Preparing Your Finances to Leave the Military

Making the transition from a career in the military to civilian life is a major life adjustment.

According to the U.S. Department of Veterans Affairs, about 200,000 service members transition to civilian life every year. While there are many adjustments to be made, your finances, in particular, may require some finessing as you face the loss of tax-free allowances, higher healthcare costs, increased costs of living, unexpected relocation expenses, income gaps during a job search, and more. Read on for a list of financial realities you might face and how to plan for them.

Most service members benefit from at least one tax-free allowance as part of their overall compensation package. The most common benefits are Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAH). BAS is a monthly stipend intended to offset the cost of food for military members, while BAH is a monthly allowance for service members who aren’t living in government-provided housing. Stipend amounts vary depending on many factors like rank, pay grade, location, or dependency status. Regardless of the amount given, these allowances are a boost to your take-home pay. When you move to the civilian workforce, your entire income is taxed. This means you’ll need to make more money than you did in the military to maintain the same net income or adjust your budget to make up for the loss of that extra money. Keep that in mind while considering new jobs.

You could face an increased cost of living when you return to civilian life, because you’ll lose access to allowances and discounts offered to the military. For instance, service members can live in subsidized on-base housing or receive tax-free stipends like the BAH to cover the costs of living off-base. Perks like grocery shopping at tax-free commissaries and fueling up at on-base discounted gas stations save military families money, too. Basically, life is going to get a bit more expensive, so you’ll need to plan for the loss of these savings in your budget.

When you’re finished with your service, you may be on the hook for relocation costs. Even if the military covers the costs of moving your belongings and relocating your family, there are other expenses associated with moving that likely won’t be covered. There may be deposits on rentals or down payments on a home, realtor or leasing agent fees, storage fees, pet relocation fees, and other unexpected expenses. Think through your relocation plan and try to anticipate costs that could arise so you can factor them into your budget.

Looking for a new job comes with a price tag that can include the cost of interview attire, resume or professional services, new certifications, and more. Not to mention that searching for the right job can take time, so you may have a gap of weeks or even months where you aren’t bringing in income. Relying on an emergency fund or savings account may be necessary during this time. You may need to take a temp job while you’re looking for more permanent employment or plan to drastically reduce your expenses during the gap. You may be able to lean on Unemployment Compensation for Veterans (UCX) if you meet the qualifications.

The 2021 Military Family Support Programming Survey showed that more than 75% of military and veteran and family respondents carry debt. Active service members benefit from certain debt protections that don’t carry over when you transition to civilian life. Under the Servicemembers Civil Relief Act (SCRA), military members receive reduced interest rates on certain pre-service debts and are protected from default judgments such as debt collection lawsuits and foreclosure. When you leave the military for civilian life, you’ll need to consider how that will impact your debt management. Will your interest rates increase and require a larger monthly payment? Do you need to take action on a debt collection issue? Make a plan for how you’ll manage debt going forward.

Because civilian life offers less financial protections than life in the military, it’s crucial to have emergency savings set aside as a buffer for budget shortfalls. Statistics show that nearly 40% of veteran families have less than $500 in an emergency savings fund, or have no fund at all. Any emergency fund is better than none, but experts recommend that you work toward at least 3-6 months. Try an emergency fund calculator to figure out your target savings amount, and take time to think through how you could find funds in an emergency.

Retired military members can access TRICARE health insurance through the Department of Defense, but it may not be the best fit for you after you leave active service. If you move to a civilian plan, make sure you’re aware of the full costs: premiums, deductibles, copayments, and other details. If necessary, educate yourself on the basics of health insurance

As you explore the financial ins and outs of transitioning to civilian life, make sure you know all about the veteran benefits you’re entitled to. In particular, take advantage of the military’s transition assistance program, or TAP. The program is mandatory for all separating service members, including active duty, National Guard, and Reserves members, and recommended for military spouses. TAP resources and counseling cover areas like career exploration, financial planning, benefits, disability compensation, healthcare, education, and more. It’s recommended to begin TAP a full year before separating (two years if retiring from the military).

Knowledge is power, and this is true when it comes to transitioning from the military to civilian life. The best way to minimize the financial downsides of this transition is to understand the costs, know your benefits, and make a realistic plan for dealing with it all.