If you’ve hung out around KateHorrell.com long enough, you have heard me talk about having a transition fund. I think I may have made up that term…maybe not. But I sure am fond of it. So what exactly is a transition fund, and why would you want one?
This post is part of The Comprehensive Military Retirement Checklist. Be sure to read all the other posts that go with the checklist, too!
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What Is A Transition Fund?
A transition fund is a chunk of money to help you during the time when you’re leaving the military and transitioning to the civilian world. Whether that’s after one four-year tour, or after a 30 year retirement, some level of transition fund is really helpful. Because no one stays in the military forever.
Why Do You Want A Transition Fund?
The transition to civilian life can be seamless, but more likely you’ll encounter a few bumps along the way. Having a stash of cash can make it a little easier to sail over those bumps. Some reasons you may need a transition fund include:
- delayed last military paycheck
- security deposit on a new home, or a down payment if you’re buying
- registering vehicles in your new home state
- civilian clothes for a new job
- delay in finding a new job
- temporary housing while you figure out where you want to live
- travel to job interviews
- pet boarding, if your situation requires it
- required items for your kids’ new school (uniforms, calculators, etc.)
- uniforms for your new job
- delay in Department of Veterans Affairs (VA) benefits
- drivers’ licenses in your new home state
- unexpected delays in starting a new job
- utility deposits
- transferring professional licenses to a new state
- new regular clothes if you move to a new climate
- if retiring from overseas (double-whammy), new small appliances and possibly vehicles
- unexpected moving expenses that exceed what the military will cover
- setting up your new home: window coverings, toilet brushes, and the like
- Tricare enrollment fees and upfront costs to switch to retiree dental (if you choose)
- higher catastrophic cap for retiree families on Tricare
- training for a new job: certifications, classes, or tests
- the usual things that come up when you can least afford them: car repairs, pet illnesses, emergency travel
- possibly maintaining two households for a period of time
- eating out – during move(s), while you’re job hunting, etc.
- the lag time between starting your new job and getting your first paycheck
Of course, you probably won’t have all these expenses. Heck, you’ll probably only have a few. You may not even have any. (But I doubt that.) The idea is to be prepared for the possibilities.
How Big Does Your Transition Fund Need To Be?
That depends. What does life look like when you get out? There’s a huge difference in needs between a single 21-year-old, with no car payment, who is headed back to college on the GI Bill, and a 52-year-old retiree with four kids in college, a huge mortgage, two car loans, and credit card debt, who is looking for that perfect senior executive job. Obviously, most of us live somewhere in between those two extremes. What’s right for you isn’t going to be right for me, or your best friend, or your neighbor.
I suggest you start by guesstimating six months of bare-bones living expenses (minus retirement, if you’ll be getting it), plus the costs of the transition itself. That number might be tiny, or it might be huge and overwhelming. Either way, it’s just a goal. You can only do what you can do. But don’t let the size of the goal be a reason not to start.
Don’t forget to consider the “sleep at night” factor. It’s entirely possible that you want to save more money, just so you can be covered. For me, I want at least one year’s expenses. Which with four kids in college, is a LOT. So my number is crazy high.
When Should You Start Building Your Transition Fund?
In my perfect world, service members would start saving that transition fund with their very first military paycheck. Sound crazy? It’s really not, and here’s why: most new service members don’t need a large emergency fund. It’s not terribly hard to save $500 to move back home and get started in school, or find a new job. But if you start that fund early, then it’s easier to grow the fund as your needs evolve.
Truly, though, most of us don’t start until the end of military service is on the horizon. That’s OK! Jump in where you are, and do what you can.
A side note: many a military career has ended before expected. Don’t put off starting that transition fund because you plan to do 20 years. Reductions in force, medical boards, family situations, early retirement offers – there are many reasons that even lifers end up leaving before they expect.
In my perfect world, service members would start their transition fund when they entered the military. Click To Tweet
How In The Heck Can I Save?
Sometimes, it’s tough. You’ve got to prioritize this. Put off buying that replacement car for another year or two. Save your Dislocation Allowance with each move. Skip a vacation. Trim your grocery budget for a year. Stash your bonus, or continuation pay if you’re in the Blended Retirement System. Save your tax returns. Quit drinking soda. You know, the usual way to find a way to save: track your spending, see where you can cut back, and do it. It’s not always fun, but the results are worth it.
One common debate is whether to pay off debt or build your transition fund. Ideally, you’ll do both. Heck, you know I want you to be debt free long before you get near transition. But I also realized that isn’t always possible. If you’re two choices are to build a transition fund or pay down debt, having larger savings gives you more flexibility. You can always pay down the debt with your savings. You can’t pay your mortgage or buy food by being debt free (unless you accrue new debt. Which might be fine with you.)
But My Friend Didn’t Need A Transition Fund
Lucky friend! Some people manage to have a seamless transition, and I’m thrilled for them. I hope it happens to you, too! I sincerely hope that you build up a huge transition fund and don’t need to spend a single penny. Then you can have a huge party or put it in your retirement account or go on vacation or pay down your debt. I promise the money isn’t going to go to waste if you save it.
Where Should I Keep My Transition Fund?
That depends on a wide variety of factors, most importantly how long you’ll have until you get out. In general, the idea is to keep this money relatively liquid and relatively safe. We keep ours in a ladder of Certificates of Deposit, with a cash cushion to get us through the first few months. I shop around for promotional rate CDs (I like Navy Federal) to earn as much interest as possible.
Another consideration is whether your transition fund should be kept separate or just be part of your big emergency fund. Again, that’s a preference. I will say that I merged our two funds a couple of years ago, and it has thrown off my mental accounting ever since. And, in talking to those who have transitioned already, many found that the regular life emergencies (see above: car repairs, ill pets, family funerals, etc.) seemed to increase during transition, or maybe the impact just felt larger during transition. For me, at least, seeing those things come out of different pots of money will be less stressful.
Obviously, a transition fund is a very personal thing. (Heck, that’s why we call it personal finance.) But whether you need $500 or $50,000, I encourage you to think ahead and start working a plan. You will be glad that you did in the long run.
