Military members are accustomed to significant challenges. Combat tours, deployments, and frequent transfers are just a few of the difficulties they face on a frequent basis. Perhaps because of this stress, many military members experience significant struggle when it comes to getting ahead financially.
A recent FINRA study reveals that despite a regular paycheck, military members are struggling with significant debt. 82% of military families carry an average credit card balance of $10,000 – and it gets worse. One in four service members reports overdrawing their checking account in the last year, one in five has used a payday loan or auto title loan in the past five years, and only one in two has an emergency fund.
What this means is that most military members shouldn’t even consider serious investing until they get out of debt and develop a savings cushion. But for those members who have paid off their non-mortgage debt and have an adequate emergency fund, it is time to save for retirement.
If you’re in the military, the pay may not make you rich, but you are afforded excellent opportunities to save and invest that are not available to civilians. By understanding how to take advantage of such opportunities, you can secure your future and build an enviable nest egg.
The military pension system is the single most important financial resource available to service members who choose to remain in service for 20 years or more. It provides an immediate annual income upon retirement which corresponds to 50% of the member’s base salary at 20 years, and is further increased by 2.5% for every additional year of service.
Plus, the retiree will receive an annual cost of living increase linked to the Consumer Price Index (CPI). Along with an impressive pension, military retirees are provided affordable lifetime medical coverage and access to other benefits, such as base access and exchange shopping privileges.
In spite of these benefits, a military pension is frequently not sufficient to cover all your annual expenses.
Thrift Savings Plan
The U.S. government’s Thrift Savings Plan (TSP) is a vastly underutilized investment resource. Current statistics indicate that only 37% of military members choose to participate. If you are a military member looking to save for retirement, the TSP is a convenient, low-cost, and tax-smart way to do it.
Like 401k contributions, money invested in a TSP is not subject to federal income tax, which effectively increases the amount you’re able to contribute. For example, if a service member who pays 25% in taxes contributes $10,000 to their TSP, they will only reduce their take home pay by $7,500. This can be a huge benefit, as the time value of money can result in substantial monetary gains. That said, once funds are withdrawn during retirement, members must pay income tax on the entire withdrawal.
However, members who contribute tax exempt combat pay can withdraw these tax-free contributions in retirement without paying taxes on the withdrawals. This is an impressive benefit not readily available elsewhere.