Pension pitfalls

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A friend’s active-duty retirement reminded us of the potential surprises & pitfalls of the first pension payment.

The first surprise you may encounter is the date of your pension deposit. When you’re on active duty you’re getting paid on the 1st and the 15th — although the exact date that the money’s in your account will vary with the business day and your bank’s deposit policies. After years of active duty, you’re reflexively looking forward to those paydays!

When you retire, that’s going to change. You’ll look forward to the beginning of the month, and it’ll be just once a month.

The first “pay change” in retirement is that your pension shifts to arrears. The second change is that it’s only paid once a month on the first of the month. If you retire on 1 October, then your first retirement deposit will arrive on 1 November.  Not only that, but if it’s been a very busy retirement month (for example, June) or around the end of a fiscal year (September, October) then the Defense Finance and Accounting Service may need a few extra days to process your retirement package and that first payment. It’s not unheard of for the very first pension deposit to be a week late.

When this surprise was revealed at my transition assistance seminar, an unpleasant murmur rippled through the room. These people were all retiring from active duty, but many of them weren’t ready to go five or six weeks without a “paycheck”!

When you retire, make sure you’re ready to handle six weeks without a pension deposit. The system should settle down in a month or two, but the first month isn’t always predictable. If you’re on the highway en route a new retirement destination then Murphy’s Law will almost guarantee that there will be pension problems before you have a chance to discuss it with DFAS.

Here’s another potential pitfall. Usually your required periodic federal/state tax payments are withheld from your paycheck. You may also elect to have that happen with your pension deposit. However, when you receive a lump sum of income, withholding doesn’t always happen.

If you sell back leave as part of your retirement package, you’ll get a lump sum of money along with your first pension deposit. (That’s all good. No pitfall there.) When you receive that lump sum of income (the base pay of the leave you sold back), it’s considered taxable. Unless you ask DFAS to withhold estimated taxes from that lump sum, you’ll get the entire amount of the money you’re entitled to. If it’s a big lump sum (for example, 30 days of leave) then you may be required to pay estimated taxes on that amount at the next quarterly payment date (roughly 15 January, April, June, and September). That’s the pitfall: if you owe estimated taxes but don’t pay them, then interest & penalties will be assessed on your next tax return.

If you’re the kind of person who has lumpy income during the tax year, then you’re probably already all too familiar with estimated tax payments. But if your income has been fairly steady over the years and taxes have been handled by paycheck withholding, then interest & penalties on estimated taxes will be a very unpleasant surprise.

The best financial solution would be to avoid selling back leave, but you may have a better reason for not wanting to take duty recall leave before retirement. An easy solution is to have estimated taxes withheld by DFAS when you sell back your leave for a lump sum. A more complicated solution would be to learn how to calculate your estimated taxes and pay them when they’re due.

Here’s another pension pitfall: state residency. Are you going to owe any income taxes to that state, possibly requiring estimated payments? If you’ve already been living in that state for a number of years (on military orders) and now you’re planning to retire there to become a resident, then you may need to start paying state taxes. (Your military pension may not be taxed, but you’ll still have other employment or investment income.) Worse, you may need to get a driver’s license for that state (possibly requiring a written exam or even a road test) and re-register your cars. You may be required to do so within 30 days of retirement, especially if your old state of residence learns that you’re retired and cancels your driver’s license.

And remember to register to vote in your new state of residence!

If you’re like me then you need to be ready for one final pension pitfall. When you’re on active duty, you probably log into DFAS’ MyPay website frequently enough to remember your password. When you retire, you’ll only log in once a year to download your pension tax statement. Not only will you have trouble remembering your password, but you might not even remember your user name! So give yourself plenty of time to recover from that loss of proficiency, and make sure you’re not trying to retrieve your login/password at the last minute before your taxes are due. No, I don’t want to get into how I learned that…

Kimo, congratulations on your retirement!

Related articles:
Kate’s “Paycheck Chronicles”  (Excellent resource for all pay questions, no matter how obscure or complex)
Retirement and discharge paperwork
Six months before retirement…

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

4 Comments
  1. Great advice for those soon-to-retire.

    A well-funded emergency savings account can come in handy for tax time. We got the shock of our lives with our tax bill the first year of retirement. 9 months of active duty, 3 months of retirement, 6 months of new civilian job, and continuing spouse’s job added up to over $10,000 in taxes due.

    Why?

    New civilian job and retirement was now under state income tax codes. New civilian job withheld like that was the only job, not just a small portion of our total household income.

    Our emergency funded saved us big time!

    • Thanks for commenting– you made the point with far more impact than I did!

      • Nords,
        During my retirement brief by the Finance folks, I was informed that I needed to request a new PIN and password thru DFAS by the mid-month of the first month I would be officially retired, which in my case would be 15AUG2013. I was also informed that retirement pay might be delayed a month or so…which as you and a previous poster indicated would not be an issue for those with an emergency fund and can “weather” a temporary stoppage of income. I also noticed that myPay already has an Active and Retired portion depicted on the main page as soon as I log in.

        By the way, you might also include that you will no longer have the benefit of a military exemption for your vehicle registration and will have to pay “full price” for that registration. Not looking forward to paying in upwards of $150 for registration when I got used to paying just over $20 for it while on active duty here in Hawaii.

        • Thanks for the update, Mel!

          It looks like your accounts are already being updated– that’s a good sign. You’ll still want to check your 2013 W-2 very carefully next year to make sure they got your total pay correct, especially if you sell back any leave.

          I have to admit that it’s nearly impossible to remember a MyPay login/password when you only use it once a year to download your 1099-R.

          Good point about retirement and military exemptions! I retired 1 June 2002 but started my 100 days of leave/PTDY in February… and forgot about the 30-day deadline to convert to Hawaii residency. Around 20 June my spouse and I realized that we’d almost run out of time to apply for our Hawaii driver’s licenses and registrations. I got away with just a written exam. Florida had already canceled my spouse’s license (without notifying her) so Hawaii’s DMV database caught it and she actually had to go through a road test.

          I don’t know what’s happened to fees, but over the last five years our 2006 Prius registration has gone from $165 to $275. If that trend continues then within five years it’ll be more expensive to register it than to insure it…

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