Good news! Your age and length of service will largely determine WHY this post is relevant to you, but anyone actively serving will benefit from reading this. It’s never too early to start thinking about and saving for retirement. There’s some toxic old-fashioned thinking out there that says for those of us that have been in long enough to get the fixed-benefit pension (Legacy), that we’re good to go. That’s not exactly true. Likewise, for the younger generation of soldiers who are in the new Blended Retirement System (BRS), you’re getting some equally toxic information from the same crusty old soldiers who think they know what they’re talking about and certainly mean well, but when it comes to this kind of stuff you really have to fact check those guys.
Here’s my main point. No matter which group you’re in above, I would highly recommend contributing to the Thrift Savings Plan. For Legacy soldiers, it’s icing on the cake, and for BRS soldiers, it equates to free money. The magic if compound interest makes both recipients free money, but BRS gets a government match additionally. My purpose in this writing is to compel Legacy soldiers to contribute to TSP, and for Legacy and BRS soldiers already contributing to give more than they are now.
For anyone who currently doesn’t contribute, go to MyPay and login. On the Main Menu you will see an option for “Traditional TSP and Roth TSP” – this is where you can go to start contributions, it’s that easy. Before you do it, it’s important to understand the difference between Traditional and Roth. This is one of those topics where you’ll start hearing that toxic old garbage advice get thrown around. Traditional and Roth are not complicated concepts, but they can become that way if too many people get in your head with bad or misinformed advice.
So let’s take a quick moment to go over the differences. Traditional means they take it out of your check before you pay taxes on it. That means when you’re retired and drawing it out as income, they will tax it then. Roth means you pay taxes on it now, therefore when you take it out as a retiree, you don’t pay taxes. Most people will make less money as retirees, and therefore be in a lower tax bracket, so it’s usually best to do Traditional and benefit from tax deferment now, and a lower tax rate later. If somehow you suspect or know that you will make MORE money as a retiree, then a Roth might be better for you because as a retiree you’d be in a higher tax bracket, and drawing tax-free money would benefit you tremendously in that situation. Some of us, perhaps most of us, are not sure. For this group in the middle, it might not be a bad idea to do both. You can contribute to both, you don’t have to pick just one. This is the case for many civilian 401k plans as well.
Truth be told, it’s more important to start saving early and often than it is to get this Traditional versus Roth thing figured out right away. Once you get closer to retirement, there are many ways you can convert funds to avoid tax exposure. Fortunately in America, rich people write the tax laws, which usually means they have hidden countless ways that are totally legal in which you can “launder” your tax exposure and liability – so don’t get too wrapped up in the details. Just save as much as you can as early as you can.
So, back to you Legacy soldiers. It’s great that you have a fixed benefit pension coming your way when you turn 60 (minus any years deployed post 9-11). That’s great, but here are some things to think about. Let’s say you’re 36 years old and nearing military retirement. When you turn 40, you’ll have 20 years in and be eligible to retire. Congrats! Depending on your rank and points, you could collect anywhere from $800-$1600 per month (just a rough estimate – don’t freak out), but not for another 20 years after you retire! So as a 36-year-old with 4 years left you decide to start putting $100 of your drill check into a traditional TSP. Check this out…if you did this, that 4 years of contributions would be worth an estimated $5700 when you retired, and without touching it, it would be worth over $22,000! Better yet, if you took your $5700 and rolled it into a civilian or personal plan and continued to feed it just $100 per month, it would be worth almost $75000 – not counting anything else you’ve got going on with civilian retirement, etc. So naturally, in this example it truly benefits you to not only reduce your taxable income, but have more money to add to that fixed benefit pension when you turn 60. As a retiree, you could damn near live off that $75k for two years! Or allow it to keep compounding and grow…but at least you have options. When you factor in inflation, our money will be worth less in the future, so we have to understand it will take more money in the future to equal the same as now. If you could live off $40k per year, that’s great, but $40k in the future is actually going to translate to a higher dollar amount to be the same. Saving more earlier is critical.
Now, you folks that opted in or were forced in to BRS, you have a different math problem. Traditional advice says always give at least what it takes to get the free money. So you think your reduced fixed benefit will be strengthened by your TSP because you’re giving the amount necessary to get the match. That’s not always true. First of all, anyone enrolled in the BRS that’s not contributing anything is giving away free money, so indeed, get to the 6% or whatever it is right now to get the free money, but I’d like to compel you to give more. As a soldier in the National Guard or Reserves, 6% of a drill check is not very much money at all, so if you’re getting half that matched, that’s fine, but it’s not that much money. Here are two examples to demonstrate the difference. I will not account for the match – this is strictly dollars you’ve invested. In the first example, a soldier gives 6%. That comes out to a rough average of $37 (less for lower ranking, more for higher ranking). Assume you start this on day 1 of your military career. You would only be contributing $324 annually from drill checks. That would translate to $14, 212 by the time you did 20 years in the military…and roughly $55k when you hit retirement age and could start collecting. That’s barely a year’s worth of expenses!?!? Now, pretend you just got in the military and don’t want to count on your drill check as income. So you wisely contribute 25% of your drill check to a TSP. That would be roughly $112.50 per month, and $1350 annually. When you completed 20 years of service, this plan would net you about $59k (in the first method, you’d have to be 60 to have that much saved). Better yet, in this scenario when you turned 60, it would be worth $229k or more! So you see, there’s a huge difference when you jack up your contribution.
For soldiers, no matter what category you’re in for retirement, the math is simple. Save early, save often, and you will save more. You don’t need to pay someone to help you with that. If you found this helpful, please like and share with a fellow soldier. Feel free to contact me if you have a question, and don’t forget to subscribe!