After serving for 20 years in the Navy, I’ve now provided financial and investment advice professionally for eight years. In the past few years, I’ve been invited into a few Facebook groups where military families discuss personal finance matters, and it always hurts my heart a little when financial advisors dispense bad advice to the hundreds of people in those groups.
A topic that frequently attracts some of that less-than-stellar advice is how to make the best use of your Thrift Savings Plan (TSP) account. I won’t rehash any of it here. Instead, let’s focus on the practices most likely to produce your best results. The best news is these tips are much simpler than some of the exotic strategies you’ll hear in the barracks.
- Maximize your match: If you’re in the Blended Retirement System, make sure you contribute no less than 5% of your base pay every month in order to collect the maximum 5% matching contribution from DOD. One way to look at this is that the match is an immediate guaranteed return on your investment. Another is to understand that if you’re not maximizing your match, you’ve essentially volunteered to work at a discount. If neither of those does the trick, look in the mirror and explain to your 60-year-old self why you can’t afford to retire because you couldn’t invest 5% of your pay to get another 5%.
- Allocate aggressively: Tax law determines that the earliest most people can get money out of TSP without penalty is age 55. Even with a bear market every six or seven years — the historical average between them — stocks nearly always perform better than bonds over any 20-year period. And they’ve always outperformed inflation. If you can stay disciplined during bear markets, your portfolio will be better off for it in the long run. As an entering argument, we typically favor more or less equal allocations to the C, S and I Funds.
- Make your contributions Roth: This is “eat your broccoli” advice that’s incredibly powerful. If you pay the taxes on the income that you contribute to your TSP right now, the long-term tax efficiency that lifetime tax-free growth delivers might be eye-watering. We’ve run numbers on this for clients, particularly for younger clients, and it’s not unusual to project more than $100K in lifetime inflation-adjusted tax savings just by doing this simple thing.
- Leave your assets in TSP: After you separate or retire from active duty, don’t be in a hurry to move the TSP funds anywhere. You can literally leave them in TSP your entire life. There might be a compelling reason one day to roll over your TSP assets to an IRA. But a fast-talking investment advisor telling you how much better they can manage it for you in an IRA (while typically billing 1% against the account), isn’t it.
The bottom line? Avoid razzle–dazzle in your plan. The people who stick with these plain and simple tips will almost always get the best results.
Sean Gillespie is a co-founder and managing partner of Redeployment Wealth Strategies, a fee-only financial planning firm and Registered Investment Advisor in Virginia, and a co-founder and member of the board of directors of the Military Financial Advisors Association, a nonprofit association of fee-only firms who serve military families.
