Planning for Retirement
Factors to Consider
Retirement may seem distant, and as a member of the military, saving for retirement may feel like the least of your concerns. However, planning for retirement is one of the most important ways of ensuring your long-term financial security. The earlier you start saving, the better chance you will have of meeting your goals. There are many factors you will want to consider when you think about saving for retirement, including:
- Your age
- When you plan to retire
- Your risk tolerance
With these factors in mind, you should consider how best to take advantage of the retirement benefits available to you. You should also consider how to reinforce those retirement benefits with additional savings and investments.
Two Different Retirement Systems
As a member of the military, you are under one of two retirement systems.
1. Legacy Retirement System, officially called the Uniformed Services Retirement System, is a defined benefit plan: if you serve 20 years or more, you will receive a lifetime monthly annuity (pension) determined by years of service and the average of your highest 36 months of basic pay. You must serve at least 20 years to receive any benefit from this plan. If you were a service member on or before December 31, 2017, you are under the Legacy Retirement System unless you opted into the Blended Retirement System.
2. Blended Retirement System (BRS) is a combination of a retirement annuity for those who serve 20 years or more and contributions to a defined contribution plan, known as the Thrift Savings Plan (TSP). You receive TSP contributions whether or not you serve for 20 years or more, and under the BRS, the Department of Defense (DoD) will match your TSP contributions up to 5%. If you joined military service on or after January 1, 2018, you are automatically under the BRS.
Defined benefit plans also are known as pension plans. Employers sponsor defined benefit plans and promise that plan investments will provide you with a specified monthly benefit at retirement. The employer bears the investment risks.
Defined contribution plans, like the TSP do not promise a specific payment upon retirement. In these plans, the employee or the employer (or both) contribute to the employee’s individual account. The employee bears the investment risks.
For more information on preparing for retirement, consider one or more of these resources:
Thrift Savings Plan
What is the TSP?
The TSP can be a great option to save for retirement. It is a federal government-sponsored retirement savings and investment plan that is available to military members. The TSP offers the same type of savings and tax benefits that many private corporations offer their employees under 401(k) plans.
Like a 401(k) plan, the TSP is a defined contribution plan, meaning that the employee can make regular contributions into the plan. In the case of those military members under the BRS, the DoD as your employer makes additional contributions to your TSP account. The TSP is available to those under the Legacy Retirement System, but the DoD does not provide contributions.
The DoD makes no guarantees as to future account value, benefits, or income from the TSP. The ultimate account value and benefits derived from the TSP are based solely on the amounts contributed, expenses, and any gains and losses in the underlying investments. Unlike the Legacy Retirement System, which is based on years of service and the rank held at the time of retirement, the TSP account is portable. This means that the account holder retains ownership whether or not he or she separates from the uniformed services prior to being eligible for retirement.
The TSP can be one of your best options to save for retirement, offering:
- Easy enrollment
- Automatic saving
- Low fees and expenses
- Tax benefits
The TSP website explains the benefits available to the military.
Contributing to the TSP
The TSP offers two account options, Roth and traditional.
The Roth TSP allows you to contribute after-tax income to the TSP. The earnings in your Roth TSP account are not taxed when you take this money out of your account. This allows you to withdraw tax-free income during retirement.
The traditional TSP allows you to contribute before-tax income to the TSP, lowering your taxable income in the year you make the contribution. In a traditional TSP account no federal income taxes are paid on contributions to the traditional TSP account, but you are required to pay taxes on the contributions and earnings when you withdraw the funds in retirement.
Investment Options in the TSP
The TSP offers five individual investment funds—the Government Securities Investment Fund (G Fund), Fixed Income Index Investment Fund (F Fund), Common Stock Index Investment Fund (C Fund), Small Cap Stock Index Investment Fund (S Fund), and International Stock Index Investment Fund (I Fund). Each fund has a different fund objective and investment strategy. The funds also have varying degrees of risk and different potential rewards.
The TSP also offers lifecycle funds that invest in a combination of the five individual TSP funds based on professionally determined asset allocations. These funds are designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time. As an investor in a lifecycle fund, you pick a fund with the right target date based on your particular investment goals. For example, you might pick the L 2050 Fund if you are looking to withdraw your money for retirement around the year 2050. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing.
You can find more information about your investment options in the TSP on the TSP website.
Combat Zone Pay
There is another difference regarding taxes on a Roth TSP and traditional TSP unique to uniformed service members. Uniformed service members who make contributions to their Roth TSP from tax-exempt combat zone pay never have to pay taxes on those contributions or the investment earnings from those contributions if the withdrawals are qualified. Uniformed service members who make contributions of tax-exempt combat zone pay into a traditional TSP also will not have to pay taxes on such contributions, but they will have to pay taxes on the earnings of those contributions upon retirement. Social Security taxes are paid on both Roth TSP contributions and traditional TSP contributions.
Options When You Leave the Military
Even after you leave the military, you have the option to leave some or all or some of your money in the TSP. However, you will no longer be able to make additional contributions to the TSP.
You can also roll your TSP account into your new employer’s plan or an individual retirement account (IRA). It might seem nice to combine all of your retirement assets in one place, but you should carefully compare the fees and expenses of the new plan or IRA to those of the TSP. The TSP may offer fees and expenses that are significantly below average, and the difference in cost between keeping your money in the TSP versus another retirement plan can be significant over the long term.
Note: Be cautious if anyone offers you an investment and claims any type of affiliation with the government, the TSP, or government retirement plans. Call the SEC’s toll-free investor assistance line at (800) 732-0330 to check whether the seller is registered.
Other Ways to Save for Retirement
Of course, your retirement savings don’t have to be limited to the retirement benefits offered by the DoD. If possible, consider saving and investing additional money on your own. On Investor.gov, explore a wealth of information about retirement topics, such as employer-sponsored plans, managing lifetime income, avoiding retirement fraud and understanding senior specialists’ designations. Use Investor.gov’s 401(k) and IRA Required Minimum Distribution Calculator to determine how much you are required by IRS regulations to withdraw from your retirement fund at various ages.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.