Insurance (SGLI), which provides $500,000 of coverage for the low cost of $30 per month, only lasts for 120 days after a servicemember’s last day on active duty. To avoid a lapse in coverage, servicemembers may choose to convert their SGLI policies to specific commercial whole life insurance policies during this 120-day period. There is no proof of medical insurability required to convert coverage through this program. Servicemembers could also choose to convert their SGLI coverage to Veteran’s Group Life Insurance (VGLI) coverage. They have up to one year and 120 days to convert to a VGLI policy, but after 120 days they may be required to answer medical questions to determine their insurability. VGLI coverage amounts range from $10,000 up to the amount of coverage a servicemember had under SGLI. After this time, veterans who are interested in getting life insurance through the VA can only apply for VALife, which provides whole life coverage that maxes out at $40,000. VALife is only available to veterans with a disability rating.
Note that VGLI is significantly more expensive than SGLI, especially if maintained into a veteran’s old age – VGLI prices increase every five years with the age of the veteran. VALife premiums do not increase with age but depend solely on the age at which a veteran applies for their policy.
These aren’t the only options that separating servicemembers have for life insurance. Those who are willing to shop around may find that commercial insurers offer lower pricing and more coverage than what might be available through VGLI or VALife. Navy Mutual, for example, offers a no-exam-necessary alternative to VGLI to separating servicemembers as well as term policies that allow for up to $1.5 million in coverage – get a quote today.
You can no longer make contributions to TSP.
After leaving the military, servicemembers lose the ability to make direct contributions to their Thrift Savings Plan (TSP) accounts. However, unlike most employer-sponsored retirement accounts, veterans can keep their accounts open and are not required to take a distribution (until age 73) or complete a rollover (provided the account has a balance of at least $200). Veterans are able to make contributions to their TSP accounts through rollovers from other eligible retirement accounts. One of the biggest advantages of TSP is the low maintenance fees compared to private IRAs and other employer-sponsored retirement accounts.
Note that servicemembers who leave the military but are later employed by the federal government will regain access to TSP, but will establish a new, different account.
Your state income tax situation may change.
There are nine states that do not collect income tax from their residents: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- If you live in one of these states post-military, you will not have to pay state taxes on earned income.
- If you established one of these states as your state of residence while in the military, but move to a different state after separating, you will be required to pay state taxes on earned income.
Note that once you are separated or retired from the military, you can no longer choose a residency state. You will pay income tax to the state you live in when earning income.
If you live in one of the 41 states where income is taxed, your tax rate will depend on your location; this percentage can range from just over 3% to 13%. Note that while you may live in a state with a favorable income tax situation, there are other ways for states to collect money, including local taxes and sales tax.
Note: If you retired from the military and have begun collecting your retirement pension, you may owe state income taxes on your benefits depending on your location. California fully taxes military retirement pay; 11 additional states at least partially tax military retirement pay (Colorado, Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, New Mexico, Oregon, Vermont, and Virginia).
You may begin collecting benefit pay from other sources.
Servicemembers who serve for a minimum of 20 years before separating receive retirement pay for the remainder of their lives. The amount of this pay depends on the retirement system that the servicemember falls under, but ranges from 2–2.5% times the number of years served multiplied by the average of the servicemember’s highest 36 months of basic pay.
Separating servicemembers may also be eligible for disability compensation pay from the Department of Veterans Affairs, regardless of the number of years served. These monthly payments are made to those who became sick or were injured while serving in the military and to those with a preexisting condition made worse by their service. Monthly payments depend on the veteran’s disability rating and their number of dependents.
Note that retirement pay is taxable federally and at the state level, depending on the state, as discussed above. Disability payments are tax-free. Both retirement pay and VA disability payments are paid only once a month; this is unlike active duty pay, which comes twice a month. This difference in schedule can cause cash flow management problems for someone who is accustomed to bimonthly payments, so it’s wise to put half of any retirement and disability payments aside to cover expenses in the second half of each month.
Transitioning out of the military can result in significant changes to your household income. Prepare ahead of time by learning about the changes that might affect you, then plan your budget around what you find. Navy Mutual’s financial educators are available for free one-on-one counseling sessions with military and veteran families and can help answer any questions that may arise.