With over 1.3 million people serving actively in the armed forces, it is very likely you or someone you know is serving in the military. Unfortunately, according to statistics, the majority of them are not saving for retirement, at least not by participating in the Thrift Savings Plan.
In a nutshell, the Thrift Savings Plan is a tax-deferred* retirement investment plan available to federal employees and uniformed service members. It is very similar to 401(k) plans offered by private organizations.
*There is a post-tax option…more on that later…
Investment-savvy military members are probably already taking advantage of TSP or independently managing their own retirement, but for those that are not, the TSP offers low barriers to entry.
Some excuses for not participating include:
- I don’t need TSP because I will get a military pension
- I’m not going to stay in the military
- I can’t afford it
- I’m not going to get a match for my contributions, so why bother
A military pension is probably the best retirement deal around. If you plan on living a frugal lifestyle, you probably could survive on your pension, BUT its only 50% of your high 3 average income at 20 years of service. It is adjusted annually for inflation. If you are immune to lifestyle inflation, this is going to be a difficult adjustment.
Congressional budget deals at the end of 2013 cut the cost-of-living adjustments by 1% until age 62. Many veterans that served 20+ years feel the federal government is not upholding its commitment. For this reason alone, I would not recommend anyone rely solely on pensions.
If that is not reason enough, the Department of Defense budget and personnel cuts mean less people will have the opportunity to serve 20+ years. I’ve personally witnessed many young airmen with the aspirations of being a lifer have their dreams crushed by force reduction quotas.
There is simply no guarantee that you’ll be able to serve for 20+ years or that the pension policy will remain the same.
I’m not going to stay in the military
If you are not planning on making a career out of the military, investing in TSP may seem frivolous. However, the basic principle of investing remains the same. Time is on your side when it comes to compounding interest. It is a short-sighted mistake to prolong investing until military discharge because a TSP can be rolled over into another retirement fund such as an IRA or 401(k). Start investing early!
Can’t Afford it
Military pay, especially for the junior enlisted, can be slim. However, you can’t afford not to invest. Investing 1% and increasing with annual and rank pay increases will pay off in the long run. Build a habit of investing now to take charge of your financial future.
No matching for military
This is probably the most compelling argument for not investing in TSP. Civilian employees receive up to a 5% match, but this is not extended to service members. This is one area where the TSP is not like most 401(k) plans. I will admit, there is little incentive, however, invest in something! If you can do a better job managing your retirement funds (some people can), then go for it! However, if you would prefer to set it and forget it, TSP is a low cost option.
TSP Investment Strategies
While getting started with TSP is relatively easy, enrollment is not automatic like it is for federal civil service employees. Service members can enroll online or consult their local finance office for specific information. Contributions are based on percentages, not fixed dollar amounts. Up until 2012, the contributions were made with pre-tax dollars; however, the Roth TSP now adds another option.
The Roth TSP works like a Roth IRA because the contributions are made after taxes. When you withdraw in the future, the money is not taxed. This is appealing to service members who anticipate being in a higher tax bracket when they retire. Also, if the service member spends time in a tax-exempt combat area they can contribute without tax going in, and withdraw later without taxes coming out! An excellent bonus!
When someone signs up with TSP, 100% of their investments are G-Fund (Government Securities) assets. The G Fund buys nonmarketable U.S. Treasury security (bonds) that are guaranteed by the U.S. Government. This means the G Fund will not (highly unlikely) lose money. However, it also means its rate of growth is very low (around 1%).
The F-fund (Fixed Income Index) is a broad index that includes U.S. Government, mortgage-backed, corporate and foreign government sectors of the U.S. bond market. F-fund investments are subject to market risk.
The C-fund (Common Stock Index) is managed to match the S&P 500 index. The earnings consist primarily of income and gains (or losses) in the price of stocks. These funds are exposed to market and inflation risk.
The S-fund (Small Cap Stock Index) tracks the Dow Jones. The earnings consist of dividend income and gains (and losses) in the price of stocks. Like the C and F funds, it is subject to market risk.
The I-fund (International Stock Index) replicates the Morgan Stanley International Index. The earning consist of gains (or losses) in the price of stocks, dividend income, and change in the relative value of currencies. Like the F, C, and S funds, it is subject to risk.
To learn more about the funds and their performance, visit: https://www.tsp.gov/investmentfunds/fundsheets/
The L-funds, or Lifecycle funds are my personal favorite. They are professionally determined investment mixes tailored to meet investment objectives based on various time horizons. The participant selects the year they project they will retire. For example, someone planning to retire in 2043 would invest in the L2040 fund.
These funds assume the farther you are from retirement, the more risk you can assume, and therefore gain a greater potential reward. Someone 20 years from retirement would be able to tolerate the risks associated with the F, C, S, and I funds. As the target retirement date draws closer, the funds allocate more to the low/no risk G-fund.
This is a great vehicle for someone who wants to diversify and maximize their investments without doing it themselves. You are still subject to risk; however your funds are broadly diversified and automatically adjusted.
Thrift Savings Plan offers several varieties for retirement planning. The military has done a better job in the past several years of educating service members of the plans in their options. However, participation is still very low. A quick poll of my work center aligns with the statistics. Out of the 20 service members in my shop, only 2 are actively contributing to their retirement. Most of them are under 30.
If you are savvy enough to manage your own investments, you may present a dozen arguments why the TSP is not for you. However, if you are not doing anything at all, the low fees and payroll deductions make it an attractive option.
God Bless our Veterans!
What about you?
Are you a service member or federal employee? We DEFINITELY want to hear from you….
Are you investing in TSP? Why or Why Not?
If you are not a service member, do you know someone who can use this information?
MomCents is a 30-something Christian, wife, and mother of a 2-year old son who is jumping back into the wonderful world of blogging with her attempt to create a PF/Mom Blog. If you’re looking for expert advice, she advises you to stay away! But, if you want to follow the up, downs, twists, and turns of a real person who will make mistakes along the way…stop on by. Hopefully you’ll find a laugh, encouragement, or both! Find MomCents on Twitter & Facebook