Sometimes, I get involved in conversations that really make me wonder. Take, for example, conversation that I had a couple of weeks ago. I was talking with the spouse of a recently retired service member, who was lamenting the higher deductible that retirees pay on their Tricare medical coverage. She mentioned that her husband wasn't able to find a job immediately, and that it was tough hitting that higher deductible with lower income. Trying to find a silver lining, I asked if those higher expenses and lower income were enough to deduct medical expenses from their income tax in that year. She said no, because they'd cashed out his Thrift Savings Plan (TSP) for living expenses until he found a job. They were surprised to discover that they'd have to pay taxes and a penalty on the money taken out of TSP. Her all-around bitterness really struck me, and I thought about it for a couple of days.
At first, I thought that it was a tough run of luck. Then, I realized that she hadn't said anything in there that was actual bad luck. There were no surprise illnesses, there was no catastrophe, there was no quirk in the law that they hadn't understood. Every single thing that she mentioned was something that was absolutely expected.
Higher Medical Costs
It's no secret that retirees pay more for their Tricare coverage than active duty families. It's not much more, with an annual catastrophic cap of $3,000 versus the active duty catastrophic cap of $1,000. (And the $1,000 you pay while on active duty counts towards the $3,000 cap in that first year.)
Now, hypothetically, if you retired on 1 September, you could have to pay up to $2,000 in extra catastrophic cap in the first month of retirement, and then start over with a new fiscal year in October. If you have large medical bills, you could shell out $5,000 in medical expenses within the first few months of retirement. Expensive? Maybe, but still a lot less than any other medical coverage out there. More importantly, it's not a surprise. Planning for this should be part of the overall retirement planning process, especially if you have family members with medical concerns.
Lower Income
Military retirement is a generous program, but it is still a lot less than active duty pay. In addition to receiving only a portion of your active duty pay, retirees do not receive any allowances such as Basic Allowance for Housing or Basic Allowance for Subsistence.
People who are retiring should build a budget based on the lower income they'll have in retirement. It's not a complex calculation, and can easily be done years in advance. It'll be impacted a little bit by annual raises, but that baseline is important for planning purposes. Don't wait until your first retirement check to figure out how to pay your bills.
Delay In Employment
We've all heard stories about people who go into work in uniform on Friday, retire, and return as a civilian on Monday. While that does happen, it's not as often as you'd think. It's not uncommon for the post-retirement job search to take months. When planning that post-retirement budget, you should assume that there will be a significant period of unemployment. This means you'll either have to scale back the spending plan, or have cash reserves to cover the shortfall.
Don't forget that even when you do get a job, it may be weeks before the first paycheck arrives. For example, if you start a new job with the federal government on the first day of the pay period, you won't get paid for 18 days.
Penalties for Withdrawing Retirement Savings
It's a rare case where withdrawing retirement savings makes sense, but sometimes people thing that is what they need to do. In addition to owing ordinary taxes on any amount that wasn't taxed previously, there will likely be a 10% penalty for early withdrawal. Again, this should not be a surprise to anyone. It's in the tax law, and it's in your retirement account documentation, and it is explained when you request the withdrawal.
I completely understand feeling frustrated when your finances are out of line. It's no fun. However, I have a lot less sympathy when people don't plan ahead for things that are going to happen. To avoid such unhappiness in your life, do a little pre-planning for major situations, such as retirement. You'll be a lot less stressed if you have a solid plan based on facts.
