October 9th 2001 marked the first day a service member could put part of their pre-tax pay into the Thrift Savings Plan (TSP). This new retirement savings vehicle would become a staple in the military members retirement savings plan over the next 13 years. Today the TSP has 11 different investment options broken down into five index funds, and six-life cycle funds. The reasons behind making the TSP (normally reserved for civilian federal employees) available to the military are many; however, the main idea is that less than 20% of all military members will retire from service. This means that over 80% of those who serve will have to find retirement funds and benefits from some other source. Enter the reason for the TSP; to provide the military member an alternate way to save for retirement.
The TSP is almost identical to the 401(k) programs of the civilian work force, whereby an employee can contribute part of their salary on a pre-tax basis to a savings program that has investment choices. The pre-tax contribution helps the employee reduce their annual income by putting the money in the account before their income taxes are calculated therefore lowering their annual taxable income. Additionally, should the employee leave the company, they can take their 401(k) with them to the next job, or move it to a Traditional IRA. The TSP works just the same. Military members can put up to 10% of their salary into their TSP, reduce their annual taxable income, and have portable retirement savings available to them if they are part of the 80% that decide not to stay the 20 years required for a military retirement.
The contribution limits for the TSP are pretty simple. You can put up to 10% of your salary into the TSP not to exceed annual amounts for 2014 of $17,500 for those under 50 years of age, and $22,500 for those over 50. In 2015 those limits will rise to $18,000 and $24,000 respectively. If you can afford to max out your contributions annually, you are certainly ahead of the game. However, most individuals cannot give up $17,500 a year on their current budget. Do not be discouraged by these large numbers. Consider that the annual contribution limits on IRA’s is only $5,500 and $6,500 for those over 50. The key, as in most cases for savings, is to start early.
There is a class given at each boot camp for recruits that talks about TSP. However, most recruits are so tired and glazed over that I doubt it makes a lot of since at the time. Nonetheless, if the recruit were to put $25 a month into their TSP for 10 years increasing the contribution only by 2% of their total pay raises, all into the S-Fund, they would have contributed a total of $3,284.88; a modest amount to save over 10 years. However, letting it continue to grow over the next 40 years, without any more contributions would yield a final sum of $183,060.61. Using the same model, a $50 per-month contribution would yield a final sum of $366,118.00.
Now these examples are oversimplified to provide an illustration for the point that early savings can yield great results if careful patient investing is utilized. This savings can become significantly important if a military member chooses not to put in over 20 years of service to qualify for a military retirement.
We all have to hedge against future events, or risk manage, if you like that term better. Some join the military intending only to serve four years and then return to their civilian lives, others join with the intention to serve over 20 years. No matter how well intentioned our original plans were, rarely do we ever end up exactly where we intended. The TSP can provide the flexibility for military members to add an extra layer of retirement security, no matter what their future intentions.
Capt. Jonathon E. Rowles (USMC, Ret.)
If you would like to play with the TSP savings calculations for your personal financial goals, you can visit the “How Much Will My Savings Grow” calculator on the TSP website at: https://www.tsp.gov/planningtools/howsavingsgrow/howSavingsGrow.shtml
The “How Much Will My Savings Grow” calculator was used to create the illustration in the blog post.