TSP is an amazing program for people who are in the Blended Retirement System. If you joined after Jan 1, 2018 you are in this program. This program changed the military retirement system entirely. Previously if you did not stay in the military for 20 years, you did not receive any retirement benefits (other than special circumstances, medical discharge for example). With BRS everybody will leave the military with some form of retirement, even if you do not elect to put money into TSP. You will automatically be saving 1% of your income.
What makes BRS so good?
Well, through TSP you can put 5% of your income into your TSP account, and you will receive a 5% match on your money! That means your money up to 5% is INSTANTLY doubling. So, you will be adding 10% of your base pay into your TSP account each month. The more you put in the more your money can grow, but they only match 5% max.
Imagine somebody coming up to you and saying, if you give me a $50 dollar bill, I’ll give you $100 dollar bill. That’s a deal you CANNOT refuse. That is what the match is equivalent to. TSP is also a better match than many companies that match a 401k.
What does this mean for you?
Well, if you decide to stay in the armed forces for 20 years, let’s say from age 20 to age 40. You make rank within the first few tries bringing you to an E-6 or E-7 by the time you retire. If you have contributed your 5% since the day you joined, until the day you leave. You will likely have well over $100,000 depending on the market conditions, this is a conservative estimate, it could even be well over $250,000+ depending on the markets. Because you need to wait until you’re 59 and ½ years old, that money can become a half a million dollars OR MORE when you reach that age. All by saving a low 5% of your income for just 20 years. On top of that you will still have your retirement from the 20 years of serving.
Another thing to mention is that you don’t have to stay in 20 years to have a large sum of money by the time you are 59 and ½ years old. If you only serve for 4 years, you will have somewhere around $5,000 to $10,000 dollars in that account if the markets have stayed steady. If you joined when you were 20 and left when you were 24. That $5,000 can turn into about $60,000. That’s of course not an extreme quantity of money but it is an incredible return for only saving $5,000, and hopefully you’ve saved additional money with the other careers or businesses you’ve had for the 35+ years until you receive this TSP retirement money.
Roth vs Traditional
There are two options with TSP. You can choose Roth and Traditional.
Roth means that people pay taxes, and then invest. Somebody would get paid then pay the taxes and then the money will go into the TSP account. The Roth benefit is that all of the investment gains are NOT taxed. For example if $100 dollars invested becomes $200. The extra $100 will not have taxes.
Traditional means that they will take the money out of someones paycheck prior to paying taxes and then they would pay taxes once the money is withdrawn from TSP at retirement. Before you get your pay check, the money will go directly into your TSP and then you will get paid and pay taxes on the remaining money. For Traditional the benefit is that your taxable income that year is lowered, this is not a huge benefit for military because we pay low taxes due to our low taxable income (we are not taxed on BAH or BAS). For Traditional, if somebody had $100 in TSP. Then it grows to $200, they WILL be taxed on the extra $100 made.
Money removed from TSP prior to retirement age will have additional fees, so removing money early is usually not the best way to having as much money as possible in retirement.
Do you want to pay taxes before, or after your money is invested? Many will benefit from paying taxes before, meaning the Roth TSP. It really depends on personal situations, there are many factors. Because people in the military make such little base pay (most of our taxes are base pay) it can be worth paying taxes NOW instead of waiting and possibly paying a heart shattering amount of taxes during retirement. Most people in the military are in low tax brackets, if that is the case for you then it may be little benefit to avoiding taxes now with a Traditional TSP because it is likely that members will be in a higher tax bracket once reaching your 60’s. Something to consider is how much money do you think you will have during retirement.
This by the way goes for any IRA or 401k that is Roth or Traditional as well.
For example, $5000 turning into $60,000. The $55,000 profit will NOT BE TAXED if they choose to do a Roth. That means all the gains on the money will be TAX FREE. This is an incredible perk that makes the Roth so incredibly powerful for long term investing. If they choose traditional, the money will go from $55,000 dollars in profit to as low as half of that, depending on the tax bracket they fall under.
The last thing, and an important thing is that TSP has 5 main funds, and the fund you choose can DRASTICALLY change your results. You can decide yourself which ones you want to choose. Money in the G fund will probably not grow from $5,000 to $60,000 dollars, or anywhere even close to that number based on its current history. You may want to move your money into the other funds. The C fund is the common stock fund, which can be one of the better ones for safety and risk, historically. S fund is higher risk, I fund is international, F fund is Fixed income (like bonds) and G fund is the grandma fund (that’s a joke) it’s the government securities fund. As of this year it moved (G fund) about +.89% compared to the S fund that moved almost 23% and the C fund that was almost 14%. S fund is much riskier though so just be sure that you check the long-term histories of each fund and talk to a professional to make a good decision for your situation.
Another quick example, if someone invested $5,000 at 24 like we discussed previously, and the market went up 14% like the C fund did this year in 2020 according to the TSP.gov website. You would have $554,000 dollars. Yes, you saw that right. The $5,000 to $60,000 number was from a conservative 7% estimate. The $100,000 dollar figure if you had $100,000 at retirement at age 40 in your TSP that would be $1,274,000, if it went up 14% annually. That brings that person to over a millionaire by only investing 5% of their income into TSP at 14% returns. If they were around the $250,000, 7.5% would have them become a MILLIONAIRE!
I personally like doing my estimates at 8 and 10 percent for a bit safer and a bit more realistic price point, but nobody knows what the market will do, that number could be much lower or much higher. The market has moved around 12 percent over the last 10 years.
You can do your own calculations by typing in “investment calculator” into google and plugging your numbers in. Hopefully you can invest more than just this 5% and become a millionaire much sooner in life. I will have other articles about where to invest your money outside of TSP!
*You should not make investing decisions based on this post. Please talk to a professional! They have free financial advisors on many military bases.
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