I Have A Military Pension: Do I Still Need An Emergency Fund?

For years, the standard financial advice has been simple: Keep three to six months of expenses in cash for emergencies.

That guidance makes sense for households that rely entirely on earned income. But for many military retirees with a pension and especially those with VA disability, this rule of thumb deserves a second look. When a significant portion or the entirety of your mandatory expenses is already covered by guaranteed income, your emergency fund doesn’t need to serve the same purpose it does for everyone else.

Why the Traditional Emergency Fund Exists

A traditional emergency fund is insurance; self-insurance to be exact. You are accepting the risk that in the short term, you can fund yourself against two main risks:

Loss of income
Unexpected large expenses

For someone whose paycheck could disappear overnight, cash reserves are critical. The standard advice is 3-6 months’ worth of mandatory living expenses saved into a highly liquid account such as a regular or high yield savings account. If you have stable pay, two incomes, and/or low expenses, you may feel comfortable with a leaner, 3-month fund. Alternatively, a 6-month fund might be more appropriate for those supporting a family on a single income or with unstable/uneven pay. Even with the occasional government shutdown, a 3-month fund is often appropriate for those in the military. When you decide your time in the military is over, you may consider an increase to a 6-month fund due to changing incomes and expenses. In either case, the emergency fund is there to become your income in case your normal income stops unexpectedly or is insufficient to handle large, one-time expenses.

But for retirees with reliable income streams, that first risk looks very different.

Guaranteed Income Changes the Emergency Fund Math

Military pensions and VA disability compensation have unique characteristics:

They are reliable and predictable
They are not tied to employment
They adjust for inflation
They continue regardless of market conditions

So, what if those guaranteed income streams already cover your baseline needs such as a mortgage payment, utilities, food, and insurance premiums? How should you think about the amount you should keep for emergencies then?

From Income Protection to Event Protection: A Different Way to Size the Emergency Fund

Well first, perhaps take a moment to consider how exciting this is! Think about it:

Your guaranteed income covers your mandatory expenses.

Maybe I am naïve, but to me, this looks oddly like a definition of financial independence – at least maybe Coast FI. Sure, you might not be able to accomplish all the goals you set out for your life, but at minimum, you have the income you need to keep a roof over your head, food on the table, and gas in the car. Any income beyond that is icing on the cake!

With that out of the way, now we can consider our emergency fund amount. Remember, there were two purposes to an emergency fund, and we’ve just eliminated one of them – income sourcing. The second, covering the costs of unexpected bills, remains. This is where the shift occurs. Instead of thinking about this in terms of 3-6 months income, now we can think about this in terms of what’s the worst thing that can happen that I don’t already have insurance for.

A quick trip to ChatGPT generates some of the most common large-ticket expenses to plan for:

Home repairs such as HVAC or roof replacement
An engine or transmission on your vehicle
A significant health event (not covered by Tricare)
Unplanned travel

Given these types of expenses, anywhere between $20,000 and $50,000 would almost, if not completely cover the cost.

The Trade-Off: Cash vs. Opportunity

As you consider how much to store away for those potential large expenses, keep in mind that too much cash in savings can be risky. Even highest of the high-yield savings accounts are generally only staying even with inflation. That means that if you have a lot of cash in a savings account, you may not be earning enough interest to keep up with the value of the dollar or worse, you may actually be losing value over time.

Peace of Mind Still Matters

There is a comfort factor to an emergency fund. If you decide that $10,000 would cover the worst thing that could happen to you, but you still can’t sleep at night because the account value is too low, consider the amount that would help you sleep at night. So your new number doesn’t become arbitrary, try to consider why your new number makes you comfortable. Quite often, we have a tendency to create the worst-case scenario in our mind, when in reality, our worst case scenario may not even happen – ever. Try to find a balance between your worry, anxiety, and the reality that an event may actually happen. If you find yourself getting to a number beyond $50,000 or so, perhaps shifting risk to an insurance company might be a more appropriate solution. Before you head to the nearest insurance agent, perhaps use an outside party as a sounding board for your idea.

Setting Your New Number

The key to establishing your retirement emergency fund is that it is personalized to you. With guaranteed income that covers your mandatory expenses, your emergency fund shifts from income protection to event protection; an added source of comfort and confidence to your guaranteed income. You get to set the amount balanced between what could happen, what helps you sleep at night, and the risk of too much idle cash. When aligned, your emergency fund does exactly as it is designed; it offers the ability to respond with clarity and control when life inevitably throws a wrench in your plans.

Are you reconsidering your emergency fund or even something more? A MFAA financial advisor can help.

Rolling out of the military: Do I have to roll out of the TSP?

Getting out of the military, whether at the end of your service, because you are retiring, or for any other reason, comes with a lot of decisions and moving parts. For those with a Thrift Savings Plan (TSP) balance, one of the most common questions among those getting out of the service is if they should roll their TSP account into something else such as another employer plan or an Individual Retirement Arrangement (IRA). While this article isn’t going to tell you what to do, it will give you a few considerations as you ponder your decision.

Keep your TSP account: It’s the easy button!

While you might be getting out of the service, your TSP doesn’t have to. You may not be able to contribute to it anymore, but you can certainly continue to adjust the allocation and watch your account balance continue to do what it always has – grow or decline in line with your allocation and market swings. If anything, in the landscape of decisions you “have to” make when exiting the service, this one does not need to be one of them. You can leave it for later.

Keep your TSP account: It’s inexpensive

Another reason to keep your TSP is that the TSP net expense ratios for the various core funds are relatively inexpensive compared to other employer plans and some other investments such as mutual funds and actively traded accounts. This is becoming more of a “push” with many Exchange Traded Funds having similar fees to TSP, but all in all, TSP is still low cost. When thinking about how much investment growth remains in your pocket, the net operating cost of any given investment is important to keep in mind. When the fees get too high, they chip away at your earnings.

Keep your TSP account: It’s protected

Don’t forget about some of the legal protections to keeping your investments in an employer plan. Unfortunately, bankruptcy is a reality for some and if you ever have to file for, with some rare exceptions, your TSP balance is protected from bankruptcy. This includes money that you roll into your TSP balance. Assuming the rollover was done correctly, money you roll into the TSP is now also protected, which brings us to a final reason to keep your TSP account balance.

Keep your TSP account: A backdoor Roth’s best friend

Keeping your TSP account open allows you to keep the option open to roll other pre-tax account balances into the TSP. Wait, into? Yes, into. Let’s assume you’ve been saving pre-tax dollars in your personal IRA. One day, you reach the income level where you can no longer do that so your financial advisor says to you, “we should look into a backdoor Roth conversion,” and you should! However, you have an IRA with pre-tax dollars that you are about to mix with after-tax dollars. While you can, the IRS has something to say about that. You’ll be subject to the pro-rata rule which states that you can’t cherry-pick just the after-tax contributions to convert into your Roth IRA. The pro-rata rule will determine the ratio of pre-tax and after-tax dollars and subject whatever amount you convert to Roth to that ratio. Pro-rata, although manageable, can make your Roth conversions and tax efficiency unnecessarily complex. Fortunately, the TSP allows IRA rollovers into the TSP. This means that before you begin contributing after-tax dollars to your Traditional IRA, you can clear your pre-tax contributions out by rolling the balances into your TSP, thus giving you a clean Traditional IRA account without subjection to pro-rata.

Rollover your TSP account: It’s not very flexible

There are some decent reasons to roll your TSP contributions out into another employer plan or IRA, the first of which is control. No, you aren’t losing control of your money, but you do give up quite a bit of flexibility control. For example, let’s say you’ve got an allocation either within one of the many Lifecycle funds or even your own mix of C, S, I, G, and F core funds. You decide that you are ready to begin your regular distributions or have even reached the point of requirement minimum distributions (RMD). Ideally, you would distribute from fixed income allocations leaving equity to continue to grow. You won’t be able to do that in the TSP. The TSP will take a pro-rata (there’s that word again!) distribution across your entire allocation.

Rollover your TSP account: It’s Not Friendly To Contingent Beneficiaries

Another area where you lose control is after you’re gone. If you have a spousal beneficiary who outlives you, your spouse will inherit your TSP through what is known as a Beneficiary Participant Account. However, if your spouse passes or if you don’t have a spouse, your next beneficiary, a non-spouse, is not allowed to have a TSP account. They will instead have 90 days to make an election to have their TSP benefit rolled into an inherited IRA or else a check be written for the full balance which cannot then be rolled into an inherited IRA. This could be significant tax problem in the year of receipt, depending on the balance received. In the government, 90 days is not a lot of time to get anything done and this could turn into a complete tax disaster.

Rollover your TSP account: Limited Investment Options

One more area of control has to do with the TSP fund options. While the TSPs core five funds have done well historically, they are limited to those five options. For instance, if you wanted to be a little more specific about value, growth, or blended equities, you can’t do that in the TSP. To find additional investment options, you would have to roll your TSP into an IRA where the whole wide world of investments is open to you.

Rollover your TSP account: You Might Forget It!

Lastly, and a reason less to do with control, is simply forgetting about the TSP. You might think to yourself that that could never happen, but weirder things have happened. Think about it. You get out of the military and go to work for someone else with a 401(k) employer plan. You also open a Roth and Traditional IRA. You’re married and your spouse has employer plan and their two IRAs. You have 4 kids and you open 529 accounts for them all. You also decide to open a taxable brokerage account. Before you know it, you have a dozen investment and bank accounts, it’s been 20 years since your military days, and you suddenly remember, “I’ve got a TSP!” While you likely haven’t lost any money, it probably also wasn’t optimized for growth and taxes over the last 20 years. Rolling your TSP, or any employer plan “forward” into your current employer plan if they allow it, or your IRA, helps consolidate your accounts and simplify where possible

A Little Bit Of Both

There is a middle ground you might consider. TSP requires that you maintain an account balance of at least $200 or else they will close your account and send you a check. A strategy often used is to keep a $500 – $1,000 TSP balance to account for any market declines and roll the rest out into your employer plan or IRA. This allows you to take advantage of some of the key benefits of both. Just remember that by rolling money out of the TSP into an IRA, you then could lose some of the bankruptcy protections you would have by keeping your money in an employer plan. Also, be sure to set yourself a reminder for when you turn 65 to distribute or rollover whatever is left in your TSP account.

Do What Works For You

You don’t have to be in a rush making a decision about what to do with your TSP account. You can transition from the military and then come back to your TSP decision. You have options which include keeping your TSP right where it is. Just be aware that eventually, when you pass and if married, your spouse passes, your non-spouse beneficiaries will be forced to exit TSP. So, the real question is not if you roll your TSP balance out, but when will you do it? Stay in control and roll it out when it works best for you.

If you’re ready to explore the impact of TSP rollovers on your financial plan, an MFAA advisor can help. Find the profiles here.