December 20, 2012
by CPO Tim Duncan, USN
The bi-weekly regularity of military pay, along with the relative job security we enjoy, creates a paycheck-to-paycheck culture where saving has been placed on the back burner. Regrettably, many servicemembers have little to no savings in place, while others have found themselves overburdened with debt. Yet there are many programs in place that help us overcome this trend, and the Thrift Savings Plan is the most powerful savings tool among them.
TSP: Uncle Sam’s Get Rich Slow Scheme
The Thrift Savings Plan (TSP) was inaugurated for military personnel in January 2002. It provides a tax-advantaged investment account for servicemembers and their families to save for retirement, similar to a 401(k). The savings in your TSP grow, based on your investment preferences and market performance, over the course of your lifetime.
Once you retire, after the age of 65, you can begin drawing distributions from your account. Thus whether you hope to one day receive a military pension, or you plan to get out and pursue employment elsewhere, the TSP is essential to helping you achieve your retirement goals. (And yes, even if you get out of the military, you have the option of keeping your savings in the TSP account until you reach retirement age.)
Not convinced it works yet? Consider this: there are now over 200 TSP accounts worth in excess of $1 million.
(Hint: a common trend among these TSP millionaires was maxing contributions and primarily investing in the C, S and I Funds)
Now that we are all believers in the TSP, here comes the hard part: funding your account. In order for the TSP to really work for you, you want to contribute the max amount possible and as early as you can: contribution limits for 2013 are $17,500. As we all know, saving a few hundred extra dollars per month is a real challenge. Yet those additional savings over the years will add up in a big way in retirement. And considering that the average uniformed TSP contributor is only in his/her early 30s, military personnel are perfectly positioned to take advantage of decades of compound interest.
Simple Tactics: Investing in Your Future
Here are some simple yet powerful ways to boost your TSP contributions:
Pay Raises - Every time you get an annual or promotion pay raise, simply leave the additional income out of your budget and allocate it to the TSP.
BAH increases - Same deal. Once a year, allocate your BAH increases to your TSP account. And here’s a hint: since BAH is non-taxable, I suggest allocating these funds to the brand new Roth TSP. The resulting distributions in retirement will be non-taxable. The same goes for OCONUS COLA and BAS. (CONUS COLA is taxable)
Bonuses - Nothing builds a TSP account as quickly as military bonuses. I have personally seen Sailors max out their TSP contributions for multiple years on one reenlistment bonus. If given the opportunity to divert a bonus to your account, I would suggest doing so. Besides, receiving a bonus payment usually results in taking a big tax hit on April 15th. Instead of handing a chunk of it over to the IRS, why not gift it to the 65 year old you instead?
Incentive Pays - There are many pays that are unique to specific military assignments, including flyer pay, hazardous duty pay, and submarine duty pay. Accepting a new assignment, with an increase in pay, is an ideal time to bump up your savings.
Special Pays - Dozens of pays fall into this category. These include hostile fire and imminent danger, dive pay, and Foreign Language Proficiency Pay, to name a few. I’ve seen linguists contribute up to $1000 per month to their TSP from this last pay.
Your myPay account has straightforward guidance on allocating these pays to your TSP account under the TSP link.
Military TSP Statistics: Grade Your Retirement
In closing, let’s take a quick look at the state of the overall military TSP program. It is important to periodically gauge your progress, taking regular check-ups to see if you are on track to meet your goals. Conversely, if you are just getting started, you can use these numbers as an initial guide.
Here is a graph of average TSP accounts, as of December 31st, 2011:
So now we have seen where we fall out amongst peers, and we can adjust our savings plans accordingly. But how do our military savings stack up against the civilian sector? The Employee Benefit Research Institute recently published a status report of retirement accounts nationwide, showing us that the average American’s IRA account balance in 2010 was $67,438. With the military average just over $12,500, we have a long way to go. But with some discipline and perseverance, we can certainly close the gap. Let’s get saving!
You can save and we can help! Take the Military Saves Pledge today and make the commitment to build long-term wealth through saving and debt reduction.