How do you plan for retirement when you begin receiving retirement payments in your 20s, 30s or 40s? Military veterans with service-related injuries are sometimes in this situation, in which they’re paid a monthly rating and a corresponding dollar amount that generally increases each year as the cost of living rises.
Many of these veterans are on the PDRL, receiving monthly payments on a permanent basis. They are left virtually unconcerned with the possibility of job loss, demotion, or many other factors that could reduce or eliminate pay. Although this pay provides a stable and secure source of income for these veterans, does this mean that they do not have to plan for retirement like a traditional worker does?
With a veteran receiving only a percentage of base pay and additional payments like housing allowance no longer coming in, that person most likely cannot retire on this pay alone. As of 2014, a service member with the rank of E-5 earns $2,735 in base pay per month. A retired vet with this rank and a 70 percent rating receives around $1,915 per month, or $22,980 per year. For most, this is not enough to cover basic expenses, and during retirement, it will be no different.
Because VA retirement payments are tax-free and are generally not considered earned income, these payments on their own are not an eligible form of income for an IRA. Helga Cuthbert is a certified financial planner and founder and principal of Cuthbert Financial Guidance. She said “many veterans [who] receive benefits also have earned income (work for a company themselves).” When you enter earned income into the picture, this opens up additional opportunities, such as the ability to contribute to an IRA.