401(k), Retirement Fund, Roth IRA, Matching Options, Interest, Target Accounts, Life-cycle Funds, Common Stocks. A lot of great word porn for nerds. Well, nerds and rich people. When I started researching how to invest my money, I felt like I was in way over my head. I am living proof however, that anyone can grasp these terms and figure out how to invest and retire rich.
For us military folk, the TSP or Thrift Savings Plan is our version of a 401(k). This is our Retirement Investment. We were all told, while completing financial paperwork in Boot Camp, about this wonderful savings tool. “Just put an automatic withdrawal of like 5 or 10% of your paycheck and it will make you money for retirement.” Easy, right? Well, you may have been wasting valuable time and interest returns by not looking further into your TSP’s contribution amount or various fund options. “Oh, thank you Bunts! I’ve always wanted to deep dive into fund options!” Well today is your lucky day because I’m going to show you some ways you can make a bunch of money in TSP and not die poor.
*Note: Pay off any of your high interest debt before considering investing in retirement. That debt is draining any return on investment you make!
Take Stock of Your Current Investment
First thing you should do is log into your MyPay account to verify how much you’re contributing to your TSP in dollar amounts. You can do this by checking your pay stub for the month or by clicking TSP towards the bottom of the MyPay homepage . In the past, you may have set up an automatic percentage to be taken out of your Base Pay. Our pay scale changes with rank so in turn our TSP withdrawal amount will also change. We need to stay on top of our TSP contributions just like we should with any other Investment.
When I first logged in, after having ignored my account for 2 years, I discovered that I had only been submitting 10% of my BASE PAY to TSP, and only to the G FUND! Sad!
“What have I done?”
My Base Pay for E-5 is $2856 a month. So I was contributing $285 a month or $3,420 a year. For me at the time living in Hawaii that was about 5% of my total take home pay. It was pathetic! Like I’ve said before, Your goal should be to contribute at least 15% of your TOTAL pay to retirement.
To determine how much you should contribute simply add your BASE PAY + BAH + BAS + COLA + Special Pay. This is your BEFORE TAX earnings. For me this is $6553 a month. Subtract your Taxes (for myself, $435) and any other deductions you may have, and you find out your TAKE HOME PAY. Approximately $6100 a month for me, or $73,000 a year. If my goal is to contribute 15% of my pay to my retirement, my contribution should be $915 a month or about $11,000 a year. That’s a huge difference from the $3,420 I was putting in before!
The MyPay and the TSP websites can be difficult to navigate sometimes. To make it easier, on the MyPay contribution part of the website, find out what your total contribution of Base Pay alone should be as a percentage. For example, if I am contributing $915 a month, and my base pay is $2856, my TOTAL contribution percentage 32%. In the first line under TSP (Base Pay), I simply put in 32% and boom I’ve met my goal contribution without breaking it down into BAH, Special Pay, etc. Try to simplify it the best you can.
I understand not everyone can contribute this much money, or perhaps you can contribute more! Military Pay is location dependent and family size dependent. I’m single and living in Hawaii so I can only consider my specific situation. When I move to a new duty station, I will need to adjust my numbers as I will be taking a pay cut. Do the math for yourself and your families’ goals. You may have more monthly expenses and can only contribute 10% a month. You may be in a situation where you can contribute the maximum of $18,000 a year. That would be a fantastic retirement in the future! Just realize if you contribute less now, you will have less money for your family when you retire. Are there areas you can cut back on in your household to ensure you can put away money for later? I recommend thinking about these things. Every little bit counts, especially when you consider the power of compounding interest over time.
Roth or Traditional?
Sixty years old (59 1/2 to be exact). That’s our goal, ladies and gentlemen. You may begin to collect off retirement earning at this point in life, without penalty. Will you be in a higher tax bracket at the age of 59 ½, or a lower tax bracket? Well, if you’ll be making more money at sixty than you do now, you will be in a higher bracket. Use Roth IRA. Your current contribution will be taxed at your currently lower tax rate and you will withdraw money tax free later.
If you will be making less money at sixty, then contribute to Traditional. Your money will not be taxed now and when you withdraw it later, it will be taxed at a lower rate than it would be right now. If you’re not sure, then I would contribute to Traditional. My goal is to retire after 20 years of service and live off of pension and savings until 59 1/2. That will put me in a very low tax bracket because I will have little actual earning coming in at that point. Decide which is best for you and what fits with your employment goals after the military.
What fund should I contribute to?
One of the greatest benefits of the TSP is that you don’t pay a lot of money to have it managed! All retirement accounts cost money to be managed by someone. This is referred to as an Expense Ratio. The TSP offers a very competitive expense ratio compared to other companies who manage retirement funds. Always look at how much a company or adviser is charging you to manage a fund. It will take away from your total return, sometimes by a large percentage. Most people don’t realize they are paying huge fees to someone and losing money that way.
As I mentioned above, my TSP was being contributed to the G FUND. The G FUND is a Government Securities fund that basically tracks U.S. Government BONDS. It guarantees a super SAFE 2% return on your money, not adjusted for inflation. Inflation is the spending power of your dollar now vs. 1 year from now. It goes up about 2% a year in our country. Your money is breaking even, give or take a small amount, if you have it in a G FUND. Always take inflation into account for your return on investments. Inflation is the reason having your money in Cash or a Savings Account is usually a bad idea.
My current contribution amount goes to the C FUND. The C FUND is a common stock fund that tracks the S&P 500 (top 500 companies in the US) and is the benchmark of most stock market trackers. It is higher risk than the G FUND. With the risk you take, you hope for higher returns. The C FUND earned 15.2% last year. Inflation adjusted, I made 13.2% on my money in 2016. Making money in the C FUND is not guaranteed! I could have easily lost 15% last year. It’s a risk you take to earn money. The younger you are the more risk you can take on earlier in life and bounce back later.
Historically the stock market always goes up. Use compounding interest, along with time, to your advantage. As you contribute to the C FUND you’re investing in the stock market through ups and downs. It’s an automatic withdrawal so you will buy at high prices and low prices through the year. We are banking on it going up over the long term and in turn making us money as long as we hold onto it. At some point when I get closer to retirement and don’t want to take this risk any more I will start contributing to a BOND oriented fund to avoid the volatility. The goal is to have this money in this account for a long time and make a ton of compounded interest. Check out my earlier savings blog for information on compounding interest.
There are other funds available in TSP. Another I would recommend is the Life-cycle Fund. Choose a date close to when you plan on retiring and these funds will AUTOMATICALLY balance STOCK funds and BOND funds all depending on how old you are and what risk you should take as you come closer to retirement, taking on less risk the closer you get.
If you’re savvy on International Stocks maybe consider the I FUND. If you would prefer to track smaller companies in the US, consider the S FUND for Small Cap stocks. Do your research and know what you are investing your money in. Earnings will vary widely for different funds. No return is guaranteed, the major key is to be invested for a long period.
The market will always go up. Do you have the patience for it?
What happens after I leave the military?
Once you stop collecting money from the US Government you can no longer contribute to the TSP. Let’s say you begin work at a new company, if you choose to, you may roll over your TSP money and earnings to a 401(k) at that company so you can keep contributing to it. Of course, there will be paperwork on both sides to complete this process. Contact your new fund manager to see what is available to you and how much your new expense ratio will be.
Like I mentioned above, you will be able to withdraw from your TSP account, without penalty, at the age of 59 ½. If you take earnings from your TSP before this age, there will be a large penalty along with the money you take out. You may incur a penalty up to 25%, and that’s not even including the taxes that will be taken out as well. In most cases, it will be better to leave that money there and find another way to come up with what you need. As always there are extenuating circumstances but you should weigh ALL of your options before touching retirement earnings.
Hope you found this information helpful. As always any questions or comments are appreciated!