Why Soldiers Should Consider Putting More in their TSP Right Now

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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!

 

 

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3 Commonly Under-Utilized Military Benefits

I could probably devote all my time to blogging about military matters and never run out of topics. A military career is something soldiers should be proud of, however, too many of us get half way to retirement before we realize how much money and opportunity we left on the table because of bad information or inability to properly prioritize.

Taking a quick inventory, I was able to come up with a short list of what I believe to be the most important military benefits that Guardsmen and Reservists should absolutely be taking advantage of.

1.) Tricare

No benefit outranks this one. If you’re eligible for Tricare and not using it, you are wrong.

I’m not going to bore you with specifics, but I’ll tell you that I’m not sure there’s a better insurance plan on the planet besides being a billionaire and just paying cash for any medical needs. Tricare has low premiums, low deductibles, excellent coverage, and seems to be accepted pretty much anywhere. I cover my family of seven for less than $220 per month, and rarely spend more than $500 out of pocket on any given year. If this were the only benefit of being in the military, it would still justify doing as many years in the military as they would let you stay! Healthcare costs seem to perpetually rise annually, while Tricare’s premium actually went down a couple bucks last year. I don’t care how good you think your civilian insurance might be, odds are, Tricare is probably better. Go sign up now by clicking here.

2.) Education Benefits

If you’re a soldier, and you’re paying anything out of pocket to go to school, you are wrong.

This is tricky. Upon swearing in, most soldiers know by the end of their Advanced Individual Training (AIT), that they will qualify for some school money. The challenge is for those soldiers who are not students yet upon joining. They know in the back of their minds that the school money is good and important, but when you start talking financial aid and school finances, for anyone that hasn’t dealt with it directly it can be very confusing. So imagine the confusion when a soldier graduates AIT and goes back to M-day status (monthly drilling) and tries to enroll at their local college or university. Anyone who has gone to school knows it’s not exactly simple. First you have to fill out a Free Application for Federal Student Aid (FAFSA). This will determine if you qualify for any financial aid outside the realm of the military, including student loans. Then you have to find your school’s Veterans Benefits Counselor (titles vary). These people are experts, so do what they say. Depending on what’s in your contract, you might qualify for more school money than you were aware. It’s important to utilize that resource at the school and get help from within your unit too (find an old-timer like me that’s done all this before). You need to know how many benefits you are qualified to use, and use them in the proper sequence to maximize all your benefits and get the most extra dollars in your pockets.

For example, if you are a new soldier and freshly graduated AIT, you probably qualify for Chapter 1606 Montgomery GI Bill benefits. If you’ve deployed, you qualify for an even better package (Post 911 Chapter 33). If you were previously active duty, there’s another package (Chapter 30) that might be your best option. Here’s the thing though, no matter what state you serve in, you probably qualify for additional state-funded tuition assistance, federal tuition-assistance, and even in awesome states like Wisconsin, it has it’s own state-funded GI Bill. Failing to take advantage of any programs you’re qualified to use is simply leaving money on the table.

3.) Thrift Savings Plan

If you’re not putting some money from your drill check into a Thrift Savings Plan, you are wrong.

The military just recently changed it’s retirement compensation plan. The downfall to that is anyone forced into the new plan is now at the mercy of the stock market and cannot rely on the same fixed benefit once they become eligible to start getting paid. The good news is that any long term investment in the stock market does just fine, and any of your money that’s not tied up in the fixed benefit portion (meaning any money in your Thrift Savings Plan) is portable.

For those of you that don’t know, the Thrift Savings Plan (TSP) is like a government 401k. You can choose to have pre-tax or post=tax money saved from your drill check that gets invested through this program and grows until you retire and are ready to start collecting. That’s the simplest way I can put it, but here’s the cool thing. If you only do 8 years and decide you’re done, now you can take any of that TSP money and roll it into a new plan. In the old days, if you didn’t do 20 years, you got nothing for retirement unless you voluntarily contributed to TSP.

Why does this matter? Every dollar you invest toward retirement matters. Every. Single. Dollar. Under the new Blended Retirement package, the government if matching money, so by not contributing, you’re missing out on free money. Secondly, it’s portable, so if you don’t stick around for a full 20+ years, you can take your TSP money with you and roll it into a civilian job’s 401k plan or go to your local bank or credit union and roll it into an Individual Retirement Account so you can continue to grow that money. You can set up TSP contributions right now by logging into MyPay.

These are what I would consider the big 3 under-utilized military benefits (for weekend warriors like me). There are more though that are worth discussing in future posts, such as the life insurance (both SGLI and SSLI), and other perks/benefits. Please like if you found this helpful, and subscribe so you don’t miss any future posts you might find helpful. I appreciate you taking the time to read this!

*I do plan on posting some more in-depth information on these benefits and more, and once I do, I will provide a link to the more in-depth analysis on this post in the appropriate sections. I hope you will read those too!

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