What is the Thrift Savings Plan?
The Thrift Savings Plan (TSP) is a 401k retirement fund for military/federal/government employees.
The TSP for military has some of the lowest fees of any 401k I’ve seen.
My favorite benefit of the Thrift Savings Plan is that it is 99% passive!
All you need to do is log in to MYPAY and set what percentage of your paycheck you wish to contribute.
After setting the allotment for monthly contributions, you need to verify into which fund(s) your money is to be deposited. I will go into more detail on the specific funds/allocations in a few minutes.
Traditional Versus Roth
There are two different types of 401k plans you can utilize with the TSP, and they each have advantages.
With the Traditional 401k, you don’t pay taxes when you contribute, but you’ll pay taxes when you withdraw your funds.
In contrast, the Roth 401k means you pay taxes when you contribute, but you won’t pay taxes when you withdraw your funds.
So, what does this mean for you?
With the Traditional 401k, you are able to write off any income you place directly into the 401k. By reducing your taxable income, you are able to invest more money into the TSP initially. The downside to this is that your 401k will be taxed as ordinary earned income when you begin withdrawing money from it.
There will be more money in it because you were able to contribute a higher amount, but again, you will pay taxes on it!
The Roth 401k, on the other hand, is funded with after-tax dollars. This means you will put less money into the 401k initially, but none of it will be taxed upon withdrawal!
Each of these funds has its advantages.
The easiest way I can think of to help you decide which account you want to use is for you to answer this question: “Do I expect to be earning more or less income in retirement than I am currently?”
If you believe you’re earning more income now than you will in retirement, pay the taxes later (Traditional 401k).
If you plan to retire with a larger income, pay the taxes now (Roth 401k). Also, it is worth noting that I don't foresee taxes being less than they are now in thirty or forty years. Eventually the government will need to increase taxes in order to pay off our ridiculously high national debt.
Blended Retirement System = TSP For Military is Now More Important Than Ever!
A lot of people are frustrated about the new Blended Retirement System (BRS), but let me show you how awesome this can be for young service members.
The dollar value of the 5% matching contribution is $178.19 per month during your first year in the service (if you’re an E-1). These numbers only include the matching contribution, not your contribution.
For the sake of simplicity, we are going to assume that you do not receive a pay raise during the first four years (even though you will). This $178.19 becomes $8553.12 over the next four years
*Side note* That is not including the interest accrued during this period, just the amount contributed.
In 40 years, that dollar amount will have grown to $128,078.33 if you received an average of 7% returns during that time.
If you had placed that money in a more aggressive fund and received an average of 10% returns, it would grow to $387,107.84 in that time.
Now, here is the crazy part.
Having $387,107.84 in your TSP will equate to $1,290.36 a month in withdrawals (at a 4% withdrawal rate, which is recommended) or $15,484.31 annually.
Keep in mind, this assumes that you only contributed to your Thrift Savings Plan for 4 years and did not stay in the military. Imagine if you kept contributing to your TSP for an entire 20-year career in the military, plus the 5% matching contribution.
If you stay in the service for 20 years and retire as an E-8 (about the average), your retirement check is currently $2504.33.
Conversely, if you take the BRS route, this drops to $2,003.46. But once you add the additional $1290.36 (assuming you stopped contributing after 4 years), in your 60’s you will be doing much better!
Long Term Benefits of the BRS
The other major benefit of the BRS is that you can exit the service after 4 years and take this $8553.12 (which could grow to $387,107.84) with you. That means the additional $1290.36 a month at retirement could still be yours, whereas with the old retirement system you would have received nothing towards retirement other than your personal contributions after four years of service.
It is important to note that the figures above refer only to the 5% matching contribution. Assuming you personally contributed only 5%, you could essentially double these numbers. Imagine if you contributed 20% or even 30% during this first 4-year period.
In fact, let’s get crazy for a moment…If you contribute 25% (20% plus 5% matching) for four years (again assuming no promotions) you will have contributed $24,280.80. In 40.5 years, it will have grown to an estimated $512,083.07 (at a 7.18% return) or $1,690,576.24 (at 10% return). At a 4% withdrawal rate, this is $67,623.05 annually!
If you contribute 35% (30% plus 5% matching) for four years (again assuming no promotions), you will have contributed $32,144.64. In 40.5 years, it will have grown to an estimated $677,932.82 (at 7.18% interest) or $2,238,104.31 (at 10% interest). At a 4% withdrawal rate this is $89,524.17 annually!
Basically, you need to maximize your effort in contributing to the TSP during your first four years of service. If you do this, your retirement could already be sufficiently funded, and you would be able to begin investing the money that you had been contributing elsewhere.
With the new retirement system, it is more important than ever to understand the various TSP funds where you can allocate for your money. Traditionally, your money started in the G-fund, which has never lost money but only earns 1%-2% interest (barely outpacing inflation).
Unfortunately, a lot of us old guys (talking about myself here) didn’t know this and left our money in there for the first few years (5 years in my case). That means I missed out on a ton of interest during the early years of my service, which is the most impactful years for a high rate of returns!
Luckily, the BRS matching portion will automatically be placed in one of the Lifecycle (L) funds. This is a much better scenario, and I believe that is going to become the default allotment in the future (but verify what account your funds are going to ASAP)!
There are so many different ways that you could allocate your funds.
Which Fund Should I Use?
My opinion is that you should place all of your money into the Lifecycle fund for the year you plan to retire if you aren’t really savvy with the various funds.
If you plan to retire in the year 2053, then you would use the Lifecycle-2050 fund.
I suggest this because that fund shifts throughout time to provide the best return in the least risky manner for you. It will be more aggressive when you’re younger, and as you get closer to retirement it will gradually move a larger allocation to the G-fund so that it won’t be hurt by any market downturns.
If you want to put the money in other funds, feel free, but the simplest way to handle the TSP is to drop your money in the L-fund.
In theory, you could do this and never look at or touch your TSP again until retirement!
Below is a brief list of the descriptions and objectives of the TSP funds, as stated on the official TSP website https://www.tsp.gov/InvestmentFunds/FundPerformance/index.html . I have also embedded a screenshot of the Summary of Returns page from their website so that you can see how some of these funds have performed. Note, it is quite possible to obtain the 10% return we have discussed.
G-fund – Government-Backed Securities (interest income without risk of loss of principal)
F-fund – Government, corporate, and mortgage-backed bonds (mirrors Bloomberg and Barclays)
C-fund – Stocks of large- and medium-sized U.S. companies (mirrors S&P 500)
S-fund – Stocks of small-to-medium-sized U.S. companies (mirrors the Dow Jones industrial avg. index)
I-fund – International stocks of more than 20 developed countries (mirrors MSCI and EAFE)
L-funds – Invested in the G, F, C, S, and I fund (provide diversified portfolios based on retirement age)
Three different Strategies
These are the three strategies for TSP/Savings allocations that you need to know about! Please note that all of these numbers are based on the paycheck of an E-1 with fewer than two years of time in service to date. As you get promoted and receive the 2-year, 3-year, and 4-year pay-raises, I hope that you will increase the amount you’re saving, as discussed above.
According to a survey conducted in 2012, the average rate of promotion across the Department of Defense looks like this:
E2 – at 0.7 years
E3 – at 1.0 years
E4 – at 2.3 years
E5 – at 4.5 years
There is also a pay raise after 2 years, 3 years, 4 years, and every other year for the remainder of your career. Using these metrics and the 2018 military pay chart information, a typical 5-year enlistment could look like this for pay raises!
According to this timeline, the average service member will receive an additional $1,219 a month in base salary by the time he or she exits the service. Imagine if you saved 100% of your pay increases! Even if you only save 50% of all pay increases, you could be saving an additional $7,314 in just the last year!
Below is a basic saving/investing allocation strategy to help you automate your wealth creation!
This strategy is easy to stick to because it will leave you roughly $862.05 in monthly spending cash.
I would personally recommend starting with this strategy only if you have large debts to pay off.
In that case, I would use as much of your “spending cash” as possible to pay off that debt quickly. Then upgrade to one of the more powerful strategies as soon as your debt is gone!
*Side note* These numbers are as an E-1 with less than two years time-in-service.
Percentage Allotted to TSP for military: 10% (plus 5% matching contribution)
Dollar amount allotted: $342.02 monthly, $4,104.24 annually (not including interest)
Savings Allotment amount: 10% of base pay
Dollar amount allotted: $163.83 monthly, $1,965.96 annually (not including interest)
Total put away monthly: $505.85
Total put away annually: $6,070.20
Without including promotions, pay-raises, or interest, this is what you will have saved after your first 4-year enlistment with this strategy!
Total value of TSP for military: $16,416.96
The total value of savings: $7,863.84
Total combined amount: $24,280.80
Taking a Loan from the TSP
You can take loans from the TSP for a couple of reasons. One of these options is to take out a loan to use as the down payment on your first home purchase.
Another, less ideal method is to use the money as a “general purpose loan”. You can withdraw the greater of half the value of your contributions, or $50,000, from your TSP as a general-purpose loan. The benefit to this loan is that you are only required to pay the G fund earnings (government-backed bonds) for interest.
That means you will receive an incredibly low-interest rate, and even better, you are paying the interest back to yourself! The downside to this kind of loan is that you are missing out on the magic of compound interest while you're repaying this loan because the money is not earning interest inside of your TSP.
So if you generally receive a 7% return on investment (a reasonable average), and you're only paying yourself 2% interest on the loan…you are realistically losing 5% on your money the entire time you're repaying the loan!
I am not completely opposed to taking a loan from your TSP, but make sure you are getting a HUGE return on that money!
I wrote a post about more advanced TSP strategies for you too!
Take Action with the TSP for military
As you can see, it is possible to save a decent amount of money with very little effort in your first term!
Unfortunately, most service members blow their money on expensive, depreciating assets (cars/motorcycles). You can still enjoy these items without missing out on the opportunities to build wealth.
I would be much further along in life financially if I had understood this information and been able to take action on it during my first term!
Read my FREE Ebook to learn how much wealth you could build with the intermediate or extreme TSP strategies!
Learning how to invest in the Thrift Savings Plan is incredibly useful, and I commend you for reading this article in entirety!