Changes to Military Retirement

This January the final version of the Report of the Military Compensation and Retirement Modernization Commission was published. (http://www.mcrmc.gov/index.php/reports) We’ve been hearing a lot about changing the military retirement plan since Secretary of Defense Hagel announced his ideas in 2013. Unfortunately, this topic is highly political, causes emotional stress and is very misunderstood so much that normal conversations quickly turn unproductive. Here are my thoughts on the situation.
THE PROBLEM
I’ve only been in for 15 years, but I’ve conclude that one of the major problems in the military is the inability to address the root problem. Here are the problems with the current military retirement system—as I see it.

1)      The Defense Budget is one of the largest expenses in discretionary spending. This post isn’t intended to discuss the ideologies about Mandatory and Discretionary spending; however, if there are cuts in the budget to be made, the Defense Budget would be the first place politicians look toward. Like all forms of business, Personnel and Labor are the largest cost drivers. For the military, our unique 20-year, annual inflation-adjusted, retirement plan is one of the most costly expenses. So the first problem is…budgets need to be cut and military retirement is a major cost driver to focus on by politicians.

2)      The second problem is the 20-year cliff dive. We have many Armed Forces members who serve honorably for less than 20 years and decide to separate. Besides what they’ve managed to save in their TSP or other savings, they do not receive any portion of their military retirement. This creates a 20-year, all or nothing, retirement plan. Many civilian jobs offer matching 401(k)s and pensions which compensate employees after an outlined amount of years.

SOLUTIONS (so far)

1)      Status Quo - Like I said, this issue is highly political and emotional. On most news sites, there are 300+ comments from retired military members and veterans regaling their war stories and any change to the military retirement plan offends them. All current recommendations would only apply to new military members so they wouldn’t even be impacted anyway. This solution will not last. There are some strong proponents of the status quo, including high-ranking members of professional enlisted and officer organizations. Regardless, the political pressure is getting stronger every year with little appetite to cut any budget anywhere else.

2)      Commission’s Recommendations - Senator Graham (R-NC) recently supported the Commission’s recommendation which is 40% of base pay at 20 years instead of 50%. Military members will get matching TSP contributions so if they choose to honorably separate before 20 years, they will have some retirement savings. (http://militaryadvantage.military.com/2015/02/graham-defends-pay-commission-after-hearing-its-critics/#idc-cover) Many professional organizations are opponents of this solution. They point several inconsistencies with the analysis the commission performed on their recommendation. These inconsistencies must be addressed because mathematically, even a one-percentage slip could cost a military member hundreds of thousands of dollars over several decades.

MY THOUGHTS

Personally, I believe the military retirement should be changed. Military members separating before 20 years should receive sufficient compensation; especially in light of how inept Veteran’s Affairs (VA) is. It’s is unacceptable to leave the fates of veterans with the support from the VA. Selfishly, I would not like the amount of retirement to change. I don’t have a solution at this time but I think about it regularly and I do know that if we're going to change it then we should provide a solution before Congress provides one for us.

What solutions do you have?

2015 Thrift Savings Plan (TSP) Contribution Changes

In 2015, there will be big changes to our retirement contribution limits. For military members and our civil servants, our Thrift Savings Plan limit will be $18,000 up $500 from $17,500 in 2014. For those 50-years or older and that are eligible for TSP Catch-Up contributions, it will increase to $6,000 up $500 from $5,500 in 2014. This is great news. This $500 increase will allow us to put more money into tax-sheltered investments. If you do the Traditional TSP, you will be able to contribute an additional $500 pre-tax money to grow tax free and then be taxed when you withdrawal. If you do the ROTH TSP, you will be able to contribute an additional $500 of post-tax money to grow tax free and then will be tax free when you withdrawal. 2015 contributions will remain the same.

http://www.afpc.af.mil/news/story.asp?id=123433265

Another great change in 2015 is a larger saver’s credit amount. For our junior enlisted that meet the income qualifications they will see higher credits.

http://money.usnews.com/money/retirement/articles/2014/01/13/tips-for-claiming-the-retirement-savers-credit

BL: If the government gives you an opportunity, then you should take it. When funding your retirement, you should max out an IRA and then max out your TSP. This allows you to invest up to $23K in 2014 and $23.5K in 2015 in tax-sheltered accounts.

Full Disclosure: I’m a conspiracy theorist who believes there is a widening social gap and the government will look to the middle class to support the rich like some future dystopia movie. The investors who took advantage of government-offered programs will be better protected.

Big Thrift Savings Plan (TSP) Returns

In my previous blog post titled, Active TSP participation, I recommended taking advantage of the recent market dip by changing your portfolio allocation or by doing an Interfund Transfer (IFT). In less than two weeks, you could have earned over .5% in most of the funds besides the “G” and “F Funds”. Considering that the national average for the ANNUAL return of savings accounts is less than .5% (http://www.bankrate.com/checking.aspx), then you could have made more in two weeks than all year in a typical savings account while keeping your money in your TSP accounts.

Date	L Income	L 2020	L 2030	L 2040	L 2050	G Fund	F Fund	C Fund	S Fund	I Fund
14-Oct-14	17.11	21.98	23.55	24.84	14.00	14.55	16.71	24.66	32.31	23.94
22-Oct-14	17.24	22.38	24.11	25.53	14.44	14.56	16.68	25.63	34.15	24.35
Gain/(Loss)	0.74%	1.79%	2.32%	2.72%	3.04%	0.06%	-0.20%	3.78%	5.38%	1.67%

*Data as of 23 Oct 14

You don’t have to be passive when it comes to major market swings and the Thrift Savings Plan (TSP). I understand most people want to invest and forget when they participate in the TSP. “Dollar cost averaging” or investing at regular intervals can earn you average results compared to the market; but by taking a passive approach to investing, you can achieve above average results.

Active Thrift Savings Plan (TSP) Participation

In the past week, the DOW Jones has dropped 1,000 points (6%). If you're like me, then you should get excited when you see quick market drops because they offer better buying opportunities. It's like your favorite pair of shoes went on sale. Even if 100% of your retirement savings is in the Thrift Savings Plan (TSP), you can still take advantage of stock market dips and rallies.

The easiest way is to log into www.tsp.gov and change the percentage you contribute to each month. The default fund is the "G Fund" which is the safest but offers the least return. It's very important to check that you don't have 100% of your retirement savings in the "G Fund"; especially if you're under 40-years old. When the stock market dips for a couple of months, you can increase the amount of money you have from each paycheck into the C, S or I Funds. When the stock market rallies, you can reduce the percentage if you're uncomfortable with the risk.

Another way of taking advantage of stock market dips and rallies is to request an Interfund Transfer (IFT). This changes the percentage of your overall portfolio by moving the selected percentage into a different fund. You can increase the percentage to the C, S, or I Funds during stock market dips. TSP has a limit to only 2 IFTs a month. You can request an IFTs by logging onto www.tsp.gov or you can call the TSP ThriftLine. (https://www.tsp.gov/planparticipation/interfundbp/IFTs.shtml)

Learn More About Your Thrift Savings Plan (TSP)

Source: www.tsp.gov

 There are some common misconceptions about the Thrift Savings Plan (TSP) causing investors to “lose” money. By understanding how the TSP works, you can make more money for your retirement. An active role in the TSP can earn you a better return and help you retire earlier. Here are some of the misconceptions with the TSP (Roth or Traditional) I’ve seen.

·         I’ve started my TSP, so I’m good right? If you’ve gone to MyPay or have gone to your local finance office and started your TSP, then you’ve only accomplished the first step. When you start TSP, by default, your money automatically gets invested in the “G” Fund. The G Fund is the safest fund, and as such, has the lowest rate of return. You will never actually lose money, but you mathematically “lost” money by not being in higher rates of return funds. According to TSP.gov, the G Fund has returned 3.4% over the last 10 years compared to the “C” Fund which returned 7.4% over the same time.¹ You must go to www.tsp.gov to change your fund allocation. This is a crucial step for retirement planning. If changing the allocation stresses you too much, then consider one of the Lifecycle (L) funds.  Pick your target retirement date (or the date nearest your 55^th birthday) and place it all in that L Fund.

·         I’ve changed my fund allocations, so I’m good right? Changing your fund allocation should be an annual event. Leaving your fund allocations stable, isn’t necessarily a bad thing and will earn you average returns from the Dollar Cost Averaging method. But if you want to maximize your earnings, you should check your fund allocation every year and change it as applicable. If the stock market is down then you should invest more in the C or S Fund to take advantage of the low market prices.  Or conversely, you’ve seen a huge increase in profits in your C or S Funds, so you can reduce those contributions and put more into your G Fund to take advantage of a potential sell off.

·         I’m following the market closely, but I can’t be as active because I have the TSP and not an active investment account. This is a very common myth. You can “buy and sell” out of your TSP funds at any time. Some people even engage in TSP day trading. “Buying and Selling” is accomplished by doing an Interfund Transfer (IFT) by going to www.tsp.gov or by calling TSP directly. There are some limitations, so day trading isn’t necessarily as easy as in a normal investment account, but you can actively trade. Instead of waiting for your annual allocation change (like mentioned above), you can take $10K out of your G Fund and move it to the S Fund and vice versa as the market changes. This differs from changing your fund allocation because you’re “locking in” the gains you’ve made in the fund you are transferring out of.

Bottom Line: Make sure, especially if you are under 45, that all your money isn’t being put in the G Fund. After you’ve adjusted your allocation to meet your investment needs, then consider changing it annually or more frequent if you do sufficient market research.

¹ Annual TSP Returns: https://www.tsp.gov/investmentfunds/annual/annualReturns.shtml

I'm Ready to Start Making Money!

Many people have asked me, “My finances are in order, so now what?” I’m very pleased to get this question. When I get asked this, I ensure, and/or assume, they have: accounted for all their expenses (as suggested in my 30-day challenge post), eliminated or reduced their debt levels and, most importantly, established an emergency savings account. If this describes you and you’re ready to start investing and making money, then read on.

·         The first step is to take advantage of tax-sheltered investments. I typically recommend everyone have an Individual Retirement Account (IRA). To determine if you should open a ROTH or Traditional IRA, then read this previous blog post: You can invest up to $5,500 annually in an IRA. Once you have the money in an IRA, you can invest it in pretty much any investment possible—mutual funds, stocks, gold, bonds, etc.

·         If you have more than $5,500 annually to invest, then you should fund your Thrift Savings Plan (TSP). Again, you can choose the ROTH or Traditional accounts, but you are limited to the funds offered by TSP.  For military members, the TSP does not match and for civil service employees, the TSP does match (up to 5% in a complicated matter). You can invest $17,500 (does not include your employer’s contributions) annually to your TSP.  With an IRA and the TSP, you can contribute to $23,000 a year in tax-sheltered investments.

·         On a lateral financial decision, if it makes sense for your particular financial situation, then purchasing a house while in the military is a great investment. When living in the dorms, base housing or renting, you are theoretically “losing” the BAH we receive. If you were a civilian, it would be factored into your base pay, but it is separated in the military. This is a basic discussion and gets more complicated on how to make the decision to buy or rent, but buying a house allows military members to “earn” that BAH.

·         Back to normal investing, if you have more than $23,000 a year to invest, then you can open up a normal taxable, brokerage account with any large bank and purchase stocks, mutual funds, bonds, art, oil, etc up to however much you want to invest.

Mathematically, the earlier you invest the better potential you have for earning a large return on your money. If you do it right, by using tax-sheltered accounts, avoiding fees and saving as much as possible, you could retire early and live a long, financially independent, life.  

Thrift Savings Plan - Lifecycle Funds Information

Do you know you have to save for retirement but are intimidated by the whole process?  Do you wish you could just give your money to someone and they would invest it for you?  If this is you, then don't worry about it and know you're not alone.  The Thrift Savings Plan, and other corporate banks, have mutual fund options for you that mimic having someone invest for you.  In the Thrift Savings Plan you have the Lifecycle Funds.

The Lifecycle fund automatically invests using the strategy of taking more risk while you're younger and less risk as you get older.  Each year that you get closer to the target retirement date, your fund will automatically "reallocate" your money to safer investments.  Anytime you set up your TSP in MyPay, the default fund is the "G" fund.  You must log onto www.tsp.gov and change your allocation to one of the Lifecycle funds.

There is the L Fund Income, 2020, 2030, 2040 and the 2050.  The goal is to pick a fund that's closest to your retirement date and choose that.  The income is reserved for people already in retirement, 2020 will be for those getting close to retirement in the next 7 - 10 years and so on until the 2050.

Corporate banks have similar funds called "Target" funds.  They have target dates just the way the TSP does.

All investments carry risk with them.  The risk of investing in Lifecycle funds is that the variable they invest with is risk-to-age models.  This risk may put someone at the risk of unpredictable changes in the market that some people would like to avoid or to take advantage of.  These funds take away the flexibility of active management.  As with all TSP funds, you can sell in and out of the funds so you can stay in the Lifecycle funds for as long as you're comfortable and then switch to avoid or take advantage of market patterns.

The Secret to Make More Money with the TSP

The Thrift Savings Plan is meant to be a retirement investment.  When investing with the TSP, you should have a long-term outlook.  That being said, it's still essential to want to make the most money as possible with it.  The secret to making more money with your TSP is to START NOW!

Time is the single most important variable on determining on how much you saved in retirement.  The sooner you start, the more you will have when you retire.  Most people wait for an arbitrary time to start saving money or dieting or making a positive lifestyle change.  The more time they wait, the harder it will be to achieve their goal.

The next time you are at your work computer, log into your Mypay (https://mypay.dfas.mil) account and increase how much you are currently saving.  If you are investing in the Traditional TSP, then up your percentage by 1% and then in a month or six months see if you can increase it by another 1%.  If you are investing in the ROTH TSP, then increase it by $25 or $50 a month and then in a month or six months see if you can increase it by another $25 or $50.  If you don't know the difference between the traditional or ROTH TSP, then read my article I've written: Traditional TSP vs. ROTH TSP. 

Should I Invest in the Traditional TSP or the ROTH TSP

Here is some information about the two types of Thrift Savings Plan (TSP) contribution options you can invest in.  They are the Traditional TSP and the ROTH TSP (started in 2012/2013).  If you want a short answer in which one you should invest in, then I suggest that people under 50 should do the ROTH TSP.  This is because ROTH accounts aren't taxed when the money is finally withdrawn.  But there are many variables before making this decision.

Traditional - The traditional option takes money out pre-tax and lowers your taxable income for that year.  So if you make $25K a year and invest $5K in a traditional TSP, then you will only have $20K of taxable income.  This benefit can be very useful for people that need to lower their taxable income to qualify for financial aid, have variable student loans or annuities and anything else that benefits you to have a lower taxable income.  Once you invest, then you can choose the fund allocation you want and your money will grow tax free.  Once you withdraw the money, it will be taxed as income that year.  Being taxed in retirement is unfavorable because you need to maximize your income as a retiree.  As time goes by, you will become  more dependent on that income which I why recommend the ROTH option.

ROTH - The ROTH option takes money out post taxes and has no affect on your taxable income.  Your money will also grow tax free and WILL NOT be taxed when you withdraw your money.  This option is amazing for people that start investing early in their career because they are currently at a low tax bracket and will get to be tax free when they are in a larger tax bracket because their money grew so much with so much time.

Both TSP accounts are retirement accounts and act like 401(k)s more than IRAs.  There are no income limits to invest in the TSP like IRAs, but most people in the military or civil service don't have to worry about that.  This is an important choice for anyone.  Seek advice or do your own research before making the final choice; however, most financial advisers will recommend the ROTH option for those under 50.

For more detailed information go here: https://www.tsp.gov/PDF/formspubs/tspbk08.pdf

How to Make More Money with TSP

You can change the amount you invest in the TSP by going to https://mypay.dfas.mil (most users use the CAC login and will need a .mil computer).  You can either enter a percentage amount to invest in the Traditional TSP or you can enter a dollar mount to invest in the ROTH TSP.

Your money will automatically invest into the "G" Fund and you will have to log into www.tsp.gov to actually change the allocation of the money that is donated.  To make more money with TSP you will need to change the allocation out of the "G" fund.  The more risk you can tolerate, the more you should move out of the "G" fund and into the stock funds.  I recommend to always have money in the "C" fund.

Since inception of the funds, the "G" fund has returned 5.69% annually versus the "C" fund's 9.5%.  In the investment world, having all your money in the "G" fund and losing out on the extra return is a LOSS of money.  We call it an opportunity loss because you had the opportunity to earn the money but didn't by investing in the "C" fund.  So to make more money with the TSP, you will need to log onto www.tsp.gov and change your asset allocation out of the "G" fund.

TSP Ticker Symbols

What are the ticker symbols for the thrift savings plan funds? They don't have any. They are traded on a public exchange. Here is the TSP fund comparison matrix you can use to determine what mutual funds are similar.

G Fund, F Fund, C Fund, S Fund, I Fund, L Funds

https://www.tsp.gov/investmentfunds/fundsoverview/comparisonMatrix.shtml