The uniformed services version of the 401(k), commonly referred to as the Thrift Savings Plan (TSP), provides servicemembers with an exceptional and low-cost manner in which to save for retirement. Offering a variety of investment options including instantly diversified life-cycle funds with some of the lowest fees across the retirement landscape, this savings vehicle is a significant benefit to those who choose to serve.
In 2018, the military made significant changes to its retirement system with the implementation of the “Blended Retirement System” or “BRS” combining elements of the legacy retirement system (pension payment at a reduced rate) with benefits similar to those offered in many civilian 401(k) plans (specifically, a match of up to 5% of the amount contributed). The BRS places a greater onus on individuals taking responsibility for their own retirement futures by reducing the pension payout but also provides a mechanism for retirement savings transferability if the Soldier, Sailor, Airman, or Marine leaves service prior to completing their 20 years.
A simple and often-cited maxim for creating a sound retirement future is, “Save early and often.” However, under the current system Service Academy cadets are prevented from utilizing the Thrift Savings Plan to save and secure their own financial futures. Cadets, following the signing of their contract, and entering their 3rd year of undergraduate study, should be provided with the option to invest a portion of their monthly pay in the TSP.
Affording cadets the opportunity to save and invest for their two remaining years of study may not seem like it would make a significant difference in their long-term financial security, but due to the beauty of compound interest, it certainly can!
For example, if a cadet invested $100 of their monthly pay in one of the TSP’s low-cost life-cycle funds for 24 months, they would have contributed a total of $2,400. If they earned a relatively conservative return of 6%, they would have accumulated approximately $2,540 after two years. Not life changing money by any means, but this initial savings has two long-lasting impacts.
First, if we assume the cadet is roughly 22 and they leave that initial investment in the TSP for 45 years and continue to earn a 6% annual return, they would have accumulated roughly $35,000 by age 67 without any additional investment. $35,000 isn’t enough to support most retirement lifestyles, but it is better than nothing and most importantly it creates a positive financial habit of saving and thinking about the future. If that cadet graduates, and regardless of service status, continues to save and invest only $5,000 per year for 45 years until age 67 and earns a 6% return, that $2,540 has now grown to an impressive $1.1 million dollar nest egg!
It is important to note that I am not advocating cadets receive all the benefits of the BRS, such as the match or years of service credit towards their traditional pension benefit, but rather simply have the option of accessing the TSP. Many may argue that cadets can invest on their own through an IRA at a typical brokerage firm such as Vanguard or Fidelity. Nevertheless, this is a significant hurdle for 20-year-olds who have never previously opened an account at a financial institution.
Countless cadets have approached me outside the classroom expressing their desire to get started investing and opening a Roth IRA, but they don’t know where to begin or how to get started. Furthermore, they are likely to be overwhelmed with the vast array of investment options when compared to the simplicity of the TSP. Providing the possibility of investing in the TSP through automatic paycheck deductions removes this deterrent. Other opponents of this proposition may cite increased administrative burdens, but the long-term economic benefits of pursuing such a program would greatly exceed these costs.
The lack of financial well-being remains a force-wide readiness issue that impacts servicemembers’ lives beyond their bank accounts. Why not extend access to the TSP to our best and brightest who have committed to a life of service? Let’s open enrollment to cadets, get them building their savings muscles, and set them on a path to financial security and financial leadership within their future formations.
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