Investor Bulletin: Investing Throughout and Beyond Your Military Service
Jan. 15, 2021
Whether you separate after only a few years or retire with 20 plus, know the steps you can take to continue to build wealth throughout and after your military career. Learn more at Investor.gov/military and DoD’s Financial Readiness website.
INVESTMENTS CAN HELP YOU BUILD WEALTH
Investments in stocks, mutual funds, and ETFs can help you build wealth over time. For example, $1000 put into a retirement account that earns on average 7% per year, would more than double in just over 10 years. The sooner you start investing, the longer your money can grow before you need it. But unlike most bank deposits (which pay much less), the money you invest in stocks and mutual funds is not federally insured, so you could lose your “principal,” which is the amount you’ve invested. For more on getting started investing, such as how investment products and the markets work, check out Investor.gov and use the Compound Interest Calculator to see how your investments can grow your wealth over time.
Take advantage of the Thrift Savings Plan
One of the key building blocks for a service member to build wealth is the Thrift Savings Plan (TSP), the military’s version of a 401(k). The TSP offers tax advantages, low fees, and diversification. With the TSP, select an investment strategy that makes sense given your time horizon (when you’ll need the money) and risk tolerance (how much investment risk you’re willing to take on). If you are under the Blended Retirement System (BRS), you are automatically enrolled in the Lifecycle Fund (L-Fund) that allocates your investments based on your projected retirement date, and you receive agency matching. If you are under the Legacy system, you need to enroll in TSP and select an investment strategy.
When your military career ends, even if you move to the civilian sector, your money can stay invested in the TSP. Keep in mind, unless you continue as a reservist or take a civilian federal job, you can’t keep contributing (i.e. invest new money) to your TSP, but maintaining a TSP account after separating may provide flexibility in your retirement planning. You can also move some or all of your money out of the TSP after separating by rolling your funds into an individual retirement account (IRA). You may also have the option to roll over your TSP into a new employer’s 401(k) account. If you need to access retirement money early, you can withdraw funds from your TSP account, but if you do before the age of 59 ½, be prepared to pay penalties and taxes. Check out TSP.gov or call 1-877-968-3778 to learn more or contact a Personal Financial Manager or Counselor at your military installation and visit the Office of Financial Readiness website at www.finred.usalearning.gov.
RISK AND RETURN
Don’t let anyone tell you otherwise: all investments involve some degree of risk. If you plan to buy securities – such as stocks, bonds, mutual funds, or ETFs – it’s important that you understand that you could lose some or all of the money you invest. Whether you’re choosing among TSP’s investment strategies or investing outside of the TSP, keep in mind the potential for higher return typically comes with higher risk. Low risk products like bank savings accounts and Treasuries (the G-Fund in the TSP) provide protection for your principal, but offer modest returns. Stocks and stock funds (such as the TSP’s C, S and I funds) have the potential for higher returns, but come with higher risk. The longer your investing time horizon, the more risk you can generally afford to take. For example, a person who will not need their money for 30 years can be more aggressive because they have decades to weather market corrections. Someone who needs their money in the near term (say, under five years) may want to have a greater portion of their portfolio devoted to more conservative investments since there is less time to recover from any market drops. Target date funds (such as the TSP’s L-Funds) are designed to be more aggressive earlier in your career when your time horizon is long, and adjust to a more conservative mix of investments as you approach retirement.
Don’t put all of your eggs in one basket – that may seem like a common-sense concept, and in investing, it’s an important strategy called diversification. One way to diversify is to invest in products like mutual funds, ETFs and the TSP that spread your money among dozens or hundreds of stocks, bonds or other investments so that if one particular company or sector experiences losses, your other holdings may help insulate you from losses. The TSP provides a selection of funds that provide diversification across different kinds of investments. Check out TSP.gov.
One of the risks of investing is that markets can go up and down over relatively short periods of time, and the value of your investments can fluctuate – that’s called volatility. Various events can cause market volatility, such as a pandemic. You can’t control how these forces impact the market, but you can take steps to lessen the impact on your investments. Having different kinds of investments reduces the impact of volatility. One of the best ways to manage the impact of market volatility on your portfolio is to create and stick with a risk-appropriate, diversified investment plan, regardless of whether the markets are up or down. If you have the right investment plan that takes into account your financial goals and risk tolerance you shouldn’t need to make rash decisions during times of market volatility. Ultimately, it’s time in the market, not timing of the market that generally leads to long-term investing success. Speak to a base Personal Financial Manager (PFM) to learn more about navigating volatility and to help you determine your financial goals and risk tolerance.
INVESTMENT FEES: HOW THEY MATTER AND HOW TO COMPARE
All investments have fees, and even small differences in fees from one fund to another can add up to substantial differences in investment returns over time. A fund with high costs must perform better than a low cost fund to generate the same returns. For example, you would have nearly $45,000 more at the end of twenty years, (assuming a 7% return) if you invested $100,000 in a TSP fund which charges .042% in annual fees, rather than a fund which charges 0.66%. When considering fees, check the fund’s prospectus or use FINRA’s Fund Analyzer Tool, which allows you to compare the fees of more than 30,000 mutual funds, ETFs and other funds. One of the great benefits of the TSP is its low fees. If you start a new job after your military service, compare the fees of all of the employer’s 401(k) investment options so that you know how much each will cost over time.
RED FLAGS OF INVESTMENT FRAUD
Scams often begin with a sales pitch, whether in person, on the phone, over the Internet, or via social media channels. Many sales pitches promise investors high returns with little or no risk, so don’t get fooled because the potential for higher returns typically comes with higher risk.
Scammers also love to pressure investors to make quick decisions, without the benefit of research or careful consideration. Don’t be rushed – no legitimate investment opportunity requires you to make a rash decision. Be extra careful if you are asked to pay for investments with a credit card, a gift card, or by wiring money overseas. Check out more Red Flags of Investment Fraud on Investor.gov.
RESEARCH THE INVESTMENT AND THE INVESTMENT PROFESSIONAL
One way to protect yourself when considering investments outside of the TSP is to check the background of any investment professional before investing your hard-earned money. Do this by going to the SEC’s Check Out Your Investment Professional tool on www.Investor.gov and typing in the name of the person or firm. You can confirm if the person is licensed, and review their employment history and any customer complaints or disciplinary actions.
You can research investment products, like stocks, bonds, ETFs, and mutual funds on the SEC’s EDGAR database. There you can find more about the company’s officers and directors, finances, business operations and risks.
Remember, the end of your military career is not the end of your investing journey. By taking steps to carefully research and consider your investments, you can continue building wealth into your next career chapter.
If you have questions about your investments or your investment professional, call the SEC’s investor assistance line (800) 732-0330 or email Help@SEC.gov. Follow us on Twitter and Facebook and sign up for updates on investing-related topics and news. Report possible securities fraud to the SEC online at www.sec.gov/tcr.
This bulletin represents the views of the staff of the Office of Investor Education and Advocacy. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This bulletin, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.