Financial planning may sound premature to you while you’re still in a military academy or ROTC program. However, when you imagine yourself 40 years from now, what does your life look like? Maybe you have a spouse, three kids in college, a family dog and cat, and aging parents who may need your assistance.
Although no one wants to imagine themselves struggling, it can happen if you don’t prepare yourself for real-life situations. Taking advantage of available retirement plan programs early in your military career — giving your financial contributions the maximum amount of time to grow before you need them — is the best way to ensure your future financial stability.
While on active duty, your retirement savings options are the Blended Retirement System, which includes access to federal military retirement benefits if you stay in for 20 years and the Thrift Savings Plan (TSP) which is similar to a civilian 401(k) plan, and other individual retirement accounts.
What Is the Blended Retirement System and the Thrift Savings Plan?
The 2001 Defense Authorization Act established the Thrift Savings Plan, or TSP, as a retirement savings and investment plan for all federal employees, including all servicemembers of the U.S. military. In 2018, the military started automatically enrolling all new servicemembers into the TSP through the Blended Retirement System (BRS).
Here’s a brief TSP fund breakdown to help you understand how it works so you can maximize its benefits.
TSP Fund Breakdown
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 them, usually when you reach retirement age. On the other hand, when you select a Roth account, you fund it with your 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.
2024 TSP Update
In 2023, the TSP elective deferral was limited to $22,500 per year. However, the IRS announced an increase in the deferral limit for the TSP in 2024 to $23,000 per year.
If you are a cadet or midshipman, the Department of Defense will automatically contribute 1% of your base pay or active duty pay to your TSP starting 60 days after you begin active service. This contribution continues through your 26th year of service.
After your second year, the DoD will match your voluntary contributions up to 5% of your base pay. As an example, if you contribute 5% of your base active duty pay, the DoD will match the full 5% of your contribution for a total of 10% contribution to your TSP. Don’t leave this money on the table. Make sure you contribute up to the DoD’s match.
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 your investment decisions.
You can allocate your TSP savings to 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.
Federal Military Retirement Benefits: The BRS
The Blended Retirement System (BRS) is available for servicemembers who enlist after January 1, 2018. It combines the defined contribution plan of the TSP with a defined benefit pension plan.
With the BRS, if you retire at 20 years of service, you will receive a pension that is equal to 40% of your base pay. For every additional year that you stay in the military, you will receive a multiplier of 2% toward your retirement savings.
Individual Retirement Accounts
IRAs are another great way to supplement the retirement savings you’re accruing through your TSP contributions and federal retirement benefits.
In 2024, the max you can contribute to a traditional or Roth IRA account is $7,000 per year.
Savings Plans for Military Members
In addition to investment and retirement accounts, there are also savings accounts available to military members.
Savings Deposit Program
The Department of Defense offers the Savings Deposit Program (or SDP) to qualified active-duty military members who meet the following criteria:
- Have been deployed for 30 days consecutively or at least one day in each of three consecutive months
- Are serving in a combat zone that is deemed eligible
You can save up to $10,000 in these accounts. The best thing about an SDP account is the extraordinary 10% interest rate you can earn, which is much higher than any civilian high-yield savings account.
Military Savings Accounts
Regular credit unions and banks offer savings accounts that are expressly designed for military members and their families. Many of these accounts offer special provisions or benefits, like higher interest rates on contributions.
Military savings accounts are different from SDPs because they allow you to save more than the $10,000 SDPs are limited to.
Learn More About Financial Planning as a Cadet or Midshipman
The best financial planning advice is to start as soon as possible in order to get ahead. The options available to you as a member of the military are vast and can certainly feel overwhelming.
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The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement. Photo by Navy Midshipman 3rd Class Jonathan Hua. University of New Mexico midshipmen participate in the endurance race at the University of Colorado Naval ROTC drill meet in Boulder, Colo., March 9, 2024. Naval Service Training Command supports 98 % of initial officer and enlisted accessions training for the Navy, as well as the Navy’s Citizenship Development program.