5 Investing Tips for Military Members
It’s easy to get started with investing when you’re in the military — you can contribute to the Thrift Savings Plan, which has some of the lowest-cost investment options available. But you’ll need to make some decisions that can have a big impact on the growth of the account. Here’s what military members need to know to make the most of their investing opportunities.
Get Free Money From the TSP
One thing that’s even more valuable than investing gains is free money. If you’re in the Blended Retirement System, the Department of Defense will match your TSP contributions up to 5% of your pay. Make investing at least that much one of your top priorities; don’t leave free money on the table.
If you aren’t in the Blended Retirement System, you won’t get matching contributions, but you can still benefit from the TSP’s tax advantages and low-cost investments.
Benefit From Regular Investing
Another benefit of the TSP is that the money is automatically invested from your paychecks on a regular basis — so you don’t have a chance to second-guess or worry about trying to time the stock market, which is very difficult to do. Otherwise, people tend to make mistakes; sometimes waiting too long and buying when prices are high, then panic-selling when prices go down. Instead, you’ll invest a set amount with each paycheck, which will buy you more shares when prices are low and give you the opportunity for extra growth when they rise, a concept called dollar-cost averaging.
“Dollar-cost averaging can help take the emotion out of investing,” said Shay Cook, financial readiness manager with the FINRA Investor Education Foundation.
You’ll also keep investing regularly before you have a chance to spend the money on anything else, which is the best way to build up your account.
Match Your Investments to Your Time Frame
The TSP simplifies your investing options: You can choose from five index funds, which invest in large companies (C Fund), small- and medium-sized companies (S Fund), international companies (I Fund), bonds (F Fund) and government securities (G Fund). You can create a portfolio based on your time frame and risk tolerance.
But many young service members make the mistake of investing too much of their TSP money in the G Fund because they think it’s safe. The G Fund doesn’t have stock market risk, but it has inflation risk — over the long run, the returns might not keep up with rising inflation. Stock funds, on the other hand, have more volatility over the short run but the potential for larger gains in the long run. When you’re young, you have time to ride the market’s ups and downs with the goal of higher returns for the future. Then you can gradually shift to more conservative investments as you get closer to withdrawing the money in retirement.
If you don’t want to make these decisions yourself, the TSP has an easy investing option that makes these moves for you — the L Fund, which is a lifecycle or target-date fund. The L Fund creates a portfolio of the TSP’s funds based on your investing time frame. You choose the L Fund with the date closest to the time you plan to start withdrawing the money in retirement — such as L2040 if you plan to start withdrawing the money in 2040 (which can be later than the date you plan to retire from the military, if you expect to work in another job for a while). The fund invests primarily in stock funds when you are young and gradually becomes more conservative through time, shifting more of the money into the fixed-income and government securities funds as you get closer to retirement.
Make the Most of the TSP’s Tax Benefits
There are two ways to make TSP contributions — traditional or Roth. Traditional TSP contributions lower your taxable income now, but you’ll have to pay taxes when you withdraw the money in retirement. Roth TSPs don’t provide a tax break for contributions, but you can withdraw all of the money that grows in the account tax-free in retirement. If your tax bracket is lower now than it will be in the future, you’ll benefit the most from making Roth TSP contributions. It’s also helpful to have a pot of money you can tap tax-free in the future when many of your other savings and income will be taxable.
“I think that many military families do not fully understand the difference between the traditional and Roth TSP options, so they may not be contributing to the plan that will be the most advantageous for them,” said Lila Quintiliani, senior program manager for Military Saves. “Typically younger service members are in a low-income tax bracket anyway, so it would make sense for them to contribute to the Roth TSP because they don’t need the tax break that the traditional TSP offers.”
In other words, they’ll benefit more from the tax-free withdrawals from the Roth TSP in the future than they would by getting a tax break now for making traditional TSP contributions.
Save Extra Money in a Flexible Roth IRA
If you get a stimulus check, tax refund or other extra money, you can use some of that to invest in a Roth IRA, which is a flexible retirement savings account. You can open a Roth IRA with a brokerage firm, bank or mutual fund company and choose from a variety of investments — you may have dozens of mutual funds to choose from, or you can buy individual stocks or exchange-traded funds. You don’t get a tax break for your contributions, but you can withdraw all of the money from the account tax-free after age 59 ½, as long as you’ve had a Roth IRA for at least five years.
And a Roth IRA has extra flexibility: You can withdraw your contributions at any time without taxes or penalties for any reason, making a Roth a great backup emergency fund in addition to a retirement savings account.
You can contribute up to $6,000 to a Roth IRA in 2021, or $7,000 if you’re 50 or older — and you can still save in the Thrift Savings Plan, too. To qualify to make Roth IRA contributions for 2021, your modified adjusted gross income must be less than $140,000 if single or $208,000 if married filing jointly.
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Last updated: May 13, 2021