Income Planning for Military Transition
Updated: Jan 23
Transitioning out of the military can be a daunting task for members who have given all of their professional career to a life of service. This can be a difficult transition for members who are leaving after a few years, as well as those retiring after 30+ years of service.
For many, leaving the military isn’t the end of a working career, and they transition into another job. One of the most stressful parts of the transition is destined to be the change in pay and benefits associated with getting a new job. The military compensation structure has a large component of tax-free pay, as well as completely free healthcare, and doesn’t usually require members to have disability insurance as they will be covered by the VA.
Therefore, it is necessary to create an analysis of the difference not only in just salary, but all aspects of compensation including a pension, disability, taxes, and costs such as healthcare, and life and disability insurance. Only after taking all of this into consideration can you truly compare an offer of a civilian salary to your current paycheck but also plan for the increase or decrease in take-home pay for your family.
I developed the attached spreadsheet to assist in this analysis and thought process for transitioning members. The inputs column has all of the fields that will need to be filled out for the spreadsheet to work, while the yellow highlighted table has the take-home pay results. I will go through the inputs so that you completely understand them.
Active-Duty Compensation consists of four basic payments for most members. These are Base Pay, BAH, BAS, and a TSP match. Flight pay may apply to some members. Your Base Pay, BAH, and BAS can be found here: Regular Military Compensation (RMC) Calculator (defense.gov). In this day in age, some members have self-employment income as well which will need to be considered. To summarize:
Base Pay: This is your taxable income that comes from the pay tables.
BAH: Tax-free housing payment based on where you live
BAS: Tax-free payment for food
TSP Match: 5% max match on Base Pay for those who are in the BRS
Civilian Compensation has different components to consider. Usually, there is a salary, bonus, and 401(k) match. Now, there will also be potentially a military pension, and a tax-free VA disability payment. There may also be self-employment to consider. To summarize:
Salary: Basic payment from your employer
Bonus: Variable rate, may depend on performance, usually 1-2x per year
Pension: Federally taxable pension payment from your military service
VA Disability: tax-free disability payment (Calculate here)
401(k) Match: Usually anywhere from 3-8% of salary
A huge consideration in this process is taxes. This largely depends on your filing status (single or married) as well as your spouse’s taxable income. I have inputted federal tax tables for 2022 into the spreadsheet. The taxes will automatically calculate based on the inputs. This information is subject to change with coming changes to tax laws. In a perfect scenario, I would also include state taxes in this analysis, but for complexity’s sake I used federal tax rates as those are the most impactful.
There are a few additional costs that may be incurred when transitioning to the civilian sector. These can include healthcare, life insurance, disability insurance, and other miscellaneous costs that were usually covered when you were in the military. Here is a quick snippet on each:
Healthcare cost: This is a big one for those who are not retired or serving in the National Guard/Reserves. Healthcare costs can range from as little as $3,000 per year to as much as $10,000+ depending on your plan and your health. You can use this tool here to estimate healthcare costs: Health insurance plans & prices | HealthCare.gov
Life insurance cost: You may decide that you need more or less life insurance once you are off Active Duty. This can be a cost, or this could be a negative number if you are going to drop it due to your pension and disability payment being enough for your family.
Disability insurance cost: This is another big one that is very expensive if you are not on Active Duty. This could be anywhere from 1-2% of your income and gets more expensive as you get older. These policies are usually offered through your employer, but that plan may be insufficient, and you may need to seek an outside policy.
Misc. Cost: This could be anything from legal fees to property taxes to anything that will be an out-of-pocket cost for you that you didn’t have while on active duty. Alternatively, if there is anything that will be less expensive (like no longer needing to pay for childcare), you could enter a negative number here.
After understanding the inputs and making reasonable assumptions for your family, you can use this calculator to get a better grasp on how your take-home pay will change when departing the military. There are endless complexities that you could add to this analysis from Reserve/National Guard pay, to state taxes, rental income, and many other things. The purpose behind this analysis was to give a simple but useful framework that can be used to compare Active Duty and Civilian compensation for transitioning military members so that they can plan for the change in pay. Planning for a decrease in pay would cause you to do things like increasing your emergency fund, decreasing TSP contributions, starting a side hustle, etc. Planning for a pay increase can get you to start thinking about things like increasing 401(k) contributions, opening another investment account, saving for a down payment on a house or a car, or buying rental property. The key is that you are actively aware of the financial changes you are going through with this transition, and you are taking financial planning steps to adequately prepare your family as best possible.