Financial Tips for New Military Members and Retired Military Members
Whether you’re just starting out in the military or just about to retire, you’ll need to make some important decisions that can have a long-term impact on your finances. Here’s what you need to do to make the most of your military benefits at these pivotal points in your life.
Financial Tips When Starting Out in the Military
When you’re starting out in the military, your income may be low and it can be challenging just to pay the bills. But you may also be living on base or receiving a tax-free housing allowance, and you can access free healthcare and are eligible for other military perks that can reduce your regular expenses. It’s a key time to take advantage of some benefits that can make a big difference in your financial future — if you know the steps to take.
Military Money: The Complete Guide on Benefits, Investing and More
Get Free Money From the Thrift Savings Plan
The TSP is a low-cost retirement savings plan for service members, and it’s a great way to build tax-advantaged savings. Even if you don’t have much extra income when you’re starting out, try to contribute at least enough to the TSP to make the most of matching contributions from the Department of Defense — that’s free money that can stretch your income and start growing for the future.
People who joined the military in 2018 or later, or who joined from 2006 to 2017 and opted into the Blended Retirement System, can get matching contributions of up to 5% of their pay. Try to contribute at least enough to get this match, and add more whenever you get a raise or bonus — before you have a chance to spend it on anything else. “Even just a few dollars per pay period can add up,” said Lila Quintiliani, senior program manager for Military Saves. “The best part is that when you save automatically, you truly ‘set it and forget it.’ You won’t miss that money because you won’t even see it and you’ll be building the savings habit.” Even small investments when you’re young can grow significantly by the time you retire. See www.tsp.gov for details.
Focus On Tax-Free Savings
You can make two kinds of TSP contributions: traditional or Roth. Traditional TSP contributions reduce your taxable income now but the money is taxable when withdrawn. Roth TSP contributions don’t lower your taxable income now but your withdrawals will be tax-free in retirement. When you get started in the military, your income is usually low and your taxable income is even lower if you receive a tax-free housing allowance. You’re likely to be in a much lower income-tax bracket now than you will be later. As a result, it’s a good time to make Roth contributions to the TSP and build up savings you can access tax-free in the future.
“Many military families do not fully understand the difference between the traditional and the Roth TSP options, so they may not be contributing to the plan that will be the most advantageous for them,” Quintiliani said. “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.”
Making Roth contributions to the TSP can be even more valuable when you are deployed and receiving tax-free income because that money goes in and comes out tax-free. “I once gave a class to a unit that had recently redeployed from a year in Afghanistan,” she said. “Sadly, few of them had been contributing to the Roth TSP. When you are earning combat pay and contribute to the Roth TSP, that is pretty much the perfect retirement savings scenario: that money will not ever be taxed, either when you earn it or when you withdraw it after age 59 ½.”
Match Your Investments to Your Timeframe
When you’re just starting out in the military, you have the benefit of time: Any money you can save in your TSP has decades to grow for retirement. You’ll need to set aside so much less money now to reach your goals than you would if you started saving later. Since you have such a long time before you need the money, you also have more time to ride the stock market’s ups and downs. You can invest more money in stock funds without having to worry about having to take withdrawals during a downturn. Stock funds may be more volatile than fixed-income investments over the short term, but have the opportunity for larger growth over the long run.
One of the biggest TSP mistakes young service members make, in addition to not taking advantage of matching contributions, is to invest all of their money in the G Fund, the government securities fund, said Shay Cook, financial readiness manager for the FINRA Investor Education Foundation. The G Fund doesn’t have stock market risk, but it has inflation risk instead — its low guaranteed returns may not keep up with inflation over the long run.
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An easy way to match your investments with your timeframe is to invest TSP money in the L Fund, a lifecycle fund (also known as a target date fund) where the money is automatically invested in a portfolio of the TSP’s funds based on your target retirement date (such as L2050 for people who plan to retire in 2050). The portfolio is invested primarily in the stock market when you have decades before retirement, and then gradually shifts to more conservative investments as your retirement date gets closer.
Get Your Loan Rates Reduced
The Servicemembers Civil Relief Act lets members of the military get their loan rates reduced to 6% for debt they incurred before they joined the military. If you have high-interest debt from loans you took out before you joined the military — such as from a car loan, credit cards, student loans or a mortgage — you can contact your lender and get the loan rates reduced. You usually need to submit an SCRA form and a copy of your military orders. The legal affairs office on base can help answer SCRA questions.
Learn the Timeline for Other Benefits
You become eligible for some other valuable benefits after you serve in the military for a certain amount of time. For example, you can be eligible for a VA loan, a government-backed mortgage, after you’ve served on active duty for at least 24 months. The VA loan offers competitive mortgage rates and enables you to buy a house with no down payment and no private mortgage insurance. See the VA-backed Veterans Home Loans page for more information.
You’ll also start to qualify for Post 9/11 GI Bill benefits after you serve in the military for at least 90 days and can qualify for the maximum benefits after serving for 36 months. The GI Bill can cover the full cost of in-state tuition and fees at public colleges for four academic years, or up to a maximum dollar amount per year for four academic years at private colleges ($26,042.81 for the 2021-22 school year). Keep the timeline for these benefits in mind as you’re planning for your future. See the VA’s GI Bill Benefits page for more information.
Financial Tips When Retiring From the Military
After you serve in the military for at least 20 years, you can retire from the service and receive valuable benefits for the rest of your life, but you need to make some key decisions before you leave.
Make Decisions About Retirement and Healthcare Benefits
If you retire after 20 years in the military, you can get retirement income for life, starting as young as in your 40s or 50s. If you’re in the traditional retirement system, your retirement pay is 50% of your base pay if you served for 20 years or up to 75% if you stay for 30 years, and is adjusted for inflation. If you opted into the blended retirement system (people who join from 2006 to 2017 and opted in, and everyone who joined from 2018 or later), then your retirement pay is 40% of your base pay if you stay for 20 years, or 60% for 30 years. You can also keep your healthcare coverage through TRICARE — see the TRICARE website for more information and your options.
You’ll also need to decide whether you want to sign up for the Survivor Benefit Program (SBP), which lets your beneficiary continue to receive a portion of your retirement pay after you die. If your spouse is counting on your pension to help pay the bills, it can be worthwhile to pay extra for this benefit. See the Department of Defense’s Survivor Benefit Program page for more information.
Transfer GI Bill Benefits to Your Children Several Years Before You Retire
The Post 9/11 GI bill can cover the full cost of in-state tuition and fees at public colleges for up to 36 months (four academic years) or up to a maximum dollar amount per year for 36 months at private colleges ($26,042.81 for the 2021-22 school year). If you don’t plan to use the benefits yourself, consider transferring them to your spouse or children. To qualify to transfer the benefits, you generally need to have served for at least six years and agree to serve for four more. Keep this schedule in mind as you consider the timeframe for your retirement years in advance. For more information, see the VA’s Transfer Your Post 9/11 GI Bill Benefits page.
Roll Over or Keep Your TSP
When you leave the military, you have a few options for your Thrift Savings Plan money — you can roll over the money to an IRA, where you’ll have more investing options but may have more fees. Or you can keep it in the low-cost TSP until you’re ready to start taking withdrawals in retirement (the TSP withdrawal options are now much more flexible than they had been in the past). In both cases, the money can continue to grow tax-deferred for the future.
As you do get closer to the time you plan to start taking withdrawals, consider moving some of the money to more conservative investments within the TSP — such as the G Fund (the government securities fund) and the F Fund (the fixed-income fund). If you have a lifecycle fund (such as the L2025 fund), some of the money will be shifted automatically to more conservative investments when you get closer to the date you plan to start taking withdrawals. For more information, see www.tsp.gov.
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