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23 Feb 2024

How to be thrifty with the Thrift Savings Plan

Historically, Military retirement compensation came in the form of a pension that was paid out to Veterans who served at least 20 years. However, only about 17% of enlisted personnel and 49% of officers serve for at least 20 years (Murray & Adedeji, 2020). In 2018, the Military revised their retirement system by creating the Blended Retirement System (BRS).

Thrift Savings Plan (TSP)

Under the BRS, pension benefits are still offered for those who serve at least 20 qualifying years (Office of Financial Readiness, 2023). An additional retirement option under the BRS that any Service member can invest in is the Thrift Savings Plan (TSP; Office of Financial Readiness, 2023). A TSP account is comparable to a civilian 401(k) plan where an employee can invest part of their paycheck into collections of stocks, bonds, and other investments that can earn money over time.

Put differently, the TSP involves opening a retirement account that Service members can use to save money for retirement. Like civilian 401(k) plans, the TSP has an employer match (after two years of Service). If a Service member invests at least 5% of their paycheck into their TSP account, DoD will also invest an amount equal to 5% of the Service member’s paycheck. The employer match is not deducted out of a Service member’s paycheck; rather, the employer match is, in essence, free money put into the TSP account.

To show why investing through one’s TSP account might be a worthwhile endeavor, consider the following example. Tom is enlisted, rank E-5, active-duty, and has been Serving for about 9 years. After learning about the TSP, he chooses to invest 5% of his paycheck into his TSP account, which means that with the match, 10% of his paycheck goes into his account each month (about $384.80).

Tom stays in the Service for 20 more years, and even though his income will increase, let’s assume only $384.80 goes into his TSP account every month for the next 20 years. Tom wants to retire in 2060, so he invests his monthly contribution into the 2060 lifecycle fund. After 20 more years of Service, assuming the average rate of return for the 2060 lifecycle fund, Tom would have about $374,175.55 in his TSP account.

Including the match, Tom contributed $92,352.00, but with the power of compound interest, this money quadrupled over the 20 years. Mathematical estimations like this one exemplify why Albert Einstein said, “Compound interest is the eighth wonder of the world.” In short, the TSP is a great way to take advantage of the eighth wonder of the world.

Roth TSP Plans

Interested Service members can manage their TSP account through the TSP website. In doing so, it is important to note the tax implications of investing in the TSP (Thrift Savings Plan, 2023a). Roth TSP contributions involve Service members paying taxes on income they earn before investing it into their TSP account (Thrift Savings Plan, 2023a). With these Roth contributions, once Service members are 59.5 years old, they can withdraw money from their TSP account tax-free. Said another way, income would be taxed before going into the account, but money can be taken out of the account without any taxes once a Service member is retirement age.

Traditional TSP Plans

Traditional TSP contributions are somewhat different. That is, the income that is invested is not taxed initially. However, once a Service member is 59.5 years old, the money that is withdrawn from the TSP account would be taxed as income (Thrift Savings Plan, 2023a). There are advantages and disadvantages to both types of contributions, and Service members and their families should choose the TSP contribution option, Roth or Traditional, that is most in line with their current financial situation and financial goals.

TSP Investment Options

For both Roth and Traditional contributions, there are three different kinds of investment options within the TSP. First, there are mutual funds (Thrift Savings Plan, 2023b). Mutual funds are a collection of several different kinds of stocks and other investments (e.g., bonds) so that not all of one’s ‘eggs’ are put in one basket. Individual stocks and other investments can fluctuate in investment returns, so having a mutual fund with a group of many different stocks and other investments is thought to decrease risk while still maximizing potential gains over time.

Second, there are five different kinds of individual TSP funds (Thrift Savings Plan, 2023b). The G and F funds have a lower level of risk with smaller projected returns while the C, S, and I funds have higher levels of risk with greater projected returns. Financial planners generally recommend diversifying a portfolio with some riskier and some less risky investments to provide good return. However, someone with more time before their retirement (e.g., 40 years vs. 20 years) typically would invest in a greater collection of riskier investments for greater returns, on average, over time.

Lifecycle Funds

Finally, there are lifecycle funds, also called L funds (Thrift Savings Plan, 2023b). These L funds are a diversified collection of the G, F, C, S, and I funds that are designed to coincide with one’s expected retirement year. For example, if someone is planning to retire in 2055, then they might consider investing money into the 2055 L fund. The L funds’ allocation to the five different individual TSP funds is constructed in a way that is in line with when someone wants to retire. For instance, the 2025 L fund involves much less risky investments than the 2065 L fund. To learn more about the specifics of these three investment options, visit the TSP investment options on the TSP website.

Being Thrifty with the Thrift Savings Plan

Half the battle of being thrifty with the Thrift Savings Plan is simply being aware of it and why potentially choosing to invest in it might be beneficial. The other half involves deciding whether investing in the TSP coincides with one’s current financial situation and financial goals for the future—and consistently following through with the decision. Some Service members and their families might find great value in investing in their TSP account as part of their retirement plan while others might choose to invest in other ways (e.g., investing in a civilian spouse’s 401[k] plan) or rely on the BRS’ pension options.

In other words, having a financial plan for retirement (and following through with the plan) is how to be thrifty with the Thrift Savings Plan or other retirement plans. To learn more about investing (e.g., the differences between stocks, bonds, and other investment vehicles) and financial readiness for Military families, visit the Office of Financial Readiness’ website and experience the benefits of planning for, and seeking to achieve, a desired financial future.

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