(This article by Kimberly Lankford originally appeared in the March 2023 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)

Even if you serve long enough to qualify for lifetime military retirement pay, you still need a retirement income plan.

The valuable pension can be worth up to 50% of your base pay if you serve for 20 years, adjusted for inflation, but you’ll need to figure out how to piece together several sources of retirement income to cover the rest of your expenses.

“The military pension covers the basics, but it doesn’t add the richness to life,” said Lt. Col. Rorik Larson, USA (Ret), a CFP® professional and enrolled agent with Essential Financial Strategies in Palos Heights, Ill., and Life Member of MOAA.

Without careful planning for the rest of your retirement income, you could end up with fees and tax bills that eat into your savings—and erode your quality of life later in retirement.

“I think people generally focus on the accumulation phase of retirement, and they don’t know what to do when the time comes to take withdrawals. It’s all about how you can make your money last,” said Lila Quintiliani, AFC®, ChFC®, MOAA’s program director of financial and benefits education/ counseling. “For a 65-year-old couple, there’s a 50% chance that one spouse will live to age 93 and 25% that one will live to age 97. You don’t want to make a mistake with this.”

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Making smart decisions when creating layers of retirement income can help you stretch your savings, afford the retirement you’ve dreamed about, and maybe even leave a legacy for your children and grandchildren.

The Key Calculation

Retirement income planning boils down to the same calculation for everyone: Add up your expenses in retirement, subtract your guaranteed sources of income, and figure out how to fill in the gap, said Patrick Carney, CFP®, a financial adviser and chartered retirement planning counselor with Rodgers & Associates in Lancaster, Pa.

If you qualify for military retirement pay, that pension combined with Social Security could end up covering many of your retirement income needs. You may fill the gap with withdrawals from your Thrift Savings Plan (TSP), individual retirement account (IRA), 401(k), or other retirement savings. If you aren’t eligible for a military pension, you’ll need to cover more of your expenses from savings.

A quick way to estimate if you’ve saved enough, Carney said, is to calculate whether 4% of your retirement savings covers that gap between your annual income and expenses, which is a general guideline for retirement withdrawals to avoid running out of money in most financial scenarios.

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When adding up your regular retirement expenses, include mortgage or rent, utilities, food, transportation, insurance premiums, and other regular bills. Most of these expenses will increase with inflation every year, and the inflation-adjusted military retirement pay and Social Security might keep up with those rising costs. But if you don’t have a military pension—or if it only covers a small portion of your expenses—then you’ll have to cover more of those costs each year from your savings.

One thing that can erode the value of your pension to cover your expenses is lifestyle creep, said Col. Curt Sheldon, USAF (Ret), a CFP® professional and enrolled agent with C.L. Sheldon & Company in Alexandria, Va., and Life Member of MOAA. He said especially in the national capital region, military retirees can earn a lot of money in civilian jobs after they leave the military. But if their spending also rises, their military pension may not cover as much after they ultimately retire.

“If they want to continue to spend a lot of money in retirement, the pension becomes less of a percentage of their spending and less of a safety blanket,” he said.

Social Security Decisions 

Social Security benefits provide an extra layer of lifetime income, and decisions you make about when to take your Social Security benefits can make a big difference in the size of that income over time. If you already have many of your expenses covered by military retirement pay or a civilian job, you might be able to delay claiming Social Security benefits past your full retirement age, which can increase your monthly payouts for life.

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The age for receiving full Social Security benefits is 66 for people born from 1943-54, and it increases by two months each birth year until it hits age 67 for people born in 1960 or later. You can claim benefits as early as age 62, but your monthly payouts will be reduced by 25%to 30% from your full benefits. Or you can delay receiving benefits up to age 70, and your payouts will increase by 8% for every year you wait past full retirement age.

Sheldon generally recommends waiting to claim benefits.

“My position is that we’re going to delay Social Security as long as possible, even if we have to dip into investment accounts,” he said.

Having the higher Social Security benefits helps protect against the risk of outliving your income, no matter how long you live.

“I like to mitigate that unknown with guaranteed income sources such as military retirement, Social Security, and any disability payments,” he said.

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However, someone with significant health issues may choose to claim earlier if they have a much shorter life expectancy.

Withdrawal Strategies

If you’ve been saving in the TSP, an IRA, or a civilian 401(k), 403(b), or other retirement-savings plan after you leave the military, you’ll have more flexibility to make up the gap between your retirement income and expenses.

Deciding how much to withdraw and which accounts to tap can be a puzzle, and your decisions can determine how long you can stretch your savings.

“How much do you need, where will you get it from, and what will the tax impacts be?” said Quintiliani. “They don’t always think about the tax side of things, and it can really catch people by surprise.”

This is when you realize the value of tax-diversifying your retirement savings. You might have made some pre-tax contributions to your TSP, IRA, 401(k), or 403(b), which grow tax-deferred and are taxable when withdrawn. You might have also made Roth contributions, which aren’t tax-deductible but can be withdrawn tax-free in retirement.

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And if you made extra contributions to your TSP when you were deployed, you might also have some tax-exempt contributions in that account. Those contributions will not be taxed when the money is withdrawn, but any earnings on the tax-exempt contributions in the traditional TSP are taxable upon withdrawal.

Consider all of these different pots of money when plotting your retirement withdrawals each year to help manage the tax liability and avoid extra fees if your taxable income reaches a certain level — such as the Medicare high-income surcharge, also called the Income-Related Monthly Adjustment Amount (IRMAA).

In 2023, the standard Medicare Part B premium is $164.90 a month, but if your modified adjusted gross income in 2021 was more than $97,000 if single, or $194,000 if married filing a joint return, you might have to pay much more — from $230.80 to $560.50 a month, depending on your income.

Earning just $1 over the cutoff could boost your premiums by nearly $800 for the year, or $1,600 if you and your spouse are both paying Medicare premiums—or more at higher income levels. “They get pretty punitive,” said Sheldon.

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The IRMAA is based on your adjusted gross income plus tax-exempt interest income. Taxable military retirement pay, any civilian earnings, taxable Social Security benefits, and taxable withdrawals from retirement savings all count toward that IRMAA threshold. Roth withdrawals do not.

Keeping these cut-offs in mind when choosing which accounts to tap can make a big difference in your Medicare premiums for the year. Try not to get too close to the current cut-offs because the IRMAA is based on your last tax return on file — 2023 premiums are generally based on 2021 income — and the income levels generally rise each year.

If you’ve experienced certain life-changing events since your last tax return on file — such as retirement, marriage, divorce, or death of a spouse — you can ask the Social Security Administration (which manages these charges) to use your more-recent income and reduce or eliminate the surcharge.

Investing Decisions After Retirement

Your investing strategies change after you stop working. You don’t want to have to sell investments at a loss to pay your bills during a market downturn, but you also don’t want to invest so conservatively that your savings don’t keep up with inflation over a retirement that could last for 20 or 30 years. If most of your expenses are covered by military retirement pay and eventually Social Security and you only have to withdraw a small amount from your savings every year, you might be able to invest more aggressively for the future.

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“If your guaranteed income covers almost all of your planned expenses, you’re not going to be as dependent on portfolio withdrawals as a typical retiree,” said Carney. “For someone in that situation, if your fixed income sources plus drawing 4% a year on your portfolio would exceed your expenses, that excess could be used for enhancing your lifestyle, leaving a legacy to your family, or giving generously to organizations that you care about.”

It is also important to make sure that you have money available each year to fill in that gap between your retirement expenses and income. There are a few ways to do this, based on your time frame and risk tolerance.

“It’s really important in asset allocation to protect that money,” said Larson. He creates a ladder of CDs or bonds (such as Treasury bond STRIPS) that pay out the amount you need to cover the gap for each of the next 10 to 15 years, holding the CDs or bonds to maturity so you know exactly how much you have no matter what happens to the stock market during that time. “That assures you that you have the money coming in,” he said. Then you can invest the rest of your money in a balanced portfolio, with a portion in stock funds and bond funds, depending on your risk tolerance.

You also need to have a plan for unexpected expenses, such as the potential cost of long term care. The average cost of a private room in a nursing home is more than $100,000, and one year of assisted living or home care costs around $50,000, according to the Genworth Cost of Care study. Some veterans qualify for help from the VA’s Aid and Attendance program and other benefits, but most people have to pay the bills themselves.

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“Many people believe Medicare provides for long-term care, but it does not,” said Mark Mitchell, a financial professional with Equitable Advisors in Irvine, Calif., who served in the Army in the late 1970s and early ’80s. “You need to make sure you understand the nature of hedges — is something in place to protect against something unforeseen?”

Mitchell recommends looking into long-term care insurance in your mid- to late 50s that can help cover those costs in a nursing home, assisted-living facility, or in your own home.

Other Sources of Retirement Income

You might not have to withdraw as much from your retirement savings if you have other income sources, too.

Doing some part-time work can give you flexibility and help stretch your savings, even if you’re earning much less than you did while working full-time.

“If somebody is of an age where they want to have more time to be a grandparent, consulting allows them a transition period into the next phase of life, adding meaning to their life and giving value to their life both financially and emotionally,” said Larson.

Many servicemembers become landlords when they have to move while on active duty, and some continue to rent out property as another source of income after retirement. But first make sure you understand how much income you’re actually taking home after subtracting all of the expenses.

“If you can get the money out of your house and invest it elsewhere, how would the two compare?” said Sheldon.

Kimberly Lankford is a financial expert based in Virginia and the spouse of a retired Army colonel.