Military Financial Planning 101 – Utilizing the Thrift Savings Plan (TSP)

I’ve been doing personal financial coaching with health care professionals for years, and one of the most common things I address is a general feeling of hopelessness, especially when it comes to retirement, including utilizing the Thrift Savings Plan (TSP).

People feel overwhelmed with their student loan debt, or they’re afraid of not having enough money in retirement, or they worry they won’t be able to achieve their financial goals.

 

But here’s the thing…

 

If you start investing consistently when you are in your 20s (or even 30s) and keep investing throughout your life, there’s no excuse for you to not retire as a millionaire.  

Take a second to let that sink in.  If you start investing early and continue investing consistently, becoming a millionaire is not only achievable, it’s inevitable!

Let’s look at some simple math:

Assume you are starting at age 35, planning to retire at 65, with a household income of $50,000 per year (median U.S. household income in 2018).

 

Scenario 1:

Starting amount: $0

Rate of return: 8%

Annual savings: $7,500 (15% of household income)

At age 65, you’ll have: $917,594.09

 

Scenario 2:

Starting amount: $0

Rate of return: 10%

Annual savings: $7,500 (15% of household income)

At age 65, you’ll have: $1,357,075.74

 

These scenarios also assume you started with no savings, earned an average household income your whole life, and never got a raise or changed your rate of savings for 30 years.  

So, if you start early enough and keep consistently working and saving, there’s just no excuse to not be a millionaire!  

Obviously, if your household income is less than $50,000 per year, or if you start later due to a long training period or a long period paying off student loans, or if you end up divorcing your spouse and dividing your wealth in half, you’ll need to adjust your math.  

But, I hope this offers you encouragement that building wealth is inevitable if you believe it, work at it, and just don’t give up.  

The formula is really simple: 

 

Work.  Save.  Repeat.  

 

Do that for several decades, and you will retire wealthy.  It’s a boring plan, but it works every time.  

Before you start utilizing the Thrift Savings Plan (TSP)

I strongly advise getting rid of all your debt and developing an emergency fund of 3-6 months of expenses.  

Once you are debt-free and have an emergency fund, begin investing 15% of your household income into Roth IRAs and pre-tax retirement plans like the TSP.

 

Before we set up your TSP account, let’s talk about some basics.

1. What is the TSP?

The TSP is the tax-favored option for investing offered through the federal government.  It’s basically like a 401(k) for government employees (military and civilian).  It is now offered in both traditional and Roth options.

2. How much can I contribute to the TSP?

As of 2019, the maximum annual contribution to the TSP (combined Roth and traditional options) is $19,000.  Check the IRS website for updates to this amount, as it changes every few years.

3. What’s the difference between Roth TSP and Traditional TSP?

This is a really important distinction to recognize.  The Roth/Traditional distinction describes how the TSP fund is treated for tax purposes.

Think of it this way: if you invest your money in the TSP, it’s like putting a kevlar vest around your money to prevent it from getting hit by taxes.  

The Roth/Traditional concept is like picking a different brand of kevlar vest.

For the Roth TSP (or Roth IRA), any money you invest goes into the account after taxes have been paid.  You pay taxes on the money the same year you invest it.  

For example, if you have a household income of $100,000 and invest $15,000 in the Roth TSP, you have to pay taxes on the entire $100,000.  However, the money that you withdraw (after age 59 1/2) comes out tax-free!!

For the Traditional TSP (or Traditional IRA), you get a tax deduction for the amount you invest during the year you invest it.  So, if you have a household income of $100,000 and invest $15,000 this year in the traditional TSP, next year you’ll pay taxes on only $85,000.  However, when you withdraw the money, it gets taxed at your income tax rate.

4. Which is better, Roth or Traditional TSP?

The short answer is that Roth is generally better during your lower income years and Traditional may be superior during higher income years.  I discuss this in greater detail in this article, so I recommend checking it out as well.

I invest as much as I can into Roth accounts.  In general, the Roth TSP will be better for most military single-income households.  If your spouse is a high-income earner, e.g. another physician or lawyer, then Traditional may be better.

5. What about the match?

Ok, if you are in the Blended Retirement System (BRS), you are eligible for up to a 5% match into your TSP account.  So, for every dollar you invest into the TSP, the government will automatically add another dollar into the TSP, up to 5% of your base pay.  This is free money!  Always take free money!!

The match happens in your traditional TSP, so make sure that under your TSP allocation, you include 5% of your base pay into the traditional TSP, and any additional investments can go into the Roth TSP.

6. What’s the difference between the Blended Retirement System and the Traditional (“High 3″) Retirement System?

Under the traditional “High 3” retirement system, you earn a government pension after serving 20 years on active duty.  You retain 100% of your pension but get no matching into the TSP while on active duty.  Also, if you retire at less than 20 years, you get no retirement benefits at all.

Under the new BRS, you are eligible for only 80% of your maximum pension at retirement, but the government will match up to 5% of your base pay during your time on active duty.  This works out way better for people just starting out, assuming you take advantage of the full match.  Also, it at least offers some retirement benefits (in the form of matching) to people who don’t serve the full 20 years on active duty.

Utilizing the Thrift Savings Plan (TSP) – getting started

  1. Set up your TSP account

    • Call the TSP ThriftLine at 1-877-968-3778 (404-233-4400 outside the U.S. and Canada) and select option 3 to speak to a Participant Service Representative.  You’ll need some basic information like your DOD ID number, your social security number, date of birth, etc.  They can help you establish your account and they’ll mail you an account number and password (separate documents).
    • Once you get the account number and password, go to www.tsp.gov and register your account.

      TSP home screen
      TSP home screen
    • Now that you’ve registered your account, you need to set up a contribution allocation (see below).  This is where you’ll decide which funds your contributions get invested in.
      • For example, if you choose to have $100 deducted from your paycheck to get invested in the TSP, your contribution allocation will dictate how that $100 gets split up into the different available funds once it gets into your TSP account.  See below for a description of the funds that are available to invest in.
      • This is the same method you’ll use any time you make a change as to which funds you pick to invest in.

        setting up the contribution allocation
        setting up the contribution allocation
    • Next, go to your MYPAY account.  Log in and click on the item in the home menu screen labeled “Thrift Savings Plan (TSP).”
      mypay
      mypay

    • Once you are inside this section, you’ll select the percentage of your base pay, special pay, incentive pay, and bonus pay that will go into the traditional TSP or Roth TSP.  As I mentioned, I recommend setting up 5% of your base pay to go into the traditional TSP, and anything above and beyond that you want to invest should go to the Roth TSP.  Once you save it, it will tell you when the selections will be active (usually 1-2 paycheck cycles).
      • This is the same method you’ll use any time you want to change the amount of money you are investing in the TSP.
        allocating to traditional vs Roth TSP
        allocating to traditional vs Roth TSP

2. A good basic strategy for investing your income for retirement:

    • Contribute enough to get the full match in the TSP and your spouse’s 401(k) if available.
    • Above the match amount, fund Roth IRAs or contribute to Roth TSP.  If there is no match, start with Roth IRAs or Roth TSP.
    • The remainder of your investments can go to your spouse’s 401(k) or other employer retirement plans.  

3. What options can I invest in?

There are a couple of different options here.  Let’s define the funds first, then we can consider a couple of strategies.

    1. L funds: “Life cycle” funds select a target date and gradually change the allocation of funds to more conservative investments as you get closer to the date.
    2. G fund: Government securities fund, like bonds.  Very poor historical rates of return, but very low volatility.  This is the default investment account.
    3. F fund: Fixed income index, like a money market account.  Basically like a savings account.
    4. C fund: Common stock index, like the S&P 500 index.  Mirrors the stock market average.  
    5. S fund: Small cap index, more aggressive growth.  Higher risk/volatility but higher historical returns.
    6. I fund: International stock index: invests in international companies.

4. So, which funds should I choose?  

First of all, you DO need to pick something.  Don’t just set up your TSP through MYPAY and then call it good.  If you don’t pick something, the TSP defaults to the G fund, which is terrible.  It has incredibly poor historical returns.  

The funds you pick ultimately come down to your risk tolerance and your desire to be actively involved.  

Personally, I invest in the C fund (60%), S fund (20%), and I fund (20%).  I don’t currently own any bonds in the TSP, although the TSP is just one of several places I invest money.  This mix gives me a broad diversification of stocks across the domestic and international markets, limiting my overall risk.  

You could do something similar, or you could go with an L fund.  The benefit of the L fund is that it automatically adjusts the allocation from less conservative to more conservative as you get closer to your retirement/target date.  So, when you’re 30 years away from your target date, you can tolerate more risk and your investments can be in riskier funds to get higher returns.  

As you get closer to that target date, the L fund will adjust its allocation to more bonds and securities with lower risk but lower returns.  This is a good option for people who want to “set it and forget it.”  However, on average you’ll have lower returns than someone investing in the C/S/I funds.  

In general, I would avoid large investments in the G and F funds because of their very poor historical rates of return.  

5. What happens to my TSP when I leave the military/government service?

You are still able to keep your money invested in your TSP account, and the money will continue to grow and compound.  If you’re not actively working for the federal government, you just can’t add to it from your regular salary.  

Alternatively, you can transfer the TSP to any IRA or other tax-favored retirement plan.  The easiest way to do that is to contact the company that will be receiving the money from the TSP transfer and have them walk you through it.  Trust me, they’ll be very eager to help you.  

Just make sure that the money is transferred directly from the TSP to the new account, without coming to you.  If it comes into your checking account, for example, and then you put it into an IRA, you’ll get hit with a huge tax bill and you’ll have to spend time dealing with that.  

Pros of utilizing the thrift savings plan (TSP): 

  • Expense ratios are the lowest on the open market.
  • You’re already familiar with this investment program.

Cons of utilizing the thrift savings plan (TSP):

  • Fewer available options for investment.
  • Customer service is ok but not as good as a lot of mainstream investment companies.

Other investment options

Take a look at this article for an in-depth discussion on other tax-favored investment options for retirement.  In the article, I go into a lot of detail on IRA investments, calculating the amount you need to save per month to hit your retirement goals, and some basic investment concepts that will really inform your strategies for long-term investing.

I also recommend taking a look at this article which discusses how to set reachable financial goals and includes a free downloadable guide that will walk you step-by-step through the process to develop reasonable financial goals and devise practical, actionable steps for achieving them.  

Final thoughts on utilizing the Thrift Savings Plan (TSP)

As a military servicemember, you actually get a pretty great benefit with the military pension and matching funds in the TSP (if you are in the Blended Retirement System).  Be sure to take advantage of all of the benefits to which you are entitled.  At a minimum, set up your TSP account using the steps above and set some level of contribution on a monthly basis to go into the TSP account.  Be sure to select funds that you understand and are comfortable with tolerating the risk associated with those funds.  

Even if you think you’re behind on your investing, take a look at the math examples at the top of the page.  If you get started now, becoming a millionaire is inevitable. 

 

Further Reading

 

Please leave a comment or question below.  Is there anything about the TSP that still confuses you?  What are your concerns about the TSP?

 

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