Helping Service Members Secure Financial Readiness
Retirement may seem distant, and as a member of the military, it may be the least of your concerns; however, saving for retirement is one of the most important ways to ensure your long-term financial security—and knowing how to optimize your retirement benefits is crucial.
The SEC’s Office of Investor Education and Advocacy wants to help you understand how to make those work for you, which is why it recently published a guide that outlines the basics of retirement planning, investing, and saving—including how to avoid fraud and how to select an investment professional—and provides detailed information about the military-specific retirement options.
Financial Readiness 101
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 percent. If you joined military service on or after January 1, 2018, you are automatically under the BRS.
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.
Thrift Savings Plan (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.
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.
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.
A stock is an instrument that signifies an ownership position (called an equity security) in a company, and a claim on a proportional share in its assets and profits.
A bond is a debt security, similar to an IOU. When you buy a bond, you are lending money to the company.
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.
SEC Investment Management Division Director Dalia Blass and colleagues from the SEC’s Los Angeles office and the Office of Investor Education and Advocacy recently traveled to Navy Base San Diego to talk about financial readiness. Training topics included the fundamentals of investing, impact of fees, retirement planning, and recognizing the red flags of fraud. Joining the SEC officials were Navy service members who serve as Command Financial Specialists to their units.