Embarking on a military career is a noble and patriotic journey that not only serves your nation but also offers unique financial opportunities for your future. Beyond the honor and sacrifice, military service provides service members with retirement benefits that play a vital role in ensuring their financial security in the years beyond their active duty. Among these benefits, the Thrift Savings Plan (TSP) stands as a cornerstone of military retirement planning. Here, we will dive into the intricacies of US military retirement benefits, with a significant focus on the TSP. By the end of this exploration, you'll have a thorough understanding of how to leverage these benefits to secure your financial well-being in retirement.
Understanding US Military Retirement Benefits: A Holistic Overview When it comes to retirement benefits, the US military offers a comprehensive package designed to provide service members with stability and security in their post-service years. These benefits recognize the dedication and sacrifices made by military personnel and aim to ensure their well-being as they transition into civilian life. While there are various components to military retirement benefits, let's explore some of the key aspects in greater detail:
1. Defined Benefit Pension: One of the central pillars of military retirement benefits is the defined benefit pension, often referred to as a military retirement pension. This pension is available to service members who have completed a minimum of 20 years of active-duty service. The pension amount is calculated based on a percentage of the service member's base pay and is determined by the retirement plan they fall under. There are a few different retirement plans that uniformed individuals might fall under. This table from militarypay.defense.gov breaks down the retirement plans and criteria for an individual to receive compensation:
Depending which retirement plan one might fall under, there are slightly different pros and cons. The main difference between the two most recent retirement plans, High-36 and Blended Retirement System (BRS), is the Government matching a up to 5% of basic pay for the TSP while reducing the defined benefit from 2.5% times years of service to 2% times years of service. As we continue, we will discuss the TSP more in-depth. This information is all applicable to both the High-36 and BRS plans, except for the parts focused on the matching benefits.
Cost-of-Living Adjustments (COLA): Military pensions receive annual Cost-of-Living Adjustments to help retirees keep up with inflation. These adjustments help maintain the purchasing power of the pension over time, contributing to the retiree's financial stability.
2. Healthcare Benefits: I will save diving into all the healthcare benefits for military retirees for a different article. There are just a few high-level items to note and to understand for this one. Retired service members are eligible for healthcare benefits through the TRICARE system. There are a few plan options available including TRICARE Prime, Select, Select Overseas. Additional information can be found on the TRICARE website: Retiring | TRICARE. These benefits provide crucial medical coverage in retirement, ensuring that retirees and their families have access to necessary healthcare services. Additionally, many veterans and retirees qualify for Veterans Affairs (VA) disability compensation. This compensation is for those who got sick or injured while serving in the military or whose service worsened an existing condition. There are many programs and benefits offer by the VA. You can get more information at: VA Disability Compensation | Veterans Affairs
3. Thrift Savings Plan (TSP): Alongside the defined benefit pension, the Thrift Savings Plan (TSP) stands as a critical component of military retirement planning. Think of the TSP as a 401(k) equivalent in the civilian sector, providing service members with a powerful tool to accumulate savings for their retirement years. The TSP offers a range of features that enable service members to build wealth over time:
Pre-Tax and Roth Contributions: The TSP allows service members to contribute a portion of their income to the plan on a pre-tax basis, reducing their taxable income in the present. Additionally, the TSP offers a Roth option, allowing for after-tax contributions that can be withdrawn tax-free in retirement. If you want to learn more about Traditional and Roth account options, you can check out our article that breaks those down: Traditional vs Roth. To keep it simple, if you expect to be in a higher tax bracket once you retire, the Roth is the better option for you. Because if you’re reading this, that means you must be interested in building your wealth and some of the other benefits offered by Roth accounts, I generally recommend most people to utilize Roth options as much as practical. This is especially true for younger individuals and those focused on gaining financial independence.
Employee Matching Contributions: Members of the Blended Retirement System (BRS) are eligible to receive the Thrift Savings Plan matching contribution. This means that the government matches a portion of the service member's contributions, effectively adding "free money" to their retirement savings. All members of this plan will receive a government contribution equal to 1% of base pay. Additionally, the government will match up to an additional 4% for members after their 2nd year, through their 26th year. What does that mean for you? CONTRIBUTE AT LEAST 5% of your base pay to your TSP! Military members can make these changes at mypay.dfas.mil. It is important to note that even if you contribute to a Roth account, the government match contributions will still be contributed to a traditional account, because this match contribution is not taxable income.
Let's illustrate the impact of the matching contributions with an example. Imagine a service member with an annual base pay of $50,000 who contributes 5% of their pay to the TSP. This would amount to $2,500 in contributions. With the matching contribution, the government matches this contribution with an additional $2,500, effectively doubling the service member's savings for the year. An average $208.33 contribution per month over 20 years would result in over $50,000 of additional retirement contributions from the government. But we don’t stop there. With the incredible power of compounding interest, if we can achieve a conservative 7% return, the member would have nearly $600,000 at age 65 JUST FROM THE MATCHING CONTRIBUTIONS!
Now I am fully aware no military member is going to keep the same pay their whole career, and likely wouldn’t be retiring if they did. This is just a simple example trying to use averages to highlight the importance of taking advantage of matching contributions and the amazing power of compound interest. There is ample opportunity for many members to make much more than this example!
Diverse Investment Options: Within the TSP, service members can allocate their contributions across a selection of investment funds, including government securities, index funds, and lifecycle funds. This variety of options empowers service members to create an investment strategy tailored to their risk tolerance and financial goals. If you are looking for how to invest within your TSP account, check out a recently article we published just on that topic: Maximizing TSP . For the sake of this article, we will look at the options at a very high level.
While the TSP offers various investment funds, it's essential to create a diversified portfolio that aligns with your risk tolerance and investment goals. Diversification involves spreading your contributions across different funds to minimize risk and capture potential gains from different market segments. For instance, consider a service member who decides to allocate their contributions as follows: 40% to the C Fund (Stock Index), 30% to the S Fund (Small Cap Stock Index), and 30% to the G Fund (Government Securities). This allocation diversifies their portfolio across different asset classes, potentially reducing the impact of market volatility on their TSP balance. As a general rule of thumb, we highly recommend focusing on the C, S, and I funds.
Low Fees: The TSP is renowned for its low administrative and investment fees. These low costs ensure that a significant portion of the contributions goes directly toward growing the retirement savings. With net admin and investment expenses in the range of 0.06% (depending on the fund you choose), the TSP is competitive or cheaper than most any mutual fund out there. For additional information on the TSP funds and expenses, you can visit the TSP website at Expenses and fees | The Thrift Savings Plan (TSP).
Charting Your Financial Course with Confidence
As you embark on your military career and consider the path to retirement, understanding US military retirement benefits and the role of the TSP is paramount. The combination of a defined benefit pension, the TSP, healthcare benefits, and COLA adjustments paints a comprehensive picture of the financial support available to service members in their post-military life.
By leveraging the TSP's features and implementing strategic contributions and investment strategies, you can create a robust financial foundation for your retirement years. While the road to retirement may seem distant, the decisions you make today will shape your financial security tomorrow. As you serve your country with honor, empower yourself to secure your financial well-being through informed decisions, disciplined saving, and a proactive approach to retirement planning. Seek guidance from financial professionals with expertise in military finances to tailor your retirement strategy to your unique circumstances. With careful planning and prudent choices, you can confidently navigate the journey toward a prosperous and fulfilling retirement.
