If you’re a veteran or active duty servicemember, then retirement concerns—no matter your age—have certainly crossed your mind.
Depending on your time in service, that pension may not fully cover your post-military lifestyle.
It’s never too late (or early) to take advantage of servicemember investment and savings programs.
Here are three great ways for veterans and active duty members to build a good defense against retirement planning pitfalls.
1. Thrift Savings Plan (TSP)
The Thrift Savings Plan offers five mutual funds and one lifecycle fund from which to choose.
- G Fund: Government Securities Investment Fund—G Fund invests in short-term, non-marketable U.S. Treasury securities.
- F Fund: Fixed Income Index Investment Fund—F Fund tracks the Barclays Capital U.S. Aggregate Bond Index. Assets are housed in a separate account.
- C Fund: Common Stock Index Investment Fund—C Fund is managed and housed in a separate account to duplicate the S&P 500 Index.
- S Fund: Small Cap Stock Index Investment Fund—Earnings are comprised of dividend gains and tracks the Dow Jones U.S. Completion Total Stock Market Index.
- I Fund: International Stock Index Investment Fund—I Fund tracks and replicates the performance of MSCI EAFE Index (Australasia, Europe, and Far East)
- L Funds: Lifecycle Funds—Lifecycle Funds invest in a mix of the funds listed above, based on a targeted retirement date. Investments involve more risk for younger investors while minimizing risk as age of retirement draws near.
TSP has its advantages. For one, it’s a cheap investment vehicle—really cheap.
Last year, the average net expense was 0.29 for each $1,000 investment. And that’s on the low side, even for the least expensive index funds. That’s why it’s such a bargain.
Furthermore, the long-term investment and the earnings that come with it more than make up for than any nominal fees you may be charged.
Here’s How It Works
Investors choose a percentage they wish to be deducted from each paycheck, with a default deduction of 3%. The maximum yearly contribution is $18,000 per year.
You may choose the Traditional TSP option or the Roth TSP option.
With the Traditional TSP, contributions are pre-tax. Taxes on earnings are paid upon withdrawal of funds.
The Roth TSP functions much like a Roth IRA. Taxes are paid on contributions now and money grows tax-free.
The TSP is a viable investment option for low-ranking military personnel as well as seasoned active duty service members.
The DoD Defense Savings Deposit Program is a vehicle that allows deployed military service personnel a vehicle to save money while serving in designated combat zones.
If you’ve been deployed in one of the designated combat zones for at least 30 days, you’re eligible for the program.
Up to $10,000 per deployment can be deposited into your account.
Here’s How It Works
Money deposited into the account will earn 10% interest annually. The account must remain open for the duration of your combat deployment. Deposits will end after you leave combat.
Once you return to your permanent duty station, funds deposited into your account will continue to earn interest for 90 days. However, the account will be closed 120 days after leaving the combat zone.
There are special provisions for early withdrawal of funds. Funds will be distributed in your bank account or by check, according to your request.
If you’re receiving tax-free combat pay, you can make your tax-free money work for you by putting it in a Roth IRA or TSP Roth.
Here’s the kicker: You get the two-punch benefit of tax-free going in and tax-free coming out.
It doesn’t get better than that.
Individuals can contribute up to $5,500 in Roth accounts this year. If your combat pay exceeds that amount, consider investing the rest in your spouse’s Roth IRA.
Individuals over the age of 50 can contribute an additional $1,000 per year to catch up for lost time and investments.
It may be tempting to splurge with that extra cash, but you’ll get more bang for your buck if you park it in your IRA.
Time is on Your Side
Military personnel should take advantage of the investment vehicles the military provides, particularly since most service members do not remain active military for the 20 years required for retirement.
Even if you plan to retire from the military, those plans could eventually change. Feather your nest now so you can have a soft place to fall should crisis hit.
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