Imagine yourself 40 years from now. You have a spouse, three kids in college, a family dog and cat, and aging parents who may need your assistance. How do your personal finances look? Do you live in the comfortable home of your dreams without worrying about your income, or do you struggle to make ends meet? No one wants to imagine themselves struggling, but it can happen if you don’t prepare yourself for real-life situations.

What can you do to ensure that doesn’t happen to you? Invest in your future self — your retirement — now. The longer you wait, the more money you will have to divert from the life you dream of having. When you think about all of the tax benefits and investment opportunities available, you’ll start saving for retirement as soon as you can.

Take advantage of the available retirement plan programs and rest assured that you are taking the most responsible step forward into your future.

What is the Thrift Savings Plan?

The 2001 Defense Authorization Act established the TSP as a retirement savings and investment plan for all federal employees, including all servicemembers of the U.S. military. Starting in 2018, the military will automatically enroll all new servicemembers into the TSP.

How does the TSP work and how will it change in 2018?

When you enroll in the TSP, you elect a certain amount of your monthly salary to go into a retirement account. You also decide how to allocate your contributions between a traditional account and a Roth account. With a traditional account, the federal government will not tax the funds until you start withdrawing funds. On the other hand, when you select a Roth account, you fund it with after-tax income and typical distributions in your retirement are tax-free. Both options have advantages, and your decision depends on whether or not you think taxes will be higher or lower at the time of your target retirement date.

You may hear your civilian friends and family talk about the attractive benefits that come with their 401(K) plans, which private sector companies often offer to their employees. Good news for Cadets and Midshipmen on the verge of starting their military careers: the TSP has a lot of features similar to a competitive 401(K) package and planned changes in the coming years will likely mean more advantages for servicemembers.

In 2016, you can contribute up to $18,000 per year to your TSP. While that limit has not changed in recent years, effective in January 2018, the government will automatically contribute 1% of your base pay to your TSP for your first two years of military service. Starting your third year of service, the government will match every dollar that YOU contribute, up to 5% of your base pay.

When you hear your friends or family members with 401(K)s talk about “free money,” they are referring to features like this one!

Investments: How Your TSP Grows

The TSP offers six investment funds to help build the right portfolio allocation. Your long-term career plans, your financial goals, and your risk tolerance level will all impact in your investment decisions. You can allocate your TSP savings into any combination of the following investment Funds: 

·         Government Security Fund (G)

·         Fixed Income Fund (F)

·         Common Stock Fund (C)

·         Small Cap Stock Fund (S)

·         International Stock Fund (I)

·         Lifecycle Fund (L)

The Federal Retirement Thrift Investment Board directly manages the G Fund — a lower-risk fund most similar to a cash investment. It buys government-guaranteed U.S. Treasury securities that provide interest income.

The F, C, S and I Funds provide index fund options that come with varying levels of risk and return.

Lastly, the L Fund invests in a combination of the five individual TSP Funds.

You can visit the official TSP website here to read the specifics of each fund.

How to Proceed 

For assistance in constructing your portfolio, you can consult a number of reputable websites. Google “Determine Asset Allocation,” for starters. Vanguard, Bankrate, and other sites provide simple questionnaires that can help you determine the right portfolio for you. The questionnaire results often come with allocation charts, showing a breakdown of how to allocate your investments, the rough percentage of your money that should go into cash, bonds and stocks.  

Remember, every investor has a different tolerance for risk and performance. These questionnaires will help you understand your own tolerances, and ultimately the proper allocation model for your investments. Putting thought and research into the way you save for retirement will help you establish a long-term plan, and prevent you from making spontaneous emotional decisions as the market inevitably fluctuates. 

Investment Strategies 

While we can’t predict the exact future of the stock market, we can use the past as a general guide for what to expect.

In addition to filling out the questionnaires, you can look at the strategies of different portfolios to pick an allocation model. Study those that invest in both index funds and Treasury bonds, and at varying percentages of each. Look at long-term portfolios and short-term portfolios. For example, you will see that greater allocation to fixed income yields lower, yet more stable returns. So, if you’re investing to meet short-term financial goals, invest in bonds for a reliable return.

Remember, a diversified portfolio typically reduces risk while providing for more consistent returns. By modeling your investment allocation in C, S and I funds after the S&P 500, your portfolio will have more diversification. Also, using both the G and F funds for fixed income, adds diversification. With the right time horizon, the diversified portfolio will provide more stable returns than a non-diversified portfolio.

Start saving more today

Under the new TSP, servicemembers must play a greater role in managing their own retirement savings. If you have any questions about how to allocate your TSP funds, please contact AAFMAA Wealth Management & Trust. Our team of advisors will walk you through how to choose the allocation model that can help you achieve your goals. Visit wealth.aafmaa.com, email [email protected] or call 888-961-5427, option 3.

This document has been prepared by AAFMAA for informational purposes only and does not constitute, and is not intended to constitute, the giving of advice or the making of a recommendation. No person is authorized to use this document for any purpose other than the purpose stated above. Any opinions or estimates contained herein are subject to change without notice and are not a guarantee of future events or results. Information contained in this document has been obtained from sources believed to be reliable but there is no guarantee of such. This document is not intended to be used as a substitute for the exercise of independent judgment.

This information and any discussion should not be construed as a personalized and individual client recommendation, which should be based on each client’s investment objectives, risk tolerance, and financial situation and needs. Investments and opinions are subject to change due to market conditions and the opinions and guidance may not be profitable or realized. Any information presented is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized.