Investing Options for Military Members -- Why You Can't Afford NOT to Invest

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A survey conducted by the Federal Retirement Thrift Investment Board (FRTIB), which runs the  Federal Government Thrift Savings Plan (the government's version of the 401k retirement plan), found that 23% of eligible employees believe that that they do not have enough money to contribute to their retirement plan. Only 4.3% did not contribute because the plan lacked good investment options, and 2.2% did not invest because the choices were too complex. The participation rate in the Thrift Savings Plan (TSP) is approximately 83% for civilian employees, but a dismally low level for the military where only 38% of them contribute to TSP.

The point of this is not only to explain the TSP in a little more detail, but more importantly, to stress how imperative it is to invest your money. You don't necessarily have to invest in a TSP (in fact, for military members, a TSP may not be the best option), but you still need to find the investments that suit your needs and financial situation best. If your money isn't being put to work right now, you need to take some time to consider your options.

Thrift Savings Plan Choices Are Easy to Understand
If you do not count TSP Thrift Savings Plan's Lifecycle Funds, which are essentially target date mutual funds, there are only five investment funds to choose from. They are known by their initials and called the G, F, C, S, and I Funds.

  • The G Fund buys nonmarketable United States Treasury securities that are guaranteed by the U.S. Government and are essentially risk free.

The C, I, S, and F Funds are index funds designed to replicate the risk and return characteristics of certain benchmark indexes.

  • The C Fund is invested in a stock index fund that replicates the Standard and Poor's 500 Index (S&P 500).
  • The I Fund is set to match the match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index of 21 developed countries.
  • The S Fund tracks small and medium-size companies and the performance of the Dow Jones U.S. Completion TSM Index.
  • The F Fund matches the performance of the Barclays Capital U.S. Aggregate Bond Index with a mix of government, corporate, and mortgage-backed bonds.

The Thrift Savings Plan offers both Federal Government employees and members of the military easy-to-understand choices that replicate the stock and bond markets. As mentioned earlier, the Thrift Savings Plan also offers target date retirement funds called Lifecycle Funds that are comprised of a mix of each of the five TSP Index Funds.

If you're a Federal employee, you should definitely look to max out your Thrift Savings Plan contributions, especially since you'll earn a matching contribution from the government.

Thrift Savings Plan and Roth IRA Options
Thrift Savings Plan.
Not only does the Thrift Savings Plan invest in low-cost index funds, but the retirement plan offers investors the same benefits of index funds such as low expenses. The expense ratio for TSPs in 2009 was only 0.028%. An investor only pays $0.28 for every $1,000 invested in a TSP account. A recent study of fees in defined contribution and 401k plans found that retirement accounts in America have an average fee of 0.93%, and only 10% of the retirement and 401k plans surveyed had fees of 0.35% or less. In fact, 10% of the plans in the survey had fees in excess of 1.72% or more. Expenses are kept low in the Thrift Savings Plan by the forfeitures of automatic contributions from Federal employees who leave the job before the contributions are vested, other fund forfeitures, and loan fees charged to investors.

Roth IRA. The one caveat here is that military members do not gain the benefit of contribution matches from TSPs that federal employees get. This is why I have made the argument in favor of Roth IRAs for military members in the past. While Roth IRAs also do not offer a matching program, they have a unique tax structure that only taxes the investor on the money that goes into the account. Any profit made on Roth IRA investments can be withdrawn at retirement tax-free. As far as the investment options within the Roth IRA, it is extremely flexible in that you have almost as much freedom to invest in the vast array of securities as you would in a  personal brokerage account. So while TSPs are one of the solid options available to military members, they are not necessarily the best option.

Here is a closer comparison between the Roth IRA and the Thrift Savings Plan (TSP) 401k.

You Cannot Afford Not to Invest For Retirement
Whether you choose a TSP or a Roth IRA or some other option, the point is that choosing not to invest for retirement is a travesty. You cannot afford to delay investing for your retirement by even a few years. For example, if you started investing $5,000 a year in a Roth IRA when you graduated from college at the age of 22, you could expect to have approximately $1.6 million saved in your nest egg when you reached the retirement age of 65, assuming an 8% average annual return. If you waited for just four years to begin investing until you are 26 and did not make any investments during those first four years of your career, you would only accumulate a $1.2 million nest egg. Delaying investing for retirement can cost you hundreds of thousands of dollars. Like many things in life, the actions you take early on can have positive long-term benefits.

No matter what your budget looks like or how tight it is, there are many small, simple ways that you can find money to begin investing and planning for retirement. Last month, the Federal Retirement Thrift Investment Board began automatically enrolling new Federal employees in the Thrift Savings Plan. Automatic enrollment is a great program, and employees should not opt-out of it unless it is to move your money into an investment vehicle that better suits your financial situation, like a Roth IRA. 

Also, even if you don't opt out, make sure to take the time to change your allocation from the standard risk-free option with subpar returns to one that matches your retirement goals and risk tolerance. The Thrift Savings Plan is a solid program for Federal workers, while there may be better options for military members.

Regardless, you cannot afford to have your money sitting around. You need to put your money to work, and investment options like the TSP and the Roth IRA are ones you need to utilize in order to set yourself up for a comfortable retirement.

Hank Coleman is a captain in the US Army and writes about financial topics like saving, investing, and retirement for Military Money Might as well as the Money Crashers personal finance blog.

The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2010, at 1:43 PM, moe295 wrote:

    For federal employees; not to be harsh or insensitive, but you are a fool if you don't at least invest the 5% that will be matched by the federal government. That is like a 5% pay raise each year. I'm currently in the middle of a bankruptcy, and even though it is hard, I still invest 6%. Yes, that money would really come in nice right now, but I would rather suffer now than when I am older and NEED that money. Start saving at least 5%, more if you can, when you are first hired on, even though the matching does not start until your first 6 months. Then, each year increase this amount by 1% to 2% until you max out your maximum allowable amount (currently around $16,500 I believe). Military members; it is smart for you to start saving as well. I've read an article once that said that if you invest one time of $10,000 at age 21 and never invested again, you would have more money than if you started investing $10,000 a year at age 35 when you turn 65. That is known as the power of compounding.

    I hope this little wisdom helps.

  • Report this Comment On February 11, 2011, at 3:56 PM, pastreet wrote:

    Absolutely true. The expense ratio of the TSP is so low, that military members are missing out in a big way when they do not participate.


  • Report this Comment On May 14, 2011, at 11:02 PM, navynukesupe wrote:

    I think part of the reason for differing participation rates for military and civilians in TSP is that the civilians get pay matching. Those in uniform do not. Nor is there any expectation for that to change in the future. Despite that glaring inequality I did steer many of my sailors towards it for the unbeatable low expense ratios it does offer.

  • Report this Comment On August 18, 2011, at 2:55 PM, flight20three wrote:

    I need to look into this asap....thanks to the contributing Fools. If you fly thru Kuwait anytime, look me up.

  • Report this Comment On January 08, 2012, at 1:52 PM, Hoosier1439 wrote:

    Two major factors that explain the dismal participation rate for Active Duty:

    For one - military people are young. Yes, I wish more young Soldiers would start young and I encourage all my Solders to do so but young people generally aren't thinking about next week much less retirement. Two - don't forget the Active Duty retirement benefits. I was once warned about asking for TSP matching. I've not heard of AUSA or any of the other professional military associations asking for matching. I was told there were many on Capital Hill that would love to give Active Duty matching funds but those same law-makers would want to take our current retirement system. As it stands I contribute 10% to a Lifecycle fund and at 27 years service 67.5% of my base pay for the rest of my life. If I stay for 30 years that'll be 75%. So no thank you on the matching funds for me. Maybe a decent program would match funds for those who contribute early and do not serve the minimum 20 years to receive the retirement benefits??? But again - given the current retirement system my TSP is icing on the cake compared to most Americans.

  • Report this Comment On November 17, 2012, at 1:35 PM, laundra wrote:

    I am active duty and participate in both the 401K and Roth IRA. My priority is the Roth IRA and save each month to hit the EOY 5,000. With the limitless investment options it makes sense to me to max the Roth out and then put the remainder of my savings into the TSP. The other fools are correct in that the TSP is the lowest expense 401K around however uniformed services do not get the matching contributions. The question that arises for me is whether or not my combat zone tax exclusions are tax free when I withdrawal them from the 401K?

  • Report this Comment On July 05, 2013, at 9:38 AM, swocrates100 wrote:

    The TSP now has a ROTH option.

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