By Barbara O’Neill, Ph.D., CFP®, firstname.lastname@example.org
In May 2021, a one-hour webinar, Retirement Readiness for Military Families, aired for the first time as a collaboration between the Investor Protection Trust (IPT), a non-profit investor education organization, and PBS Books. The webinar featured experts who discussed unique benefits available to active duty and retired military families as well as strategies for overcoming obstacles to investing for a secure retirement.
An archived video of the webinar is available on the Louisiana Office of Financial Institutions (OFI) website. Below are some key takeaways from the webinar for Personal Financial Managers (PFMs) to share with service members:
- TSP Match is “Free Money”- The federal government automatically matches 1% of basic pay in a military Thrift Savings Plan (TSP) account. If service members contribute 5% of military pay, the government will contribute another 5% (10% of pay total). This is an immediate 100% return on their money. Government matching can add up to thousands of dollars annually and hundreds of thousands of dollars in later life. In addition, the TSP has very low expenses, which enables service members to keep more of what they earn.
- Military Terminology Can be Useful- The word “mission” is a core military term that is used to describe a wide variety of functions undertaken by service members to achieve certain goals (e.g., peacekeeping and combat missions). Incorporate the word “mission” into financial education briefings. Tell service members that they need to do “personal mission planning” to achieve their long-term goals.
- Compound Interest is a Service Member’s BFF– According to the Rule of 72, a sum of money that earns an average of 6% interest will double approximately every 12 years (72 ÷ 6). At 10% interest, a sum of money will double every 7.2 years (72 ÷ 10). Average annual returns on two TSP funds that contain stocks (C Fund and S Fund) have exceeded 10% since 8/31/90, indicating the potential for rapid savings growth.
- Legacy Plan Members Can Still Use the TSP- All service members, whether in the legacy military retired pay (a.k.a. High-36) system or Blended Retirement System (BRS), can invest in the TSP. However, there is no matching piece under the legacy system that requires service of 20 years to receive a retirement benefit.
- Deployment Provides Savings Opportunities– Military pay earned while on deployment in a combat zone is excluded from federal income tax. Deployed service members can also invest up to $10,000 in the Savings Deposit Program (SDP) and receive 10% annual interest, compounded quarterly (2.5% per quarter). This interest rate far exceeds the current average interest rate of about 0.02% on bank savings accounts
- Risk Changes With Age– Young service members should consider taking more investment risk because they have ample time to ride out many decades of investment volatility. One simple way to do this is to select an L (lifecycle) Fund with a date (ranging from 2025 to 2065) close to their expected retirement date. L Fund portfolios gradually become more conservative (less stock) as they get closer to the target date.
- TSP for Life- Former service members should only move money out of the TSP after careful consideration as the TSP’s low expense ratio is difficult to beat virtually anywhere. One advantage of rolling over money from the TSP to an individual retirement account (IRA) is a wider variety of investment options in an IRA.
- Simplify and Consolidate- Using military terminology, a speaker recommended keeping finances “dirt simple” by establishing a “base camp” for retirement assets. For example, consolidate down to one or two IRAs, instead of five, and have money spread around in fewer accounts to make it easier to manage.
- Wealth is Possible- It is possible to become a “military millionaire” over time through regular investing starting at a young age, investments with growth potential, and by taking maximum advantage of unique military savings opportunities. Use the TSP savings calculator to show service members what is possible.