Splitting military retirement can be complicated

Q: My ex-husband entered the active army in 1973. We were married in 1974. He was active duty for 3 years; from 1976 to 1995 he was in the reserves. In 1995 he went into the AGR and is planning to retire in 2013 as an O6 with an active federal retirement. We were divorced in 2007 after 34 years of marriage. Our divorce decree states that I am to get 50% of the retirement he earned while married plus SBP. I am on track with all the paperwork according to the Former Spouse Division in Cleveland DFAS. My question is, how can I calculate what my monthly check will be in 2013 so I can work with my financial planners?

-Sandra, Wester, Ohio

A:  That’s a very good and forward-thinking question. Unfortunately, you have not provided enough information for me to provide an accurate estimate. If we assume 26 years of active service (21 on Active Duty or AGR and 5 equivalent years from his time in the reserves), O-6, and 3% inflation, his monthly retirement pay check in 2013 will be approximately $7,000. You can use the calculator at the Office of the Secretary of Defense website to determine his retired pay. 

However, for you, the more important question is how much will your benefit be worth and how will it be calculated? You need to head back to your attorney to clarify the answers to these questions. It’s more complicated since you were married both during reserve and active duty service. It almost seems as if your divorce decree was written purely for reserve retirement (in which points determine retirement benefit and points earned while married divided by total points, is an easy calculation). Talking with a financial planner is a good thing and finding out exactly what you can count on are all positive steps as you plan out your retirement. I do know that you don’t want a surprise in 2013, so start knockin’ on your attorney’s and DFAS’ door for more specifics. Good luck!

Taking Social Security early can cost you

Q:  I will be 62 in December.  Do I have to file for social security or does my VA disability continue until I do file for social security.  Can I claim both or do I have to give up my VA disability?

-Robert, Liberty, Va.

A: Electing to file for early Social Security benefits will not impact your VA disability benefits—you can definitely receive both!  That’s the really good news!  However, since you were born in 1947, your normal or full retirement age is actually 66.  So, if you do decide to file for early benefits at age 62 your benefit will be reduced by approximately 25%.  That’s a pretty big pay cut!  This doesn’t mean that you shouldn’t apply this fall, but rather that you should take a close look at your finances and determine what makes the most sense.  If you need the additional income to make ends meet it probably makes sense to apply for early benefits.  On the other hand, if you can wait, your benefit will increase each month you put-off taking Social Security.  Obviously, the longer you live the more sense it would make to delay benefits.  Typically, it takes 10 or more years to break even if you start benefits at your full retirement age instead of 62.  The Social Security website is actually filled with a wealth of great information on this topic including calculators.  Thanks for your service and sacrifice.

 

June Walbert is a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA Financial Planning Services.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner TM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
USAA or its affiliates do not provide tax advice.  Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.

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Military retirees can enjoy both their pension and Social Security

Q: Having just turned 65, I have put off drawing Social Security in order to raise my monthly amount. How does Social Security affect my retirement check?

-John, Covington, Tenn.

 

A: Making all the right decisions when it comes to retirement income can be a challenge to say the least.  Putting off taking Social Security to drive up the monthly benefit is generally a really good idea.  So, smart move!  Applying for Social Security, tapping various investment accounts, and minimizing taxes are all part of the art of creating an efficient, effective, and lasting income stream.  Now that you’ve turned-on Social Security you need to be aware that your benefits could be taxed.  If you file taxes jointly with your wife, and if half of your Social Security plus your other income (military retirement, retirement plan/IRA distributions, interest, dividends, etc.) exceeds $32,000, a portion of your Social Security will be included as income when you file your taxes.  If you do the calculation and exceed $44,000, 85% of your Social Security will be included as income.  That’s the bad news!  The good news is that receipt of your Social Security should not impact your military retirement.

 

Does military retirement affect your Social Security benefits?

Q: I understand (just recently) that when I get to the age of 65, that I will NOT be able to collect social security benefits AND my military benefits.  How so? Thanks!

-Ruben, Williamsburg, Va.

A:  I’ve got good news…it just isn’t “so.” I’ve received a number of questions like yours, Ruben, and I’m curious where folks are getting this misinformation?  Let me clear this up:  Social Security will not impact your military retirement.  Yes, it may impact how much you pay in taxes.  This is because military retirement combined with your income from other sources, will likely exceed the thresholds at which a portion of your Social Security is included in your taxable income ($25,000 if you’re single/$32,000 if you file jointly).  While that may be bad news, it’s certainly better than no Social Security at all.  I feel compelled to point out one really important thing to you.  The Social Security Administration does not consider 65 your full retirement age.  Take a look at the Social Security Retirement Planner, it's at least 66.  So you can go ahead and take the benefit at any time starting at age 62, but know that it will be a reduced amount.  Aside from that, relax and enjoy your retirement.  Thanks for your service!

Healthcare benefits true divorce consideration

Q:  My husband is full-time AGR in the Air National Guard.  He wants a divorce. He has 20 years as a traditional and 11 years AGR. We have been married 12 years.  I have MS. Is it possible for me to keep my benefits and medical, and what rights, if any, do I have to any retirement or income? Our whole future and planning was together.  I'm in trouble.

-Cheryl, Cheyenne, Wyo.

A:  You certainly have my best wishes during what I am sure are some very trying times.  The best thing you can do is to find good counsel…financial and legal.  Unfortunately, you will not be eligible for continued medical coverage under Tricare.  In order to be eligible for at least some level of continued coverage, you would need to have been married for 15 years.  Check out the Tricare handbook for more information. 

 

There is some good news…retirement benefits are another story.  Essentially, the court will decide how they are split.  Since your 12 years of marriage have coincided with military service I would focus on getting a good attorney who understands military benefits in order to come to an equitable settlement on that front.  

 

One other point: You’ll certainly want to investigate the cost of healthcare if a divorce is inevitable.  Given your situation, you may have to tap into your state’s high risk pool, in Wyoming, it is called the WHIP (Wyoming Health Insurance Pool).  Check with Wyoming’s insurance commissioner/department for more information.  Best of luck.

The preceding discussion is not tax, legal or estate planning advice. Consult your tax, legal or estate planning professional regarding your specific situation.
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SBP carries over to new wife

Q:  I was married to my ex-spouse for over 30 years and during the time of the marriage I enrolled in the Survivors Benefit Plan. I had put a lot of money into it and I then got divorced in 2008.  At that point, I stopped paying in and the divorce decree states my ex is not to have the SBP.  I remarried in 2009 and would like to carry my current spouse is that possible?  Would the amount that I paid in still be there when and if I can add my new spouse?

-Pete, Longview, Wash.

A:  As I’ve noted here several times, I’m a big fan of SBP.  And Defense Finance and Accounting (DFAS) is pretty flexible when it comes to that benefit in regards to divorce and marriage.  I’m glad to hear you are keenly interested in covering your spouse with SBP.  So what you should do is immediately notify DFAS that you have remarried.  If you do nothing, after a year, she’ll automatically be covered based on your original elections.  If you would like to change the coverage you had before you suspended it back in 2008, you must do this before your first wedding anniversary.  Otherwise your old coverage and premiums will automatically apply after one year of marriage to your new wife.  You can contact DFAS at 800-321-1080.  Check out the related Q&A at the DFAS website

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AD, reserve retirement pay considered marital property

Q: I am getting a divorce after 17 years of marriage. I served 27 years in the military.  I spent four years on active duty and 23 in the reserves.  The reserves use a point system and you don't collect retirement pay until you are age 60.  I had 10 years of service before my marriage which included four years of active duty where I earned most of my retirement points. Is my soon to be ex-spouse entitled to any of my retirement when I turn age 60?

-David, Elk Grove, Calif.

A:  As a reservist and a financial planner, I’m very familiar with the reserve retirement system of which you write…not that I’m counting my points.  When it comes to divorce, most things, including a portion of your military retirement, are up for grabs.  Make sure you enlist the services of an attorney that is experienced and knowledgeable in military divorce arena.

 Just to give you an idea of what might be fair and how the calculation might work, I’m going to assume you earned 100 points during each of your 23 years in the reserves and last year transferred to the retired reserves as an E-8 at age 45. Here are the numbers:

Total Points: 3,760

Points earned while married:  1,700

Percentage of retirement earned while married: 45%

Ex-spouse’s projected share of 2009 retirement value:  45% * ½= 22.5%

 

Using the Army Reserve Retirement Calculator, I calculate a total retirement benefit of about $1,325 in today’s dollars.  So, your ex-spouse would be entitled to $298 per month ($1,325 * 22.5%) when you turn age 60.  Notice, I did not use the age 60 values that include inflation adjustments to calculate your ex-spouse’s share.  In my mind, these inflation adjustments are earned by continued availability and service in the retired reserves.  In this scenario, if we assume 3% inflation, your pay at age 60 would actually be around $2,000/month…of which she would receive the roughly $300/month.

 

Obviously, this is relatively complex and you should, as I mentioned earlier, focus on getting a quality lawyer in your corner.  Thank you for your service and best of luck.

 

Military pension considered marital property

Q:  I am going through an acrimonious divorce.  I have 12 years in the military, five years of it during my marriage.  I have been a traditional Guardsman during that time, although with multiple activations and deployments.  Is she entitled to a part of my military retirement, should I reach that milestone? We both have retirements of nearly equal amounts in the civilian sector.

 

-Mark, Middleboro, Mass.

A:  I’ve noted here before that your military retirement, or at least up to half of it is at risk during a divorce.  It is marital property just like a bank account or piece of real estate.  How that is calculated is a function of your divorce agreement, so make sure that you have an attorney that is familiar with the military, military retirement, and the value that it represents.  Best of luck making it through this tough period of your life. And, thank you for your service to our nation.

Tax-friendly retirement destinations

Q:  Hi June. I’m looking to retire in the next 14 months and was wondering what states along the east coast are most military pension friendly when it comes to taxes.

Thanks,
--Danny, Eldersburg, MD

A:  You’re smart to think about taxes as they relate to your military retirement! What really matters to retirees is their “take-home” pay.  Less paid in taxes equals more to cover expenses and to spend in retirement.  According to retirementliving.com,there are 26 states that don’t tax retired military pay. Of those, only Massachusetts, New Jersey, New York and North Carolina fit in your parameters. The list expands as many more states exempt disability retired pay.  Although there are many other factors to consider when choosing your retirement destination, strictly in terms of taxation North Carolina may be your best right coast bet as they don’t tax social security benefits either.  Not a small point, because you'll likley have to pay federal taxes on social security. In 2009, married filing jointly taxpayers will be hit up with federal taxes on social security starting at about $32,000 in income.  Yes, in the view of the IRS, military pensions do count as income.  

Thanks for asking such a smart question. And congratulations and thank you for your service.

Saving in triplicate

Q:  I have been a member of USAA since 1998.  I have a question on savings.  I deployed and during my deployment I paid off all bills and started saving money.  I have that in a money market and an emergency account with $500.  I know the rule is to have six to eight months of emergency funds.  Should I keep those accounts separate and build up the emergency funds and continue to put money in the money market?  I currently contribute the maximum to my Roth IRA.  Should I just rely on my Roth when I retire?

--Michele

A:  Talk about turning lemons into lemonade!  Good job using your deployment to your financial advantage.  First, your emergency fund should be a separate account to make it less easy (or tempting) to dip into.  And, yes, a money market or similar cash account works just fine.  I actually recommend adding to the emergency fund each month, even after you have the full six months worth of expenses socked away.  That way it automatically “refills” if you need to use it. 

Regarding your Roth IRA, please accept another well-deserved pat on the back!  It’s great that you are maxing out your Roth with $5,000 (2009 limit is $5,000).  However, your Roth IRA alone is probably not going to be enough to fund your retirement.  Once you get your emergency fund in ship shape and up to at least 3 months of living expenses, I would encourage you to supplement your Roth savings in two additional ways.  The first is contributing to the Thrift Savings Plan (TSP).  The TSP is just the opposite of the Roth in terms of taxes:  you save tax money currently and commit to paying taxes in the future during retirement.  Second, I recommend you invest for the long term in mutual fund accounts outside of the TSP and the Roth.  When you liquidate those funds down the road, your investment gains will be subject to long term capital gains tax which is capped at 15% currently (if the investment is held for a year or more).  The result of combining those three strategies achieves tax diversification which will allow for having some control over taxes in retirement.  

 

I know I don’t sound like much fun! Save in triplicate. But you seem like an effective financial manager, so you should have some money left at the end of the day for more fun stuff! Keep up the good work.  And, thank you for your membership!