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I first wrote this personal finance article on AHRN. However, I wanted to make sure that everyone who subscribes to this blog has the opportunity to read it. You can find the original article here.
Leaving the active duty military ranks can be very challenging. Whether you’re leaving after four years, or retiring at the end of thirty, life after the military can look uncertain. Below are ten about your financial situation that you need to answer to make sure you’re ready for your transition.
1. Where will I be in 5 years?
This question sets the stage for everything else, because it forces you to think a little more ‘big-picture.’ The rest of the questions are more tactical, but you won’t be able to address them if you don’t address this question. Why do I recommend thinking five years out? Two reasons:
- In the military, many of us are conditioned to think ‘two tours in advance.’ For most of us, two tours in advance is around 4-6 years. This way of thinking shouldn’t go away because we take off our uniform. It becomes more important because now you have to address a lot of things that you used to take for granted.
- When you transition, you’ll encounter a lot of unexpected changes. If you’re only focused on your immediate needs, you really don’t have an anchor point from which to make adjustments. Conversely, retirement is too distant a goal for many people to focus on. Five years is a realistic time frame for you to focus on what you’d like your life to look like (in broad terms). If you can draw up a plan for the next five years, you can adjust as you come across opportunities and challenges.
You should take more time thinking about this question than any other one.
2. What are my (or my family's) five year goals?
These goals should directly support the end state you visualize in Question 1. For example, if you say, “I want to own my own business,” you might want to establish goals like running your business on the side by year 2 of your retirement, then converting to a full-time business by year 4 or 5.
3. How much money do I need to support these goals?
Most people I meet naturally think that they’ll get a second career after they leave the military. However, this question forces you to think in terms of your financial needs during the first five years. You might find that you’ll need to make an investment, such as for education or to start a business, or you might need to take on temporary work to keep you afloat.
4. How much work will it take to achieve my goals?
Opportunity cost is one of the most overlooked issues here. Even if you plan to do everything at minimal expense, you will trade money for time. You need to figure out how to account for the time that you put in, and determine if this effort is sustainable. If you have a family, you need to properly balance your work commitment with your family obligations.
5. What is my plan to address my financial needs?
Do I take a job? Will I live on my savings while going to school? Have I taken the necessary steps to build up my emergency fund? Try to keep your options open so that you include possibilities you wouldn’t normally consider. When you stop limiting your options, you’re more likely to reach your goal.
6. What are the biggest financial risks standing between me (us) and my (our) goals?
The best plans acknowledge the various risks that might prevent you from reaching your goal. For example, caring for an elderly parent like an elderly parent might limit the amount of time you can work, and could prevent you from starting a business. That’s a financial risk, because you might not be profitable as soon as you need to be. Think about all the different ways that money impacts your plan.
7. How do I address those risks?
For each risk, you should have a risk mitigation plan. In some cases, the answer is straightforward (i.e. secure a life insurance policy to protect against lost income, consider survivor benefit plan to secure military pension, etc.). For other situations, it could be more difficult. For example, what happens if you’re two years into a four year business plan and have a major setback? The focus is to have a plan for each risk, even if you don’t currently have all the answers.
8. What is my ‘Plan B?’
If you land your dream job, what happens if you get laid off six months into it? If you go to start a business that fails, what is your back up plan? Instead of just focusing on how to protect yourself against risks, you should also think through ‘next steps’ in case something unavoidable happens.
9. Can I start while I'm still on active duty? Can I go into the reserves or national guard, if I need to?
Can I start college during my last tour? Can I start my business on the side, so I’m not starting from scratch during my terminal leave? Should I sell my terminal leave? Think really hard about what you could do while you’re on active duty to minimize your post-transition financial risk.
10. How can the military help me?
Transition GPS (formerly known as TAP) can help you account for the resources the military has to offer. Additionally, your installation might have additional programs to help you if you plan to go back to school or start your own business. However, you need to spend a LOT more time thinking about which resources will actually help you, and how YOU will take advantage of them. None of these resources will work without your thoughtful planning regarding how they will benefit your particular situation.
You might be surprised that this was more of a ‘top-level’ approach to personal finance, as opposed to digging more deeply into your personal situation. If you don’t have good answers to the ten questions listed above, it probably won’t matter how good your financial situation currently is, because you’ll never get to where you want to be. One last point: if you have specific personal finance questions about your transition, you should talk with the financial counselors at your local installation. They can help you get a snapshot of your current financial situation and develop a game plan for your financial future.
So, what questions do you have, or did you have about your transition? Feel free to post them in the comments section!
Forrest Baumhover is a Certified Financial Planner™ and owner of Westchase Financial Planning, a fee-only financial planning firm in Tampa, FL. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.