Episode 6 Budgeting for Military Retirement

In this show, Mike and Amy discuss the topic of budgeting for military retirement. Mike and Amy cover: 

1. Importance of a Transition Budget (1:05))
2. Planning for new/ additional expenses (3:03)
3. Timing of payments during transition from active duty into retirement (6:35)
4. Changes in paycheck timing after transition (8:11)
5. Specific thoughts in preparing for your ideal next step (11:48)
6. Start 12-24 months before transition (15:26)
7. Making savings tradeoffs (16:12)
8. Rebuilding your cash after transition (20:09)

Key Takeaway: Saving more allows more flexibility, more options, and less stress (21:33)

Links:

Operation Retirement Readiness 

Schedule a consultation with Mike

 

Transcript

00:00:00 Amy:

Hey, Mike, how’s it going?

00:00:02 Mike:

Good. How are you, Amy? Doing well. Today, let’s dive into budgeting. People don’t enjoy it, but it’s crucial. There are times when having a budget and understanding your expenses are incredibly critical.And today, we’ll focus on military retirees. Understanding expenses before retirement is key. Mike, what are your thoughts?

00:01:05 Mike:

You’re right, Amy. Transitioning is tough. Financial uncertainty adds stress. Saving more is vital for flexibility. Just save more, build up that transition budget. Cash is king. You have the optionality. These are key things to consider for military retirement transition funding.

00:02:20 Amy:

Absolutely, Mike. More is better. You need to understand both everyday and additional expenses like business attire or home upgrades. What were your additional expenses?

00:03:03 Mike:

One thing people overlook is retirement expenses. Ceremony, gifts, hosting—all add up. Moving costs too. Dislocation allowance isn’t there for your last move. Immediate expenses during transition are crucial. Job, clothes, and other items come into play.

00:04:29 Amy:

I stayed local, but had expenses for a retirement ceremony. Uncertainty lingered despite a new job. Paycheck timing added to the uncertainty. Understanding expenses and the income gap is vital. Government appointments may have a waiting period. Starting a business requires cash flow.

00:06:35 Mike:

Yeah, those are great points. Speaking of the gap, until you start looking into this, you may not realize the gap between official retirement and your last paycheck. They hold that last paycheck to ensure correctness. It’s improved but still, you may have a gap. You won’t get the last paycheck immediately, and retirement pay starts later. There can be a significant drop in income. Planning for that month is crucial if you’re not already working during terminal leave.

00:08:11 Amy:

The timing of income changes. Government pays every other week, while some companies pay monthly. Retirement paycheck is monthly. You’ll have to adjust your bill payment schedule accordingly. Having three to six months of expenses readily available is recommended. It provides breathing room in case of income fluctuations.

00:09:59 Mike:

Entrepreneurs might need a larger cash cushion, possibly 12 to 24 months of living expenses. Avoid overly optimistic projections; they can lead to bad decisions. Taking a sabbatical could be beneficial. Use that time to plan and budget for your transition, especially if you’re considering a career change or further education.

00:11:48 Amy:

During a military transition, optimism is crucial for job hunting or starting a business. However, when budgeting, honesty is key. Be realistic about income gaps and expenses. Budgeting requires brutal honesty about needs and expenses. You won’t cut your budget to zero, so prioritize essentials. Consider what standard of living your family is willing to accept. Could you recap the budgeting process we discussed last time?

00:14:10 Mike:

Sure, the main thing is looking at those expenses like you just said, you know what are the absolute mandatory things: your mortgage or rent, food, transportation, all of those things. Looking back, hopefully you’ve kept some records. If not, hopefully you’re starting early enough and can start collecting that for several months and kind of look at those things. That’s your mandatory budget. Don’t forget those things that are kind of periodic in nature, like fixing the car or taking a vacation. Basically, you add it all up, multiply by the amount of time that you want to or are planning to save for, and just multiply, and you’ll get that savings target that you need.

00:15:03 Mike:

For whatever amount of time. I always like to add a little bit of additional just as a buffer, especially if it’s planning for this transition where, OK, what if it takes eight months instead of six months to get the job that I want?

00:15:26 Amy:

Yeah, those are really good points. Once you have the information you just spoke about and understand what your spending target is and the cushion that you’re going to need, then the hard part starts. If you’re already living within your paycheck but spending all of it, you’re going to have to start cutting because you’re going to have to save. So the earlier you can start the process, the easier it will be for you and your family to maintain the standard of living that you’ve come to be comfortable with, because it could take 12 to 24 months to build up the cash cushion target that Mike just talked about.

00:16:12 Mike:

Yeah, what’s your thought? I will tell folks that, say they’re contributing to the TSP or some other retirement, say, IRAs, or even just saving somewhere in an account that maybe invested in the stock market or something. I’ll tell them, “Hey, for this two-year window or one-year window, let’s divert that, keep it in cash and just so we have it when we might need it.” And if they’re planning to continue working, that’s easy. Yeah, it’ll take maybe a three-year kind of window where you’re not investing in your retirement account, but most of the time, people are making a lot more after they retire with the retirement income and second income coming in, and you can build it back up relatively quickly if you’re truly focused on that.

00:17:24 Amy:

Yeah, I agree with that strategy as well. The reality is that if you are diverting that money into your TSP, the reality is that if you get into a situation where you’re short on cash, you might be tempted to go to your TSP and take money out, in which case now you’re simply paying more to get access to your cash through that 10% penalty, because there is no rule of 55 for military, as we’re often retiring younger than that. So that’s not going to help us. You don’t want to open yourself up to that 10%. My philosophy is sort of like yours, where you’re likely going to have higher income after you get a job, and in that case, then you can get caught up using the cash that you saved before. There’s probably still some left, so you can channel more into your retirement account than you did before, just to get caught up a little bit. I think that makes perfect sense, Mike.

00:18:29 Mike:

Yeah, all great points there. The other thing that we haven’t talked about, we talked about the 10% penalty, the other issue of not having enough cash on hand isn’t just that if you need to tap other resources, it might not be a great time to do that either because the market’s down or because of that penalty. The other thing is that it might create enough stress that you end up taking a job that’s not the right fit for you just because you’re too stressed out and you’re wanting to provide for the family. And then if that happens, you’re going to end up making another job change in fairly short order. Oftentimes, I can’t remember what the statistic is, but there’s some large number of military folks who end up changing jobs within two years of retiring, and that may or may not be quite as stressful a transition as retirement, but making changes can sometimes be stressful. So you don’t really want to be forced to take a job that’s not the right fit. You want to have the flexibility to make a good choice for yourself.

00:19:39 Mike:

Yeah, great point. I don’t remember the statistic either, but it’s significant, like you said, that folks changed jobs and, you know, some of that’s just, hey, you’ve been doing something, you know, 20 plus years and you don’t know what the other side is like. So it happens even if you’re not financially stressed, but definitely being forced to take some then you don’t like is sub.

00:20:09 Amy:

And in terms of giving up a little bit in the short term in order to fund that emergency cushion, the reality is that it creates a habit of discipline and sticking to your budget which that habit is going to be valuable to you as you endure the income gap between military retirement and being able to start that next job. Before we get into sort of wrapping things up, you know, the last part of the transition of course then is once you’ve found a new job, if you’ve depleted your emergency fund as you got through that transition, it’s time to rebuild that back up. So there could be, you know, 12 to 24 months prior to leaving the military, plus the amount of time that it takes to find another job, plus the amount of time that it takes to rebuild your cash cushion where you’re having to adjust your standard of living just a little bit. So quite honestly, the earlier you can start, even 10-15 years before you think that you’re going to get out of the military just to have enough cash to be able to get through the transition and adjust your lifestyle for a less period of time is a really good idea. Mike, do you have any thoughts about that or when you recap where we’ve been today?

00:21:33 Amy:

I think the biggest thing is starting early. You know that you just kind of hit on is coming up with your plan and then building a realistic budget, looking at what you know are the big pieces that are going to happen with your transition, if that’s moving, if that’s staying in the same place, but maybe having to move out of base housing, you know, whatever those things are. Getting a realistic hey, this is what it’s going to cost and then figuring out how much money you need to save. And the kind of last thing I’ll say is, you know, save more, have extra even if you don’t think you’ll need it, the optionality that it affords you is so much better than being stressed about it and having to run up credit card debt.

00:22:28 Mike:

I agree completely. You know, having more savings gives you options and when you have options, life always feels a little bit less stressful. So, you know, we’ll leave everyone with the thought that preparing to leave the military is very exciting whether you’re retiring or you’re leaving because your commitment is up and you’re ready to move on to other things. It’s a very exciting period of time. But it’s also a period of time that can be incredibly stressful. And the more that you can do for yourself, the earlier you can do it, the happier you’re going to be on the other side of it. And so, you know, because the main goal is that once you leave the military, if you’re retiring from the military, you’re going to be entering some of your highest earning years. And the goal is to really enjoy those years. You’ve given up a lot to serve your country, so you should have the opportunity to enjoy the years where you’re making quite a lot of money and even beyond. But in order to do that, you have to give up a little bit in the short term. And so with that, we’re going to leave you with these thoughts and in our next podcast, we’re going to be talking about preparing for ultimate retirement. So at the end of those highest earning years and as you head into your late 50s, 60s, 70s, whenever you’d like to retire.

00:24:12 Mike:

Yeah, that’s great. Looking forward to discussing that in a couple of weeks.

00:24:13 Amy:

Sounds awesome, Mike. We’ll talk to you then.

00:24:12 Mike:

All right. Take care. Bye.

00:24:13 Amy:

Take care. Bye.