One of the great things about the military is if you do your 20 years, you should be set for the rest of your life. The military pension will give you 50% of your salary for the rest of your life, you will have free health care for you and your dependents, and if you save regularly in your Thrift Savings Plan you might not even have to work after you retire from the military if you do it right (if you want more tips about how to gain financial independence take a look at The Military Guide to Financial Independence and Retirement.
The Thrift Savings Plan (TSP) is the US government’s employee funded retirement program that federal employees and uniformed service members are eligible to use. It is a great program and allows federal employees to automatically pay into their retirement accounts. For certain federal employees (employees under the Federal Employees Retirement System) the government will even match your contributions up to a certain amount. This is essentially free money to them! Unfortunately this is not true for uniformed service members, but contributing into your Thrift Savings Plan is still a great investment in your future.
The TSP also can function similarly to a mutual fund, whereas dependent on the type of fund selected, it will invest it into a “basket” of funds. You can enroll in TSP by going into your myPay account and changing the contribution settings there. What is nice about TSP is that you are never seeing that money and it is automatically invested. That way you can save for your future, instead of letting that money burn a hole in your bank account (where you might spend it on silly things like new rims for your car).
Save for your future now, or you may regret it!
Traditional Contributions vs. Roth Contributions
The main draw to a Roth account is that you pay your taxes up front on the money going into your account. This means that the growth of that money in your TSP account is not taxable when you withdraw that money. This involves paying more money now, so you can get even more money later. With traditional contributions you pay no taxes now, so less is taken out of your paycheck, but when you withdraw that money (assuming you will be in a higher tax bracket) you will pay higher taxes on that earnings you made. Through the myPay site you can also determine if your contributions are going into a Roth account or a traditional account.
G Fund: Government Securities Investment Fund. As of Nov 18, 2013 14.2497% return. The objective of this fund is to keep pace with inflation while avoiding the risks of market fluctuations. Essentially it is a low risk investment that you shouldn’t lose money on.
F Fund: Fixed Income Index Investment Fund. As of Nov 18, 2013 15.8592% return. The goal for this fund is to match the performance of the Barclays Capital US Aggregate Bond Index which represents a broad spectrum of the US bond market. This fund is a little more risk than the G Fund, and strives to provide the investors of this fund in stable “income” meaning you should consistently get money from this fund if invested in it on a monthly basis by withdrawing your “income.”
C Fund: Common Stock Index Investment Fund. As of Nov 18, 2013 23.0801% return. This fund is also an index fund that tries to match the performance of the Standar and Poor’s 500 Index. This is a broad mix of 500 stocks from mid to large sized US companies. This is more risk than the F Fund, but also has more potential profit dependent on market risks and performance.
S Fund: Small Cap Stock Index Investment Fund. As of Nov 18, 2013 32.1442% return. Again this fund can carry more risk than the previous funds and tracks the Dow Jones U.S. Completion Total Stock Market Index which consists of a large spectrum of stocks in US companies that are not included in the S&P 500. Small Cap markets can have a tendency toward volatility.
I Fund: International Stock Index Investment Fund. As of Nov 18, 2013 25.1713% return.This fund’s objective is to match the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index by collecting stocks from companies that are in Europe, Australia, Asia, and the Far East. The performance of this fund is dependent on the local economic conditions of the area.
L Income: As of Nov 18, 2013 16.6856% return. This is similar to the F Fund in that it is designed for people with the goal of withdrawing from their TSP account on a monthly basis for an “income.” It is meant to partially or fully replace your working income. What is different is that this fund, as opposed to the F Fund, is a mix of the other funds with 74% going to G Fund for principle preservation.
Lifecycle Fund: This fund depends on your planned retirement date and are split into decades dependent if you want to retire in 2020 (21.4341% return), 2030 (22.9744% return), 2040 (24.2472% return), or 2050 (13.6947% return). These years are the maturity dates of these funds. At the beginning of the funds life, it will be more aggressive in it’s asset allocation. For example at the beginning of the L 2050 Fund, there is 43% invested in the C Fund and only 4.17% invested in the G Fund. Since you have more time to retire, you can absorb volatility better than some one who is retiring in 2020. This is why it is invested heavier into the C Fund which is subject more to market conditions than the G Fund. By the year 2020, the L 2020 fund will have 74% invested into the G Fund because there is no time to accept market loses, and the goal shifts to the preservation of principle and gains. To see the L 2020 Fund move from its inception to the year 2020 please visit the TSP website.
*Information for this article is mostly taken from the TSP.gov website. I am not a financial advisor or accountant. Opinions expressed in this article are strictly opinions and should not be counted on for your investment decisions. Any money invested in the TSP or any other financial vehicle is subject to risk.