I am currently on active duty in the Air Force. I am in the mixed pension system and I invest 15 percent of my base salary. I also invest in ETFs on a personal account. Is it wise? Or should I just put all my extra money into my TSP? My goal is to have some type of passive / investment income other than my pension after 20 years of service to support me until I am 59 and a half.
May is Military Appreciation Month, and your question gives me a great opportunity to provide information not only to you but to all of our brave men and women in uniform.
All in all, it looks like you’ve got a good start on preparing for your future, so congratulations on that. I was also encouraged by a recent study from Schwab which found that you are in good company; like you, 83 percent of the current military believe they are making good progress toward retirement savings.
That said, while you can expect to be in the military for 20 years, your military career might end sooner due to changes in your health or personal goals. For this and other reasons, flexibility is not only the key to air power, but also to saving and investing for retirement, regardless of your line of service or how long you stay. . Here are some tips to consider.
The importance of savings
The reality is that less than 20 percent of the military serve the 20 years it takes to qualify for a pension, so you need to be prepared. And even if you stay 20 years, the amount you receive each month is usually not enough to cover. all your financial needs. In fact, whether you’re in the military or not, it’s extremely difficult to work for just 20 years and earn and save enough to live on for the next 40 years or more. Additional savings are essential.
Also, keep in mind that with a few exceptions, you typically need to be 59 and a half or older to withdraw retirement funds from the Thrift Savings Plan (TSP), 401 (k), and IRAs without having to pay a 10% early withdrawal penalty.
As you point out, all of this can create a financial gap between retirement from the military and age 59 and a half.
Bridging the gap
Two common ways to close this income gap are to have a second career in the civilian sector and additional savings and investments outside of qualified retirement accounts.
A civilian job can be a great way to use your valuable military skills and training. That said, the less you want to rely on work to cover that income gap and the more you delay claiming Social Security, the more savings and investment become. Investing inside and outside the TSP can give you maximum leeway.
Basic TSP training
While all service members have access to the TSP, only those under the Mixed Retirement System (BRS) receive automatic or matching TSP contributions. You are eligible to receive matching dollars after 2 years of service under BRS. In short, when you contribute 5 percent of your base salary to the TSP, your service branch pays an amount equal to 4 percent with an automatic contribution of 1 percent. So you get a total of 5%.
If you stop your base salary TSP contributions, your matching contributions will also stop, but the automatic 1% contributions will continue.
After completing two years of service, you are “invested” in the TSP, which means when you leave, the money goes with you. On the other hand, it usually takes 20 years of service to be eligible for Is the old pension or BRS. If you don’t stay that long, you keep your earned PST balances, but you won’t receive the military pension.
Whether you contribute voluntarily or automatically, investing your savings in the TSP is a great way to put money aside for retirement. It is important to always contribute at least 5% of your base salary, as matching contributions under the BRS only apply to base salary, not special or incentive pay or bonuses.
Take full advantage of TSP
You can contribute more than 5%, typically up to $ 19,500 in 2021, but you need to be careful not to overcontribute too early in the year. This could prevent receiving matching dollars for the remainder of the year. However, you may be able to contribute over $ 19,500 to the TSP with special compensation while you are deployed or if you are 50 or older. Raising your TSP contributions with extra pay when you can is a great way to prepare yourself for the road ahead.
If you’re a Reserve or National Guard member with access to a 401 (k) through a civilian employer, you’ll need to consider both accounts when considering the maximums you can carry forward. If you invest too much in either of these plans, you risk incurring tax penalties or losing matching funds.
Save outside of the TSP
Saving money outside of the TSP is also very important. Here are some things to think about:
- First, everyone needs an emergency fund to protect themselves against the unexpected. While only 16% of the current military see building an emergency fund as a top priority, having enough money to cover three to six months of necessary expenses in a safe and secure account is crucial.
- Plus, a bank or brokerage account allows you to contribute and withdraw as much as you want. However, there is no tax deduction and investment income will not be tax-sheltered, so it is important to use smart tax strategies.
- And finally, contributing to a Traditional or Roth IRA can be a great way to increase retirement savings for you or a working or non-working spouse.
Also be aware of your risk tolerance and time horizon, no matter how much you save or where you invest.
Life after the army
Sounds like you’re on your way to retirement, but remember to plan ahead for other changes when you leave the military – from health care to housing to life insurance. If you need help with any of these aspects, talk to a personal financial advisor or financial advisor. Good luck and thank you for your service.
Have a personal finance question? Write to us at [email protected]. Carrie can’t answer questions directly, but your topic may be considered for a future article. For questions relating to the Schwab account and general inquiries, contact Schwab.
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The information provided here is for general information purposes only and should not be construed as an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor should review an investment strategy suited to their own situation before making any investment decision.
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