Dear Carrie: I’m 26 and in the Navy. I enlisted last year and am currently stationed in South Korea. With some extra cash I’m expecting from my next deployment, I should finally have all my credit card debt paid off and a decent cash cushion. I’m ready to start seriously saving for retirement. Is a TSP a good move? I’m not sure if I’ll stay in or go back to school once my contract is up. — A Reader
Dear Reader: First, thank you for your service. I’m constantly impressed by the discipline, sacrifice and courage service members provide our country day in and day out. With May being Military Appreciation Month, I hope you get all the recognition you deserve!
I also applaud you for making a plan to pay down your credit cards. That’s a difficult but essential step toward gaining control of your finances. And kudos for starting to think about retirement at such a young age; if you start now, you’ll be in a great position to build a solid future. Let’s take a look at the TSP and other plans the military provides.
Blended Retirement System (BRS)
As of Jan. 1, 2018, a new retirement system was put in place for members of the uniformed services. This system, called the Blended Retirement System (BRS), “blends” the traditional legacy retirement pension, also known as a defined benefit plan, with a defined contribution plan called the Thrift Savings Plan (TSP).
Under the old system (which still applies to many longtime service members), anyone who finished at least 20 years of service received a monthly pension for the rest of his or her life. Those who left with less than 20 years of service (which is the vast majority of people who join the military) wouldn’t receive a retirement pension. Enrolling in the TSP was strictly optional.
Under the BRS, you’re still eligible for a pension if you put in 20 years of service, but the benefit has been slightly reduced. To compensate, you’re now automatically enrolled in the TSP along with a match from Uncle Sam.
The TSP, similar to a 401(k) offered in the private sector, is designed to help you save for the future whether you stay in the military or not. It’s actually the same plan available to federal civilian employees. How much and how you save and invest determine how much you’ll ultimately have in the plan.
Contributing to the TSP
Every service member under the BRS is automatically enrolled in the TSP at 3% of their basic salary, and the government adds an additional 1%. (You can see the deduction and match on your Leave and Earnings Statement or myPay from the Defense Finance Accounting Service.)
But here’s the deal. The U.S. government will match you dollar for dollar on the first 5% you contribute, so 5% is the absolute minimum you should contribute. If you contribute less than that, you’re missing out on free money. (And in recognition of this fact, the TSP is increasing the automatic enrollment percentage from 3% to 5% of pay for all participants who enroll on or after Oct. 1, 2020.)
But if you can, save even more. At your age, a good goal would be to save a total of 10% to 15% of your salary including the government match. Because of your young age, if you start to save at this rate now and continue to do so for the rest of your career, you should be in great shape come retirement.
If you wind up staying in the military for 20 years and receive a pension, these savings will be icing on the cake and increase your flexibility in retirement. That said, the longer you wait to start saving, the more you’ll need to sock away each month, or the later you’ll need to retire.
Your next decision is whether you want to make your contributions on a pre-tax basis or on a Roth (post-tax) basis. Generally speaking, contributing on a Roth basis makes a lot of sense for young people who may be in a low tax bracket now and a higher tax bracket later. You won’t get the tax break upfront, but the benefit of a Roth is that you’ll be able to withdraw earnings tax-free after you’ve had the account for five years and if you’re over 59 1/2.
Choose Your Investments Carefully
Making contributions is step one. Your next equally important step is deciding how you want to invest. Basically, you have a wide choice of low-cost index funds that invest in everything from short-term U.S. Treasury bonds, to corporate bonds, to domestic and international stocks — or a mix of them all.
Before you decide, think carefully about your goal (retirement), your time frame (several decades) and your feelings about risk. In general, stocks have the greatest potential for growth but also carry the greatest risk, especially in the short term. At your age, you have the time to ride out the ups and downs of the stock market, but you also have to be prepared to accept the inevitable, periodic market declines.
On the positive side, because you’ll be investing the same amount of money every month, in effect you’re doing what’s called dollar-cost averaging. This means you’ll buy fewer shares when prices are high and more shares when prices are down — easing the impact of a volatile market.
Although you’re free to mix and match the various funds, another option is the L series, which invests in a mix of the other funds, targeted for a particular time horizon or target retirement date. I think of it as a “fire and forget” system because the investment mix automatically becomes more conservative as the target date approaches. Because of this flexibility, L series is the default choice for anyone who joined the military after 2017.
Savings Deposit Plan (SDP)
Since you mentioned going on deployment, don’t forget the SDP, which is a great way to save extra pay. You can invest up to $10,000 during each deployment and earn 10% annual interest! You won’t find a more attractive offer anywhere else. You can’t close your account until you’ve left the combat zone, although your money will continue to draw interest for 90 days once you’ve returned home or to your permanent duty station.
If you’re serving in an SDP-eligible combat zone, any military finance office in the area can help you establish an account and assist you in setting up a convenient deposit method.
You’re off to a strong start by paying down credit cards and looking to save for the future. The TSP and SDP are great ways to supplement a potential pension. Take advantage of both if you can. Be safe, and best of luck to you.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at email@example.com. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice.
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