A Simple Guide to Retirement for Young Military Service Members
Saving for retirement may seem like a distant concern if you are a young person in the military, but starting early can make a huge difference in your financial future. Here, I’ll explain the basics of retirement accounts, how to open an IRA or Roth IRA, and provide suggestions for investing wisely—all tailored for service members.
Why Start Saving for Retirement Now?
The earlier you begin saving, the more time your money has to grow through the power of compound interest. For example, if you invest $100 a month starting at age 20 and earn an average annual return of 7%, you could have over $380,000 by age 60. Starting early helps you take advantage of this growth and allows you to save less each month compared to starting later.
For service members, your steady paycheck and benefits make it easier to set aside money consistently. Additionally, programs like the Thrift Savings Plan (TSP) offer unique opportunities to grow your savings.
Understanding Retirement Accounts: IRA, Roth IRA, 401(k), and TSP
IRA (Individual Retirement Account)
Contributions are often tax-deductible, meaning you may pay less in taxes today.
Growth is tax-deferred, so you won’t pay taxes until you withdraw money in retirement.
Withdrawals in retirement are taxed as income.
Roth IRA
Contributions are made with after-tax money, meaning no immediate tax break.
Growth and withdrawals in retirement are completely tax-free.
Income limits apply; if you earn too much, you may not be eligible.
401(k)
Offered by civilian employers, often with a contribution match (free money!).
Contributions are pre-tax, reducing your taxable income today.
Like an IRA, growth is tax-deferred, and withdrawals are taxed as income.
Higher contribution limits compared to IRAs.
Thrift Savings Plan (TSP)
Specifically for federal employees and service members.
Offers traditional (pre-tax) and Roth (after-tax) options.
Extremely low fees compared to other retirement accounts.
Contribution match for those under the Blended Retirement System (BRS).
How to Open a Roth IRA or Traditional IRA
Choose a Provider: Research financial institutions like Fidelity, Vanguard, or USAA. Look for low fees and user-friendly platforms.
Gather Information: You’ll need your Social Security number, a bank account for funding, and basic personal information.
Decide on an Account Type: Choose between a Roth IRA (if you prefer tax-free growth) or a traditional IRA (if you want a tax deduction today).
Complete the Application:
Visit the provider’s website.
Fill in your personal details.
Link your bank account to fund the account.
Contribute Money:
Decide how much to invest (up to $6,500 annually, or $7,500 if you’re 50 or older, as of 2024).
Set up a recurring contribution to make saving automatic.
Pick Investments:
Choose from mutual funds, ETFs, or individual stocks. Many providers offer target-date funds that automatically adjust your investments as you near retirement.
What Should You Invest In?
When deciding what to invest in, diversification and long-term growth should be your goals. Here are some suggestions:
Index Funds or ETFs: These are low-cost, diversified funds that track a market index like the S&P 500. They’re ideal for beginners.
Target-Date Funds: These funds automatically adjust the mix of stocks and bonds based on your retirement timeline.
Stocks: Investing in individual stocks can be rewarding but riskier. Stick to companies with strong financial performance and long-term growth potential.
Bonds: As you age, consider adding bonds for stability. Younger investors can afford to have more stocks in their portfolio.
TSP Funds: The TSP offers Lifecycle (L) Funds, which adjust automatically based on your retirement timeline, and individual funds like the G Fund (government securities) and C Fund (common stocks).
Steps to a Strong Retirement Plan
Start Small but Start Now: Even $50 a month can grow over time.
Maximize TSP Benefits: If you’re under the Blended Retirement System, contribute at least 5% to get the full government match.
Automate Contributions: Set up automatic transfers to your retirement accounts to stay consistent.
Increase Savings Over Time: As your income grows, increase the percentage you save.
Review Annually: Check your investments yearly to ensure they align with your goals.
By taking small steps now, you can set yourself up for a secure and stress-free retirement. The key is to start early, stay consistent, and let time and compound interest do the work for you. For military service members, programs like the TSP provide a valuable foundation to build upon.