How Military Members Can Save For Retirement
When it comes to saving for retirement, military members are in an interesting position.
On one hand:
They tend to earn respectable salaries from the get-go and have access to solid government-sponsored investing plans, as well as a pension program.
It seems like servicemembers should have no trouble putting away enough for a nest egg.
But at the same time, military culture may encourage spending at the expense of saving.
For a committed service member, saving for retirement doesn’t have to be a struggle.
Here are the best investing options available to men and women serving in the military, as well as some tips on how to get the most out of your salary.
Start a Thrift Savings Plan
Service members have access to a Thrift Savings Plan (TSP), a retirement plan that works similarly to an IRA or 401k.
With a TSP, investors can reduce their taxable income with every contribution.
Military members can choose between a Roth or traditional TSP.
A Roth TSP doesn’t allow investors to deduct contributions on their taxes, but they can make withdrawals tax-free.
You must be at least 59.5 and have the account for at least five years before making any withdrawals.
Former Navy engineer Doug Nordman, author of “The Military Guide to Financial Independence and Retirement,” said young cadets should choose a Roth TSP because they don’t need the tax deduction as much as older officers.
Traditional TSPs come with tax deduction benefits, but withdrawals are taxed at the normal rate in retirement.
The current contribution limit to a TSP is $19,500 a year, the same as a 401k. Members who are 50 or older can add an extra $6,500 per year.
TSPs have no commissions and famously low management fees of 0.033% - even lower than the most popular brokerage firms. In short, that means less money coming out of your pocket.
The main downside:
There are only six funds to pick from, though the funds do track indices just like traditional index funds. For most investors, this should be sufficient.
Currently, the military will match all TSP contributions up to 5% of a service member’s salary.
Those contributions are 100% vested, and members are automatically enrolled in a TSP with 3% contributions. Try to contribute the full 5% - anything less is just leaving money on the table.
Open an IRA
If you want more diversity in your portfolio, consider opening an IRA.
IRAs are popular because they can be opened with any brokerage company.
Traditional IRA Vs. Roth IRA
|Traditional IRA||Roth IRA|
|Contributions may be tax-deductible.||Contributions are not tax-deductible.|
|Pay taxes upon withdrawal.||Earnings can be withdrawn tax-free and without penalties if the funds were in the Roth IRA for 5 years and you've reached age 59 1/2.|
|You must be under age 70 1/2 to contribute.||You can contribute at any age.|
|Required minimum distributions (RMDs) are required starting at age 70 1/2.||No RMDs required.|
Choose a low-cost index fund from a reputable brokerage like Vanguard or Charles Schwab for the best results.
IRAs have a current $6,000 contribution limit, much lower than the TSPs available to military personnel, and are available in both Roth and traditional forms.
Once you’ve contributed enough to a TSP to get the 5% match, you can open an IRA if you want more options in your portfolio.
After you’ve maxed out the IRA, you can then go back to your TSP and contribute any remaining funds you have.
Visit a Free Financial Advisor
Every base has a free financial advisor or access to personal finance courses.
If you’re not sure how much you need to save for retirement or just got a big pay bump, a qualified advisor can help make sense of your situation.
Talk to a ranking officer about scheduling an appointment with the advisor. If your base doesn’t have an advisor, you can find one on your own with the National Association of Fee-Only Planners.
When choosing a planner, find one that has experience with other military clients.
A general advisor might not know the right questions to ask or the unique options available to service members.
Find a planner who charges based on the session and not by how many assets you have invested with them.
Save During Deployments
When you’re deployed, the government allows you to participate in the Department of Defense Savings Deposit Program, allowing you to contribute up to $10,000 a year with a guaranteed 10% return.
This is by far the best interest rate you could get with any retirement savings vehicle.
Even the stock market cannot return 10% over its lifetime.
This program is only available to deployed service members. If you find out you’re getting deployed, make sure to set this up before you leave.
Ask your commanding officer about any other deployment benefits you might get, such as increased pay.
Keep Track of Your Pension
The best way for any military member to save for retirement is by earning a military pension, available after 20 years of service.
The pension provides 50% of your base pay for life and also includes excellent health coverage and regular cost-of-living increases.
The total payout of a military pension can exceed $1,000,000, but only about 15% of military personnel stay long enough to earn the pension.
This brings up a common question - is earning a pension worth staying in the military for 20 years?
It will vary from person to person, but the statistics suggest that most people will leave before hitting that mark.
Staying in any industry that long is difficult, but the military can be particularly challenging in the long run.
If you’re a 22 year-old recently enrolled officer, don’t assume you’ll want to stay for the next two decades. The lifestyle can be challenging for anyone, especially those married with a family, and betting your retirement on a 20-year career is a gamble you don’t want to make.
It's important to note:
Don’t fall into the trap of saving less for retirement because you’re planning to earn a pension.
The military pension should be a fallback, and relying on it exclusively will take away the option of leaving if your priorities change.
Give yourself the freedom to choose by taking retirement planning into your own hands.
Save Cost-of-Living Increases
The military pay schedule provides regular salary increases. Rather than scaling up your lifestyle, save those raises automatically in a TSP or IRA.
Stashing away an extra 2% annually means your overall savings rate will increase every year.
Revisit your budget every year to make sure you’re not leaving money on the table.
Maximize your budget by living on base as long as you can and saving your leftover housing allowance if you move off-base. Decreasing your expenses is half the struggle to saving enough for retirement, whether you’re a member of the military or a civilian.
Justin Taylor of The Saving Sherpa is an engineer in the Air Force and saves about 75% of his salary. One of the major reasons he’s able to do so is because he spends as little as possible of his Basic Allowance for Housing (BAH). Many consider the BAH to be a limit, but members can pocket whatever they don’t spend.
“Don't feel like it's okay to spend $1,500 a month on housing just because it's your BAH,” he said.
Taylor said he also specifically requests to live in high-cost-of-living cities because the BAH increases if you move to a more expensive city. He then finds a cheap apartment and a roommate so he can pocket as much of the BAH as possible.
Avoid Temptation and Excess
Because the military has guaranteed raise increases and a stable pension, it’s easy to assume that finances shouldn’t be an issue for service members. If only that were true.
Some companies prey on military members.
When buying a car
Car dealerships located near bases have notoriously high interest rates, trying to lure naive consumers into expensive auto loans.
Payday and title loan companies also set up shop outside of bases, preying on the same demographic. They know that people in the military make good customers because of their steady paychecks and willingness to avoid defaulting.
If you’re a service member with debt, make sure you’re not being taken advantage of.
The Military Lending Act prohibits certain predatory tactics, such as charging more than 36% interest or tacking on extra prepayment fees. If you experience this, contact the Consumer Financial Protection Bureau and your local legislative representative.
This isn’t to say that buying a new car will tank your retirement plans, but do your research first.
Finding a good deal on a two or three-year-old vehicle could free up tens of thousands to put toward your investments and allow you to forego taking on high-interest debt.
When buying a home
Housing is another major issue for veterans.
Buying a house might seem tempting, especially when you have access to a 0% down VA loan, but owning a home can come with surprise expenses.
If you get transferred, you’ll have to sell the home immediately and potentially lose money on the investment.
A good rule of thumb:
Don't buy a home unless you’re going to live there for at least five years.