Thrift Savings Plan
Consider participating in the Thrift Savings Plan (TSP), which is a defined contribution retirement savings plan sponsored by the federal government. Like 401(k) plans in the corporate world, TSP accumulations depend upon how much participants contribute during their working years and the earnings on their investments. The longer contributions are made, the more time compound interest has to build up a substantial account balance.
New military service members can enroll in the TSP up to 60 days after enlistment or during semi-annual open enrollment periods. Contribute $200 a month during 20 years of active duty pay status and you’ll accumulate almost $118,000, assuming an 8 percent average annual return. TSP deposits are made via payroll deduction. There are five investment funds available to select from: common stock index (C), fixed income index (F), government securities (G), international stock index (I), and small capitalization stock index (S). Participants can invest in any combination of these five funds. Contributions are meant to be used for retirement and there is a 10 percent penalty for withdrawals before age 59 1/2, as there is for other tax-deferred retirement savings plans. Upon separation from military service, TSP accounts can be rolled over into an IRA or other tax-deferred retirement savings plan or left within the TSP to continue to earn interest until retirement. There also are several options to receive a series of periodic payments.
Military Benefits
Know your rights to present and future benefits related to military service. Service members with 20 years of service are eligible for a military pension and lifetime medical benefits through Tri Care, the health care plan for military families. For young military “retirees” in their 40s and 50s, with 20 years of service, this is a very important benefit that provides low cost health care through Medicare eligibility at age 65. Military personnel who do not attain 20 years of service do not receive a pension or retiree health care coverage. Because continued military service is based on so many factors, some of which are beyond a service member’s control, it may be a good idea to make plans as if these two benefits do not exist. Possible military benefits also should not be used as an excuse not to save for retirement in the TSP and other tax-deferred plans.
Beware Predatory Lenders
Beware of high-cost loans offered by predatory lenders located near military bases and other scams targeted toward service members or military veterans. An example is payday loans, where borrowers write a post-dated check to receive immediate cash until their next pay period. Typical annual percentage rates (APRs) for two-week payday loans range from 390 percent to 442 percent, with typical charges of $15 to $17 per $100 borrowed. Another high cost loan where lenders target military personnel is a car title loan, which uses a borrower’s car title as security for short-term cash. There also have been illegal scams reported where military veterans were duped into selling their veteran’s benefits. If a deal sounds too good to be true, it probably is. Check it out with a state securities regulator, consumer protection agency, or Better Business Bureau.