Why Do Members Of The Military Not Invest In The Thrift Savings Plan?

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.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • William

    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.

    • Mike

      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.

      • dbch

        NO TSP is garbage. Once your out you can’t roll it over until the end of contract not when you are separated from active duty. And even then the military may not even inform the tsp you are. The restrictions are such baloney no one should do it (four years in the IRR and the money just sits there and you can’t contribute another dime because your no active yet can’t withdraw because you are separated). Invest in an IRA if you are non-career military.

        • KateKashman

          dbch, I would like to learn more about your opinions on this. Where did you want to move your money, and why did you want to move it? P.S. I went back and edited some of your language because this is not the appropriate place.

  • MWife

    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!

    • justin

      no true. they match the first 5%

    • FedFAA

      Your comment sounds like the same assumption I hear all the time about federal employees. I’ve been a federal employee for 33 years now and can tell you it’s not as good as you assume. Employees in the old retirement system (which I am) do NOT get matching funds either. If you’re also under the assumption we get free health insurance as many people assume, we do NOT. We pay into it and see our coverage decrease while our premiums increase like everyone else. I’ll grant you, at the level of politicians, the system is bloated. But that’s far from true at the worker-bee level.
      As to your comment about why bother, because TSP is still a great investment. With a growing family and two kids in college, there’s no way I could have saved what I have in the TSP. Compare it to outside investing where you pay a broker fee. There are no fees with the TSP.

  • BeeBoo

    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.

  • Nate

    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.

    • Nuttin

      You’re a moron, you should manage your fund better.

    • Iymus

      Totally agree I would like to withdraw my money now but I can’t because i’m still in the service. If any knows of a loophole I would like to hear it

      • KateKashman

        Lymus, all tax qualified retirement plans have ways to get distributions before you reach retirement age (59 1/2). There are two ways to take distributions from a TSP account: a loan, or a hardship withdrawal. Both options, with their guidelines, are available at the TSP website at http://www.tsp.gov.

  • Rosario Aguirre

    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.

    • Bong

      Kate or anyone, Can you please elaborate on “fully funding the TSP and IRA” ??? I have finally fixed my debt to income ratio, where I’m debt free with the exclusion of my mortgages. After revolving bills (Rent, Cell, Gas, Food, Entertainment, Etc.) Currently I am able to invest in the TSP $1200 a month and I could put more if I wanted to…

      Single E-7 12/30 years completed.

      Should I Keep investing in my Roth TSP (L 2040 and L 2050) and open up a USAA Roth IRA and max that account as well Or Would I be fine with Only the TSP? I plan on working after the Military.

      • KateKashman

        Bong, congratulations on your great savings! When I use the term “fully funding,” I am usually referring to maximum amount allowable by IRS regulations. What is necessary for you depends on a lot of variables such as whether you are married, have children, own property, the type of job you might have after you retire, where you might live after you retire, and any other things that might impact your overall financial situation. I would recommend you speak with a qualified financial counselor who can review your overall situation and help you make the right choices for your specifics. Good luck to you!

    • Jessica
  • roobah

    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.

  • Kirk

    When i joined they gave us the option in basic training to start a TSP account and i thought “what the hell, why not”. About to come up on 4 years and I have put about 5% of my pay into it over that time. As of right now i’m sitting on almost $6,000 and i recently started allocating some of it into the other funds so i can see which ones to keep an eye on. I’m 23 and i feel like i have taken a good step for my future, not to mention the interests it is going to pick up by the time i retire. I feel like it has worked for me but i don’t know a whole lot about investing and stuff

  • savenoworpaylatter

    The TSP is a good additional tool to use. I max out a Roth IRA through an outside agency and contribute 11% of my pay to TSP. I didn’t start out this way. I started out with 1% and when we get a raise I moved it up 1%. I think the TSP is a good option if you have already have a Roth IRA. But you need to know about the funds. If you are in the “G'” fund you can’t expect to earn high returns. like wise if you are in the “I’ Fund you can must be prepared for highs and lows. Don’t think of TSP as a short term get quick rich, it’s a long term plan. If you are young don’t plan on Social Security being around. I know a lot of people who have retired from the Military as MSgt – Lt Col and all have had to work additional jobs after the military. Retirement will be coming sooner than you think. It’s better to save something then nothing, however your goal should be 15%.

  • MoGo

    I’m a believer in TSP. I started in March of 2002 an active duty Marine. I retired in October 2005 and worked as a Federal employee. I combined my military and civilian TSP into one. I consistently contributed 10% in the C, S, I fund. When the market went down in 2008, I increased to 15%. My rate of return this past 12 months as been 23%. I currently have over $160k. That is after taking a $12k loan to do some home impromements. I encourage young Marines (all service) to participate in TSP.