Personal Finance | May 18, 2021

What's the Best Way to Save if I'm Retiring from the Military?

Key Points

  • Retiring from the military requires special planning not only because of unique benefits, but because you’re often separating in your 40s or even 30s and not fully “retired.”

  • With the new Blended Retirement System, saving and investing in the Thrift Savings Plan for servicemembers is more important than ever—but you can overdo it.

  • Savings and investing inside—and outside—of the TSP can help you secure a safe landing no matter how long you’re in the military.

Dear Carrie,

I'm currently serving active duty in the Air Force. I’m in the Blended Retirement System and invest 15 percent of my base pay. I also invest in ETFs in a personal account. Is this wise? Or should I just put all of my extra money in my TSP? My goal is to have some type of passive/investment income other than my pension after 20 years of service to get me by until I turn 59 ½.

—A Reader

Dear Reader,

May is Military Appreciation Month, and your question gives me a great opportunity to provide some insights not only to you, but also to all our brave men and women in uniform.

Overall, it sounds like you're off to a strong start preparing for your future, so I commend you for that. I was also encouraged by a recent Schwab study that found you’re in good company; like you, 83 percent of current servicemembers feel they are making good headway toward saving for retirement.

That said, while you may expect to be in the military for 20 years, your military career could end earlier due to changes in your health or personal goals. For that reason and others, flexibility is not only key to airpower, but to saving and investing for retirement— regardless of your branch of service or how long you stay in. Here are a few tips to consider.

The importance of savings

The reality is that fewer than 20 percent of those in the military serve the 20 years that are required to qualify for a pension, so you need to be prepared. And even if you do stay 20 years, the amount you receive each month is generally not enough to cover all your financial needs. In fact, whether you’re in the military or not, it’s extraordinarily difficult to work for only 20 years and earn and save enough to live off for the next 40 or more years. Additional savings are essential.

Also remember that with few exceptions, you generally have to be 59½ or older to withdraw retirement funds from the TSP (Thrift Savings Plan), 401(k)s and IRAs without having to pay a 10% early withdrawal penalty.

As you point out, all of this can create a financial gap between retiring from the military and reaching 59½.

Bridging the gap

Two common ways of filling this income gap are having 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 this income gap and the longer you defer claiming Social Security, the more important saving and investing become. Investing inside and outside the TSP can provide you with maximum room to maneuver.

TSP basic training

While all service members have access to the TSP, only those under the Blended Retirement System (BRS) receive automatic or matching TSP contributions. You’re eligible to receive matching dollars after 2 years of service under BRS. In short, when you contribute 5 percent of your basic pay to the TSP, your branch of service contributes an amount equal to 4 percent along with an automatic 1 percent contribution. So, you get a total of 5 percent. If you stop your TSP contributions from basic pay, your matching contributions will also stop. However, the automatic 1 percent contributions will continue.

After completing two years of service, you're “vested” in the TSP, which means when you leave, the money goes with you. On the other hand, it generally takes 20 years of service to be eligible for either the legacy pension or BRS. If you don’t stay that long, you keep your vested TSP balances but won’t receive the military pension.

Whether you’re voluntarily contributing or automatically enrolled, investing your savings in the TSP is a fantastic way to set funds aside for retirement. It’s important to always contribute at least 5 percent of your basic pay because the matching contributions under BRS only apply to basic pay—not special or incentive pay or bonuses.

Taking full advantage of the TSP

You can contribute more than 5 percent, generally up to $19,500 in 2021, but you have to be mindful of contributing too much too early in the year. That could cut off receiving matching dollars for the remainder of the year. However, you may be able to contribute more than $19,500 to the TSP with special pay while deployed or if you're 50 or older. Increasing your TSP contributions with additional pay when you can is a great way to prepare for the road ahead.

If you’re a member of the Reserve or National Guard with access to a 401(k) through a civilian employer, you’ll need to consider both accounts when looking at the maximums you can defer. If you put too much into either plan, you might face tax penalties or lose out on matching funds. 

Saving outside of the TSP

Saving outside the TSP is also super important. Here are a few things to think about:

  • First, everyone needs an emergency fund to safeguard against the unexpected. While only 16 percent of current servicemembers consider building an emergency fund a top priority, it’s crucial to have enough money to cover three to six months of necessary expenses in a safe and secure account.
  • In addition, a bank or brokerage account allows you to contribute and withdraw as much as you want. However, there's no tax deduction, and investment earnings won’t be tax sheltered, so it’s important to use tax smart strategies. 
  • And finally, contributing to a Traditional or Roth IRA can be a great way to boost retirement savings for you or a working or nonworking spouse. 

Also be mindful of your risk tolerance and time horizon no matter how much you save or where you invest.

Life after the military

It sounds like you’re on the right track for retirement, but don’t forget to plan ahead for other changes when you leave the military—from health care to housing to life insurance. If you need help on any of these, speak with a Personal Financial Counselor or financial advisor. Good luck, and thank you for your service.

Have a personal finance question? Email us at Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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