7 Money Moves for a Smooth Return to Life as a Civilian

When you decide to leave the military, you'll face a series of key financial decisions, especially in an uncertain job market. Because valuable benefits you receive on active duty will disappear, tricky calculations are needed to decide how much you'll need to earn as a civilian to match your military pay. A job that seems to offer a higher salary could leave you less well off once you factor in lost tax breaks and benefits. With less job stability, having an emergency fund takes on added importance. But you’ll also benefit from programs to help veterans.

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If your state of legal residence while in the military has no income tax, moving as a civilian to one that does could be quite a financial shock. And no matter where you live, you'll lose your tax-free housing allowance. Keep the new reality of your finances in mind when negotiating the salary for a new job, for example, or deciding how much you can afford for a house.

David Kless, 47, retired in July 2011 as a captain in the Navy, and quickly discovered that a civilian job with a higher salary doesn't necessarily translate into more spendable cash. Kless moved every few years throughout his military career—starting at the Naval Academy in the mid 1980s, followed by postings in Georgia, South Carolina, California, Rhode Island, Japan and Virginia, and six months as a supply officer deployed to the Persian Gulf on the aircraft carrier USS Nimitz. He never paid state income tax while on active duty.

But that ended when he took a civilian job at Fort Belvoir, in Virginia. His housing allowance, which had given him about $2,500 per month tax-free, disappeared. "Now, a big part of David's retirement check goes to pay the taxes and make up for the housing allowance,” says his wife, Teresa, a civilian finance officer.

Replace Your Life Insurance

Members of the military have access to inexpensive life insurance. Servicemembers' Group Life Insurance (SGLI) costs just $312 per year for the maximum $400,000 death benefit. But that coverage expires 120 days after you leave the military. During the transition, you can convert your policy to Veterans' Group Life Insurance with no medical examination.

That can be a good deal if you have a medical condition that might make it tough to qualify for life insurance in the open market. But VGLI is a lot more expensive, and the price rises with age. For those age 30 to 34, $400,000 in coverage costs $480 per year; the price gradually rises every five years until age 75. If you're healthy, you may find a much better deal on your own and be able to lock in a fixed rate for 20 or 30 years. Shop for coverage at least six months before you leave the military, so you have time to get VGLI coverage if you don’t find a better option. Get quotes for individual policies at www.accuquote.com or www.lifequotes.com. For more information about VGLI and SGLI, visit www.insurance.va.gov/sgliSite.

Replace Your Health Insurance

If you retire after 20 years in the military, you’ll qualify for health care in retirement, although you may still want to buy supplemental insurance. If you leave before putting in 20, health-insurance premiums can be surprisingly steep. Even if you get a job that provides insurance, you’ll probably have to pay at least part of the premium yourself, in addition to out-of-pocket expenses, such as deductibles and co-payments.

If neither you nor your spouse has a new job with health insurance, you can sign up for the Continued Health Care Benefit Program for up to 18 months. (This is similar to the COBRA benefits available to civilians who leave jobs.) You have 60 days after you leave the military to enroll in the CHCBP, which costs $1,065 per quarter for individuals or $2,390 for three months for families. Even at those prices, this can be a good option if you have a medical condition that makes it difficult to qualify for coverage.

As with life insurance, though, if you're healthy, you may find a better deal on your own. To check, get quotes for policies at eHealthInsurance.com. You can also get more information about health insurance policies available in your state at www.healthcare.gov. If you buy on your own, you can lower premiums by choosing a high-deductible policy and pairing it with a health savings account. You can deduct money you put into an HSA, and it comes out tax-free if it’s used to pay your medical expenses, including that high deductible.

Check the Department of Veterans Affairs Web site to determine if you are eligible for VA health care.

Protect Your TSP

You can maintain your retirement account even after you leave the military, which can be a good deal because expenses are so low. Or you can roll the balance into a new employer's 401(k) or an IRA, to get access to different investments.

If you roll TSP money into an IRA or another plan, keep track of any contributions that were made with tax-free combat pay. A portion of each withdrawal from the new plan will be tax-free to account for the tax-free contributions. Go to www.tsp.gov for details.

Build Your Emergency Fund

A stash of safe and accessible cash is even more important once you move into a civilian job that may be susceptible to layoffs. Keep at least six months' worth of expenses in a money market or savings account.

Take Advantage of Transition and Education Resources

The transition office at your installation will explain the procedures you must follow when you leave the military, the benefits you'll receive and the resources available to help. But it's a good idea to do additional research on your own. Talk with someone who has already left the military and ask about financial surprises.

The military community-service office on your base and the Army Career and Alumni Program—there are similar programs for the other branches—offer valuable resources to help with the transition and new-job search. The Department of Labor's Veterans' Employment and Training Service program is packed with resources to help veterans find jobs.

Reassess Your Retirement Savings

When you're close to leaving the military, you’ll have a much better handle on how much of a pension and other benefits you'll receive. Once you gather those numbers, you can calculate how much more money you'll need to save to ensure a financially secure retirement (the calculators in the tools section at Kiplinger.com can help you run the numbers). Doing this calculation can be a quick reality check about how much money you need to earn from a post-military job.