This is a guest post by Hank Coleman. Hank Coleman is the founder of several personal finance blogs, including Military Money Might and Own The Dollar. He is a freelance writer, entrepreneur, and Captain in the United States Army. You can see more of his writing at Hank Coleman.net, and you can also follow him on Twitter.
Only 29% of Soldiers in the United States Army participate in the Thrift Savings Plan (TSP), federal government’s version of a 401k retirement plan. The numbers are not much better for the other branches of service either. According to recent statistics published by the Federal Retirement Thrift Investment Board (FRTIB), the board that administers the government’s defined contribution retirement plan, 38% of the Air Force, 33% of Marines, and 57% of the Navy participate in the program. But, why are the numbers so low?
They Already Get A Pension
Many members of the military believe that they do not need to invest in TSP in order to save for retirement because they will receive a pension when they reach a minimum of twenty years of service. With this thinking, servicemen and women are only thinking about a 50% solution though. And, most financial planners estimate that retirees will need 80% or more of their regular income replaced by investments and pensions during their retirement years. Retiring at twenty years of service with no additional retirement investments also does not take into consideration that members of the military retire a lot younger than most other retirees. Their expenses may not be as low as a regular retiree’s would be. Eighty percent will most likely not be enough money in retirement for someone who could be as young as 38 years-old retiring at twenty years of military service.
What If You Do Not Stay In The Military?
Another excuse, that many members of the military use, is that they do not plan to stay in the military until retirement. This is one of the best reasons to invest in TSP then. If you will not have a 50% pension, your need for income in retirement will obviously even greater. Between 15% and 20% members of military get out of the services each year. And, a very slim minority of people who have served make it to retirement and earn a 50% pension. The vast majority of people who have served in the military get out and find other employment. If you had money invested in the federal Thrift Savings Plan, you can roll that money into a traditional IRA or your new company’s 401k retirement plan. You can take your retirement nest egg with you after you leave the military instead of starting over from scratch.
They Think They Can’t Afford It
Many members of the military think that they cannot afford to save for retirement. Many are living paycheck to paycheck and feel that they cannot squeeze another dime from their budget. The problem is that you cannot afford NOT to save for retirement. The military pension alone is not enough to live off of in retirement and keep the same standard of living that a person enjoys while on active duty. So, in order to close the gap, members of the military have to invest for retirement. Investing just $100 per paycheck (twice a month) over the course of a twenty year military career will result in a nest egg of over $118,000 (assuming an 8% annual return). If a member of the military or a spouse starts small with just $25 per paycheck, he or she can work their way up to $100 and more before they even realize it. Using annual pay raises and raises from a new promotion are a great way to ramp up your investing when you think your budget is stretched to the limit.
There are many investment options available to members of the military for retirement such as the federal Thrift Savings Plan, but they have to take advantage of them if they want to close the gap between a pension and their needs during retirement. Relying on a military pension is not enough in order to survive and thrive in your Golden Years. Excuses as to why such a low percentage of members of the military are saving for retirement are nothing but that…excuses.
My answer: It wasn't a practical option. It is not like a real 401(k) where the money is taken out pre-tax, but simply a savings plan into an low risk (i.e., not worth the effort) investment vehicle. I took my money and invested in a Roth IRA and a 529 instead.
William, it seems to me that you didn't get the right information about the TSP. It is NOT a savings plan, although people sometimes use it like one. It is a good program and it has been very fair to me on my investments.
Federal employees participate in TSP because their deposits are matched, even though they get a very generous retirement benefit in addition to their TSP. Military personnel, on the other hand, do not receive any matching funds for their TSP deposits so why bother!
The federal bureaucracy is soooo bloated and they have more benefits than anyone. No wonder the country is go ing broke!
As to:
My answer: It wasn’t a practical option. It is not like a real 401(k) where the money is taken out pre-tax, but simply a savings plan into an low risk (i.e., not worth the effort) investment vehicle.
OF COURSE it is pre-tax, a top-line deduction. It reduces your taxible income by whatever your contribution amount was (obviously up to the federal limits). Course if you are in teh 0-10% bracket, the value to this yr's taxes is minimal. But you are teh very person who needs to learn discipline, with respect to savings and investing. The guy in the (soon to be) 36%, or worse-yet, the guy in AMT-land has already learned it. You might LIKE being in that club, and biccing about your tax bill like they do. But I'm sure they aren't paying their fair share….
NOW. The "real 401K" effect you are speaking of…perhaps you meant the matching contribution that the next commenter mentioned. No, you don't get that, instead you get an indexed-to-inflation 50% annuity that starts paying at 38yo if you came in at 18yo. AND your wife gets 55% of THAT after you are gone. 'Course you have to stay to 'vesting", 20 yrs and a day.
Careful what you wish for, as you WILL have your matched "real 401k" soon enough, but you will have paid for it with your pension, as that will be a relic. Hope you are grandfathered-in when they make that change. But that mil retirement you think of will shortly be going away. It's over 50% of DOD budget, PENSIONS, not wars, and that's not counting TRICARE. So think twice before you get out. I'd rather you stay in for the right reasons, and not fear, but either way, think about it folks.
As to the low-risk element, tell that to the folks who lost their shirts (at least on paper)in the S/C/I funds. You need a mix of investments in your life, why not load-up on the "low-risk" end of it now, once you're out, or even sooner if you borrow it out…you can roll it into your own IRA and buy all the cattle futures or SIVS you wish.
Wow, great reply BeeBoo. I rarely comment on posts but yours was spot on! DH and are are maxing out TSP while we can in case we need to scale back when the kiddo's are older.
I am a TSP participant, however I will soon not be. Why? How about horrible fund management that has yielded a negative return over the last three years. I know the market is bad but come on, if you can't manage a 5% return, YOU'RE BLOWING IT. Reason two, I was led to believe initially that my contributions would be matched, however this is not the case for military members. So why would I give my money over to the TSP when all they are doing is losing it and there are no matching contributions or any other incentive. Meanwhile, the funds I manage personaly are earning at 8%, I can get CD rates up to 3%, and there are multiple other IRA's that offer many other perks out there if you're looking for that tax break incentive. THATS WHY MEMBERS OF THE MILITARY DON'T PARTICIPATE IN TSP. Maybe if you offered a better product you'd see a higher participation rate.
You're a moron, you should manage your fund better.
I recently reduced the amount I was investing into the TSP from 15% to 1%. I was clueless as to how much of a rip off this savings investment plan was?!?!?! I decided to open up a ROTH IRA and have most of my funds transferred into that account. I'm very dissappointed with the investment returns TSP has to offer.
Oh, gosh, Rosario…I am sorry that you are unhappy with the performance of your TSP account. In which funds were you invested? It hasn't exactly been a spectacular time for investments in general. I hope you are more satisfied with your ROTH IRA, but please remember that you can fully fund both a TSP and IRA account to maximize your tax savings.
As a civilian federal employee that does NOT get TSP matching, either, I am tending to agree that TSP isn’t very well managed. I have other money in other very similar accounts, and the returns are much more significant for the same class of investments. I do okay in TSP, but I do better managing my own account.