If you’re currently serving in the ARNG or USAR, you should explore the Thrift Savings Plan. This is the military’s version of a 401k program. The Thrift Savings Plan is a retirement plan in addition to your military pension. You’re allowed to invest a percentage of your income into your retirement plan from each pay period. When used properly, this program will supplement your military pension and social security when you retire.
In the paragraphs below, I’d like to provide an overview of the Thrift Savings Plan and educate you about how it works. Let’s get started.
Quick Facts about the Thrift Savings Plan:
- It started in 1986 when Congress passed the Federal Employees Retirement System Act
- It is a defined contribution plan which means your investment is determined by your contributions
- Like any investment vehicle there is NO guarantee you will make money. In fact, you could LOSE money.
- If you are eligible for an employer match (most aren’t), you can get up to a 4% match
- In certain circumstances, you can borrow against your plan
- When you leave the military you can “roll over” your TSP into another retirement account. And you can “roll over” other retirement accounts into your Thrift Savings Plan.
- The TSP Board currently contracts BlackRock Institutional Trust Company to manage its F, C, S and I funds.
- In 2011, the fees were approximately 25 cents per $1000 invested. This is very inexpensive compared to other financial institutions.
- In 2011, the TSP Contribution limit was $16,500. In 2012, the IRS raised the limit to $17,000. Each year the IRS increases/establishes a new limit.
- Your first contribution establishes your account
- You can use pre-tax contributions similar to a 401k or Roth contributions that are after tax contributions
- The life-cycle funds are allocated with different types of funds based upon your anticipated withdrawal date. The current life-cycle funds are 2020, 2030, 2040 and 2050. Each one of these funds is professionally managed and diversified based upon your time window until retirement. Life-cycle funds with a short window are typically much more conservative and life-cycle funds with a large time window are generally more aggressive.
- The G, F, S, C and I are individual funds that work as index funds
Hypothetical Example
This is a hypothetical example. If you invested $600 per year ($50 per month) into your Thrift Savings Plan, starting at age 18, and did that for 20 years, you would accumulate$16,426, assuming you received a 3% return on your investment and kept it there until you are 65. That might not sound like much but it’s better than nothing. And if you invested $200 each month of your 20 year military career, you could have more than $100k in your Thrift Savings Plan Account. I think that’s quite impressive. And if you invested the maximum contribution limit each year (currently $17k per year) you could even build a seven figure portfolio. If you visit the TSP website, you will find a calculator to use.
My Advice for You
Let me preface by telling you that I’m not a financial adviser. But I can speak from personal experience. My best advice for you is to educate yourself about the Thrift Savings Plan. It might be in your best interest to sit down with a Certified Financial Planner® and compare this program to another program. That way, you have something to compare it to and can make an educated investment decision. I also can speak from personal experience and tell you that the sooner you start investing (even small investments) the better off you will be in the future. Time goes by really fast. Compound interest is a beautiful thing, when you give it time to work. My final advice is to educate your young soldiers about the Thrift Savings Plan, and the importance of planning for their financial future. You could incorporate this into your OPD/NCODP Programs and in classes with your troops.
Are you currently using the Thrift Savings Plan? Do you have any questions? Please post comments and questions below. Thank you.
Chuck Holmes
Former Army Major (resigned)
Publisher, Part-Time-Commander.com
Email: mrchuckholmes@gmail.com
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Planning retirement (as mentioned in previous blog posts) is one of the most critical things for soldiers (and really, anyone in any field) to do. People who don’t plan for the future always end up in a scramble or even worse (homeless, unable to afford food, etc.) and having a pension is a surefire way to avoid this… for such a small investment, it’s an obvious choice: secure your future.
They say that failing to plan is planning to fail.
It’s very important that you start planning your retirement well in advance. If you are a member of the service, you should sit down with someone to help map out all your options. There are ways you can start saving now to help supplement your retirement years.
One of the saddest things I see is Soldiers who don’t plan their career or retirement effectively. While the pension is nice, most Soldiers will need even more money during retirement. The Thrift Savings Plan is a very easy way to create an extra income stream for retirement. All service members should strive to save at least 10% of their gross income into the Thrift Savings Plan. Over a 20 year period that can really add up to a lot of money.