A recent front-page article in the Wall Street Journal about saving for retirement reports that “57% of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes.” That is some bad news. We all have to save for retirement, even in the military. You don’t know if you’ll want to serve long enough to get a military pension – or even be allowed to. Only about 8% of Marines stay in to earn that pension.
The good news is that when it comes to retirement savings, time is on your side: 86% of active duty enlisted Marines are under 30 and about half are 23 or younger; about 38% of active duty Marine officers are under 30 years old. If you start saving early, you have a long time for a little money to grow into a lot of money.
The simplest advice when it comes to saving is: spend less than you earn and invest the rest. If you’re having a hard time with the first part of that, you need to talk to someone about monitoring your monthly cash flow, coming up with a budget, and getting out of debt. One place to start is with the (free!) Personal Financial Management Program at your local Marine Corps Community Services office.
The next question is, “where do I ‘invest the rest’, and how much?” A great place to invest is with the Thrift Savings Program (TSP) available to all uniformed service members. There are a few reasons why it is so good, but the first has to be low fees.
When discussing the TSP, financial professionals always bring up its low expense ratios, which represent the percentage of fund assets used to pay the management fees and operating expenses of the fund. An actively managed mutual fund out there might have an expense ratio of 1% (or more), meaning that every year 1% of your investment is used to pay for the fund’s managers, employees, analysts, rent, electric bill, etc.
The expense ratios for the funds in the TSP are a mere 0.025%. Another way to say that is: most mutual funds out there, in order to pay themselves, will take 10 to 100 times more out of your investment than the TSP will. For that reason alone some people say that “the TSP is a spectacularly good deal.”
Another reason I like the TSP is that it is simple and automatic. The easiest way to invest is to pick a percentage of your base pay through MyPay; the money is automatically taken out of your pay each month and invested in the TSP. Nothing for you to remember, no checks to write, no electronic transfers to make. When you get promoted or get a pay raise, your amount going to the TSP goes up proportionally. A total no-brainer.
You’ll still need to go to the TSP website to pick which funds to invest in. If you want to keep things simple and automatic then you can just invest in the L 2050 Fund, but the TSP has 10 different fund options. The 5 main funds are the quite imaginatively named: G Fund, F Fund, C Fund, S Fund, and I Fund. They are invested in, respectively: government securities, bonds, large‑cap stocks, small‑cap stocks, and international stocks. Those funds are combined in different proportions as the Lifecycle Funds: L 2020, L 2030, L 2040, L 2050, and L Income. The L Income Fund is for people who are already retired; the other funds are named for the year you have targeted for your retirement. The best thing about the Lifecycle funds is that they are diversified and rebalanced for you based on the time left until the target date — simple and automatic.
Tax savings are another great feature of the TSP. With the traditional TSP you invest pre-tax money. Simply put, there is less tax withheld from your paycheck each month. You’ll have to pay income tax on that money, however, when you withdraw it in retirement.
There is the also the option now to invest in the Roth TSP. In that case you pay tax on the money now, before you invest it in the Roth TSP. Then when you retire everything coming out of the Roth TSP, including years of earnings ($!), is tax-free. There are many discussions around the web about the pros and cons of traditional TSP vs. Roth TSP, but the bottom line is that saving in either (or both) is better than not saving at all.
Some people assume that the TSP is not a good deal because the government does not provide matching savings. Many private companies that have 401(k) plans, which operate similarly to the TSP, will match employee savings up to as high as 8% of salary. While it is true that service members do not get matching savings in the TSP, there aren’t any savings programs directly available to them that will provide matching funds. Don’t let that stop you from taking advantage of a good deal.
On the other hand, many military families, especially O-2 and below, may be eligible for the Retirement Savings Contributions Credit on their income tax return. Also known as the Saver’s Credit, it can effectively provide a 50% match, up to $1000, of money that you save for retirement. I wrote a lot more about it here.
How much you should save in the TSP depends on a lot of things: marital status, personal debt, other household income. etc. If you are still young, most experts agree that you need to save at least 10% to 15% of your gross income. The problem is that your TSP contribution is computed as a percentage of base pay, without regard to your housing allowance (BAH), or food allowance (BAS).
As a quick example, let’s look at a married corporal on his first enlistment, stationed at Camp Pendleton, who wants to save 10% of his gross pay. In 2013, an E-4 over 3 years earns $2,193.90; BAS is $352.27; BAH (with dependents) at Camp Pendleton is $1,854; for a total of $4,400.17. To save about 10% of his gross pay, the corporal should designate a TSP savings rate 20% or 21% of his base pay to invest $438.78 or $460.72 each month.
Whatever you do, research and discover ways to save and plan for retirement. You won’t be sorry when you have that extra money tucked away in the future!
Rob Aeschbach served on active duty in the Marine Corps for 12 years, and recently retired from the Marine Corps Reserve. In addition to being an active duty Navy spouse and stay-at-home-dad, he is starting a new career as a personal financial planner. You can send Rob questions, or contact him, through his blog is www.RobAeschbach.com.