A Financial Advisor's Guide to Military & Government Retirement Planning

By understanding the complexities of military and government retirement benefits, financial advisors can provide essential guidance to service members and federal employees as they plan for their retirement.

• Military Retirement Planning
• Federal Employee Retirement Planning
• Tax Considerations for Military and Government Retirees
• Staying Updated on Policy Changes

Military Retirement Benefits & Planning

As a financial advisor, you can be part of the process of helping military members transition to civilian life. Some of the items you can help them with during this transition is developing a retirement budget, figuring out which benefits they might be entitled to, suggesting strategies to manage any debts, and planning  for their future. Ultimately you are there to help them create a retirement plan that gives them a peace of mind for the next phase of their lives.

Understanding Military Pensions

As part of helping them develop their retirement budget, making sure how their retirement pay will be calculated is an important part of the process. Depending on when they enlisted, they could have either of the three different pensions:

1. Final Pay
2. High-3
3. Blended Retirement System (BRS)

A Final Pay pension applies to military members who entered service before September 8, 1980. The amount of money they receive during retirement is tied to how much they earned at the end of their career.

A High-3 pension is a payment system that applies to military members who entered the service after September 7, 1980. This system provides retirement payments based on the average of the highest 36 months of basic pay. 

The Blended Retirement System, introduced in 2018, is a plan that combines a pension with a contribution element, typically through a Thrift Savings Plan (TSP). The pension component in a BRS is a straight forward 2% per year they were in service multiplied by the average of the highest 36 months of basic pay. 

The retirement account (TSP) is credited with an automatic 1% government contribution, with matching contributions up to 4% after two years of service. There are some differences between a TSP and civilian  retirement account including what mutual funds are available to invest in but generally the strategies are similar: maximize individual contributions to leverage matching contributions.

Guiding Clients Through Military Disability Benefits

Military clients may have lots of questions about disability benefits, especially if they were discharged due to injury. So having a good understanding about the different types of disability benefits such as service-connected disability compensation and Combat-Related Special Compensation (CRSC) will be helpful. 

Another aspect to keep in mind is helping them understand how to address the tax implications related to the Department of Veterans Affairs (VA) disability compensation as it may affect their overall tax liability. Service-connected disability payments and CRSC payments are tax exempt.

Service-Connected Disability Compensation

Service-connected disability compensation is a tax-free monetary benefit. Servicemembers with disabilities that are the result of a disease or injury or something that was aggravated during active military service are eligible for this benefit.  

Combat-Related Special Compensation (CRSC)

CRSC is a special tax-free monthly benefit for eligible military retirees with combat-related injuries. It allows them to receive both their full military retirement pay and their VA disability compensation, without the usual offset. To qualify for CRSC, your client must have at least a 10% VA disability that is directly related to a combat/operations-related disability as approved by their branch of service.

Helping Military Families Access Education Benefits

If your client is looking to pursue a professional designation or their spouse or child is interested in utilizing some of the education benefits military families have access to. Financial advisors should help them better understand education benefits like the GI Bill, the Military Spouse Education Assistance Program (MYSAP), and Tuition Assistance for Children of Military Personnel (TAFE). 

Your clients may be not aware of all the education benefits that are available to them and having access to resources for tuition, fees, and books certainly can help if they are on a fixed income. 

The GI Bill and Transfer Options

Retirement plans for military members often include considerations for children’s education and spouses’ career goals too. So having up to date information on timelines is crucial for veterans because those can change. 

Transfer requests should generally be made while on active duty and typically beneficiaries of GI Bill benefits have 15 years from the service members last discharge from active duty to use the benefits.  

GI Bill benefits accrue based on length of service. Some of those benefits are:

• Coverage of tuition and fees (Up to $4,000 per year)
• Housing allowance based on the location of the school
• An annual book and supplies stipend
• Assistance for obtaining professional licenses and certifications

Military Spouse Education Assistance Program (MYSAP)

Many military spouses put their careers or educational goals on hold during their partner's service. Retirement can be an excellent time for them to pursue those goals.

Financial advisors can help their clients determine if their spouses meet the eligibility requirements. Those are typically:

• Spouses must have a high school diploma or equivalent
• Service member should be in specific pay grades (E-1 to E-6, W-1 to W-2, and O-1 to O-3)
• Service member is active duty but eligibility may extend to retired spouses

MYSAP can help military spouses gain the skills and education needed to secure better employment opportunities, contributing to the household's financial well-being in retirement.

Survivor Benefits and the Survivor Benefit Plan (SBP)

Providing a comprehensive overview of survivor benefits and SBP options including its costs, benefits and implications is an important aspect of helping a military member develop a retirement plan. Your clients will probably have questions about how a SBP affects other benefits like Servicemembers' Group Life Insurance (SGLI) and Veterans' Group Life Insurance (VGLI). 

You should be prepared to explain the different levels of SBP coverage available and the associated costs. The cost is typically a percentage of the retiree's chosen base amount, and that amount determines the benefit the survivor will receive.

Another aspect to explain is how SBP premiums might affect your client’s retirement income. The SBP pension deductions can be a significant amount.

The decision to enroll in SBP is generally irrevocable or very difficult to change after retirement. Therefore, the client needs to be fully informed and comfortable with their decision.

Considerations for Advising Veterans on VA Healthcare

When discussing VA healthcare with your client it's important for you to know how they plan to or already have exited the military. Their discharge status will affect what type of VA benefits they can enroll into.

After figuring out which VA benefits they can apply for, you can help them with cost projections regarding how much they can budget for their healthcare in retirement, including potential out-of-pocket VA healthcare costs, Medicare premiums and other expenses. 

If they are still on active duty, it’s important to stress the importance of maintaining accurate records of military service and medical records. This will help with VA benefits enrollment applications and processes.

Helping Military Clients Understand and Utilize TRICARE Benefits

After military members transition to retirement their healthcare coverage will shift from active duty TRICARE to retiree TRICARE. This means there might be new costs like monthly premiums or copayments they haven’t had to pay before.

So as a financial planner you will need to help factor these costs into their retirement budget. If they are eligible for Medicare, TRICARE for Life (TFL) will be an excellent option to supplement it. 

Take the time to educate yourself and your client on how the different TRICARE plans and their costs to find a best fit for your clients financial situation. 

Servicemembers' Group Life Insurance (SGLI) vs. Veterans' Group Life Insurance (VGLI)

If you discuss life insurance with your client they will most likely be familiar with SGLI. That is the policy provided to active-duty service members and typically service members are automatically enrolled into SGLI. They may have questions about what happens to this benefit after they separate from active duty. You’ll want to become familiar with Veterans' Group Life Insurance as it’s common for military members to roll over into this policy during retirement, however there are other options in the private market, which you may want to evaluate with them.

If the client is interested in transitioning away from SGLI to VGLI, they should know the deadline for a service member to convert their SGLI coverage to VGLI is usually 1 year and 120 days from separation, so it’s important to discuss this early on in the planning process.

They should also be aware that VGLI premiums can be a significant expense in retirement, especially as the veteran ages. It might be beneficial to discuss alternative life insurance options that might be more cost-effective or provide better coverage for your client’s specific needs in retirement. Ask your client to provide you with details on their current SGLI coverage. This will help you compare costs and assess whether an alternative option is worth pursuing.

Helping Clients Utilize VA Home Loan Guarantees

Another area that often comes up in retirement planning for military members is relocating and buying a house. Military members may not know that VA home loan guarantees are available to them including their surviving spouses, and certain other individuals. They may be interested to know how some of the specifics around service requirements, including minimum active-duty service and discharge type affect VA home loan eligibility.

Another point to cover with clients is how retirement income, including their military pension and social security benefits can be used to qualify for a VA home loan. Purchasing a home after retiring from the military is a big decision and using a VA home loan may be a great option for them. 

Division of Military Retirement Pay in Divorce

If your client is married and has children, having some basic information about unique divorce issues in military families may benefit your client during their retirement planning. To start they should know that military retirement pay is governed by both federal law and state law. So this means that while the federal law grants state courts the authority to divide up your pay, the specific rules and procedures vary by state. 

Help them understand the 10/10 rule. This rule states that a former spouse is eligible to receive direct payments from the Defense Finance and Accounting Service only if the marriage lasted at least 10 years and the service member performed at least 10 years of creditable service that overlapped with the marriage. 

Child Support and Alimony Considerations in Military Cases

Another way divorce can impact retirement planning for military members is through child support payments. Federal law limits the amount of military retirement pay that can be garnished for child support to 65%. So having that understanding up front can help with planning for other expenses like healthcare and mortgage payments.

Learn how you can become a retirement planning expert and improve your career with the CRPC® designation from the College for Financial Planning®—A Kaplan Company.

Federal Employee Retirement Planning

Financial advisors play a crucial role in assisting federal government employees with their retirement and pension planning, especially if their retirement was premature. This includes creating a retirement budget, identifying new benefits like education assistance, offering debt management strategies, and developing a comprehensive plan for a secure future, ultimately providing peace of mind in their retirement.

Understanding the Federal Employees Retirement System (FERS)

FERS is a three-tiered retirement system for federal employees that’s made up of a Pension, Social Security and a Thrift Savings Plan (TSP). 

The first step in developing a budget will be to understand what their pension payment will look like. It’s good to know that the amount the client receives is based on years of service and the average of the highest 36 consecutive months (High 3) of base pay. The pension amount is based on their years of service and each year adds a percentage to the benefit calculation. Usually it’s 1% per year of service but it can be higher if retiring at age 62 or later with 20+ years of service.  

For example: If someone retires with 30 years of service and a High-3 average salary of $80,000, the basic pension could be calculated as (30 years * 1%) * $80,000 = $24,000 per year.

Federal employees under FERS receive Social Security which will be used to supplement their FERS pension. When Social Security benefits can be claimed varies and the timing will affect their FERS pension so getting a good picture of all income streams will be an important first step. 

Just like military clients, federal employees also have access to The Thrift Savings Plan. For context, it’s similar to a 401(K) where employees can contribute pre-tax money and the government may provide a matching contribution. There are TSP contribution limits and it’s best to encourage clients to maximize contributions especially when there are government matching contributions.  

A TSP can be vested in various investment funds so understanding your clients risk tolerance is key to setting up a plan that meets their goals. You’re also going to want to discuss the different withdrawal options of a TSP to your clients because they may not be aware of all the different options. There are 

• a lump-sum withdrawal option
• a partial withdrawal option
• a monthly payment option
• an annuity option 

All have different tax implications and should be factored into the retirement plan for a federal employee. 

Assisting Federal Employees with Disability Retirement

Federal employees do have access to disability retirement benefits, especially if the disability is related to their federal job duties. The employee may be eligible under the “bruner presumption” which shifts the burden of proof to the Office of Personnel Management. They have to prove the employee is not disabled, rather than the employee having to prove they are disabled.

If they become unable to work due to a medical condition, a disability benefit can help supplement their pension income along with their Social Security benefits. 

Education and Training Opportunities for Government Employees

If your client retired from their service as a federal employee prematurely, they may ask you to help them factor into their retirement plan assistance with education and training opportunities. Professional certifications can enhance job prospects for those seeking part-time work or a new career.  

Federal Employee Group Life Insurance (FEGLI)

Most federal employees are automatically enrolled in Basic FEGLI coverage when they begin federal service. FEGLI premiums are deducted from their paychecks, and the cost of coverage increases with age.

The cost of FEGLI in retirement is significantly higher than during employment because the government no longer shares the cost with the employee. FEGLI coverage can be continued into retirement but coverage decreases over time after retirement unless the employee elects full reduction or no reduction. This means it’s important for you to carefully consider whether or not continuing FEGLI in retirement is the best option for your client. 

Advising Clients on the Federal Employees Health Benefits (FEHB) Program

Federal employees who retire with an immediate annuity from their pension are typically eligible to continue their FEHB coverage into retirement. An "immediate annuity" generally means that retirement benefits (pension payment) begin within 30 days after separation from service.

When a federal retiree becomes eligible for Medicare, they can still enroll into Medicare and retain their FEHB coverage. Many federal retirees choose to retain their FEHB plan because it usually offers broader coverage and comes with lower out-of-pocket costs than Medicare alone, which ultimately gives them more financial freedom.

Tax Considerations for Military and Government Retirees

Taxes will significantly impact both military and federal employee’s retirement income and overall financial situation. As a financial advisor, it’s important to develop a tax strategy that is up to date and proactive. This includes understanding various income sources (pensions, social security, etc), whether or not that income is tax-deferred or tax-exempt and the state laws your client plans to retire in. 

Advising Clients on How Military Retirement Pay is Taxed

Military retirement pay is usually subject to federal income tax, and the state tax treatment varies. Some states may fully tax military retirement pay while others may offer exemptions or partial exemptions. Some states do not have state income tax at all like Florida and Tennessee. 

It’s important to remind clients that their regular military retirement pay is generally taxable, certain related benefits, such as VA disability compensation and Combat-Related Special Compensation, are typically tax-exempt.

Understanding TSP Tax Rules and Rollovers

Both military and federal employees have access to a Thrift Savings Plan. These plans function very similarly to other retirement funds which have various options for withdrawals and rollovers. Depending on your client's financial situation, it may be beneficial for them to diversify the types of savings accounts they have by rolling over their TSP funds into a Roth IRA or a Traditional IRA.

Or perhaps they are eager to start withdrawing from their TSP and need help choosing how to withdraw from their TSP. They have a few different options including: lump-sum, partial withdrawals, monthly payments, and annuity options. Each option has different tax implications so helping your clients understand the tax implications of each option is an important task as the financial advisor.

If they want to start taking withdrawals from their TSP before the age 59 1/2, they may be subject to Required Minimum Distributions (RMDs), which are mandatory withdrawals that must be taken by a certain deadline each year. As a financial advisor it’s very important your clients understand the RMD rules and how they could affect their retirement income.

Staying Updated on Policy Changes for Effective Military & Government Financial Advising

Staying updated on policy changes as a financial advisor who helps this specialized clientele can be challenging which is why Kaplan Financial has a special course titled 'Understanding Social Security, Military and Government Retirement Benefits' to their Chartered Retirement Planning CounselorSM - CRPC® Program. The CRPC® program will empower you with the expertise needed to navigate these complex retirement systems and deliver exceptional value to your military and federal employee clients.