Integrating Military Benefits into Your Financial Planning

As a financial advisor for over three decades and a former U.S. Navy officer with a daughter on active duty and several veterans in the family, a recent conversation I had with a client brought my two worlds together. The client’s son was beginning their military service and had several financial questions about military benefits. This reminded me of the importance of working with an advisor who understands these benefits and can help weave them into a greater financial plan.

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Whether you are retired military, established in your career as an active duty or reserve member of the military, or just starting your service, there are unique elements and important financial considerations surrounding military benefits to be aware of.

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Home of Record vs. State of Legal Residence

Home of Record (HOR) is designated when you commence military service and is generally the state where you first enlisted or received a commission. For most, this location will never change. By contrast, state of legal residence (SLR) can change when orders cause you to move to a different state. SLR is established as the location where you are physically present (i.e. buy a home or rent an apartment) or will return to after a deployment. It is also where you will pay taxes, register to vote and obtain a driver’s license. SLR and HOR are frequently confused. This article helps clarify the difference.

Military Pay and Allowance

There are two types of military compensation: Basic Military Pay (or “base pay”) and allowances. While base pay is determined by individual pay grade, allowances are monies provided for specific needs, such as housing (Basic Allowance for Housing (BAH)) or food (Basic Allowance for Subsistence (BAS)). Most allowances are not taxable – an important additional benefit. The Defense Finance and Accounting Service (DFAS) has a helpful website for answering questions concerning compensation.  Understanding your current and future pay is a good place to start when developing a budget and establishing savings goals.  Also, when comparing your military pay to a civilian salary, don’t forget to add an adjustment to your military pay for the tax savings on your allowances.

Saving for Retirement with a Thrift Savings Plan

A transferable benefit similar to a 401(k), the Thrift Savings Plan (TSP) is a defined contribution plan for members of the uniformed services, as well as U.S. civil service employees and retirees. Established by Congress through the Federal Employees’ Retirement System Act of 1986, it is designed to function like a 401(k) or Roth 401(k). Depending on which retirement system you are covered by, Federal Employees’ Retirement System (FERS) or Civil Service Retirement System (CSRS), your retirement package will look different.

Like any retirement savings plan, there are a variety of approaches you can take to investment selection, diversification, and contribution amounts. The TSP offers five core mutual funds and a variety of lifecycle funds (funds that adjust the investment allocation as you approach your expected retirement date), as investment choices. FINRA’s Investor Education Foundation, Investopedia and the government TSP website are good resources for getting started.

Special Legal and Financial Protections

Enacted in 2003, the Servicemembers Civil Relief Act (SCRA) provides certain protections for active duty service members.  These include the ability to break an apartment lease if you receive PCS (permanent change of station) orders.  There are also provisions for terminating car leases and cell phone contracts in certain situations, and protections against mortgage foreclosure and other adverse legal actions while deployed. These are just a few of the provisions. The SCRA revised and expanded the Soldiers’ and Sailors’ Civil Relief Act of 1940.

The Department of Justice’s website provides detailed information on specific clauses of the Act, while this blog from Military.com provides practical tips on breaking a housing lease. In general, it is advisable to check if your lease agreement has a military clause written into it. If not, you can request for one to be added.

Other Things to Consider For Your Military Benefits

  • Savings: One of the benefits of the military is a steady paycheck and housing benefits. This creates an excellent opportunity to save, especially while you are young and have no dependents. Try to maximize savings during the first couple of years of your service. Saving between 20-25% of income is a good target, divided between savings to the Thrift Plan and a regular savings account. Once you have a comfortable savings reserve equal to 3-6+ months of expenses, you can consider investing excess longer term in a diversified investment portfolio. As your family situation changes, you may need to reduce your savings rate to 10-15%, but the early head start will serve you well.
  • Transportation: If you are starting out, think carefully before buying a car. Don’t overspend and consider what would happen with the car if you are deployed.
  • Morale, Welfare & Recreation Office (MWR): Take advantage of this great source for discounted tickets for trips and entertainment.
  • Discounts: Many retailers (Home Depot and Lowes for example), hotels, movie theaters, museums, bus and train systems and others offer military discounts. Make it a habit to ask, and always have your military ID card handy.
  • Financial Services Firms that understand the military: There are huge benefits to working with organizations that understand the military. USAA is one such example. They have reasonable fees, are easy to work with even if you move around and offer a range of services including basic banking, insurance, and investment services.
  • Insurance: When considering insurance options, you may be able to receive special discounts or packages, often in the case of auto, property, and life insurance in particular. Carriers like USAA, Armed Forces Insurance, and others specialize in working with military families and commonly continue to provide benefits even after separation from the military.

While this blog highlights a few of the several considerations unique to current and former members of the uniformed services, everyone’s situation is different. This underscores the importance of working with a financial advisor who can help you navigate your military benefits and ensure they are incorporated into your larger financial plan.

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Article By Gail Harris, CFP®, CIMA®

Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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