When most reservists and guardsmen think of military benefits, what likely comes to mind is the GI Bill, the VA Loan and discounts at chain stores and restaurants.
Not many would think of retirement savings – especially those reservists and guardsmen who only plan to serve three-to-six years and then separate.
Sure, they might have heard of the Thrift Savings Plan (TSP) – the military’s version of a 401K – and maybe they even understand the basic tenet of the Blended Retirement System. (It allows service members who don’t complete a full 20 years of service to transition out of the military and still receive some transferable benefits in the form of percentage-matching payments.)
But according to the Federal Retirement Thrift Investment Board, as of end of calendar year 2021, 34.1% of DOD reservists and guardsmen contribute the automatic 3% (which they start receiving after 60 days of service) or less from their paychecks. Scarier still is that 5.5% don’t contribute anything at all, including a whopping 13.6% of Marine Corps reservists.
April is Military Saves Month, so to the reservists and guardsmen contributing 3% or less to their TSP, I challenge you to ask yourselves two questions:
- Where is my drill pay/annual training pay going?
- If I contributed the max amount of my pay (92%) from now until separation/retirement, how much could I accumulate in my TSP account?
Where is my drill pay/annual training pay going?
If you can answer this question, that’s at least a good start. Perhaps you set this money aside for a good reason, such as to pay off student loans or a car loan, or to save for an expensive and necessary purchase that you otherwise don’t have the funds to budget for. Good on you for taking responsibility and honoring your commitments. I hope the military helps you pay for these things as fast as possible so that one day you can prioritize saving to the TSP or your civilian employer 401K.
But if your answer is, to buy Jordan sneakers, or the new iPhone, or to get rims on my car… or even worse, your answer is a simple, “I don’t know”, then you’re wasting an enormous opportunity.
How much could I grow my TSP account if I maxed out my contribution rate?
Let’s use an Army Reserve, E-5 with four years of service. Their basic pay is $408 per drill month, and for their two-week annual training, they’ll make approximately an additional $1,530. Eleven drill months times $408, plus $1,530 for AT, adds up to $6,018 of income in 2022.
Service members can contribute as much as 92% of their basic pay to the TSP, and this winds up being 97% when you add in the 5% government match. Only 3% of your money is taxed if you contribute to a tax-deferred traditional account. (If you contribute to a ROTH TSP, your tax benefit comes later when you withdraw the money.)
So let’s say the soldier saves 92% of his drill pay, but needs to replace the civilian paycheck he misses while on AT orders, so he lowers the contribution rate to 5% for that month. (Note: some civilian employers have military differential pay where you can submit your LES and your civilian employee will pay the difference between what you would make in two weeks there vs. how much the military paid you for two weeks of training.)
He will have contributed $4,129 for the 11 months of drill and $77 from annual training, and he’ll have earned a total of $301 in government matching funds. His TSP balance after this one year would be $4,507.
With a sensible asset allocation heavy on stocks (C and S Funds) and light on bonds (G and F funds), this soldier can reasonably expect to get 8% or better returns on this money he’s now invested. Even if he waited until his final year of service to start contributing to the TSP, and he leaves the Army with $4,507 in his account, that money still has time to grow depending on how old that soldier is.
This is where we apply the rule of 72. To find the number of years required to double your money at a given rate of return, you just divide that rate into 72. So if we assume an 8% return rate, divide eight into 72, and you get nine years. After nine years, his $4,507 is now $9,014. After 18 years, that $9,014 doubles to $18,028.
Let’s say the soldier was 24 when he separated. That means his TSP balance had the opportunity to double four times (36 years) before he turned 60, and he could start withdrawing the money without penalty. By the time he’s 60, his TSP balance has grown to $72,112 as a result of one year of saving coupled with the magic of compounding.
Ideas to consider for retirement savings
Imagine how much you could grow your TSP account if you save like this throughout your entire Reserve/Guard career.
Plus, consider that you can contribute up to 100% of any incentive, special or bonus pay, as long as you elect to also contribute from your basic pay. (You cannot contribute from sources such as housing or subsistence allowances.)
Deployments, especially those in a Combat Zone Tax Exclusion (CZTE), are also a tremendous opportunity to stash away tons of cash in your TSP.
Two important ideas to remember are:
- No TSP contribution is too small when you have the power of compounding.
- The best time to contribute was yesterday, but the next best time is today.
So if you’re not putting your hard earned Reserve/National Guard pay to good use, consider going to DFAS-MyPay and adjusting your TSP contribution percentage. At least aim to get the full government 5% match by contributing at least 5%, but if you can do more, then do more. Take a hard look at your spending, see what you can carve out in your monthly budget to contribute to your retirement, and lock that rate in so it’s automatically coming out of your pay each month.
My guess is that if you do that, you’ll barely notice the pay you’re missing in your checking account. And when you’re ready to retire, the pot of money you earned, saved and grew from your military career will go a long way towards enabling you to retire comfortably.