Category: TSP

TSP: Moving Beyond the C Fund

Post author By Kirk Reagan, CFP®, ChFC®, MQFP®
Post date September 25, 2026

Is your TSP sitting in 100% C Fund? Or maybe you are feeling adventurous and decided to throw a little S Fund in there too.

There is nothing inherently wrong with the C Fund. It tracks large U.S. companies and has been an outstanding investment for a very long time. The problem is that after the strong run U.S. large-cap stocks have had over the last decade or so, it is easy to forget that the C Fund is still only one part of the global stock market. The S Fund adds smaller U.S. companies, while the I Fund gives you exposure to companies outside the United States. Those three funds don’t always perform the same way at the same time; and that is actually a good thing.

The Best-Performing Market Keeps Changing

Take a look at the chart below. It compares the performance of the international market’s vs the US markets as the baseline. It looks at the 5-year annualized average performance and is used to identify when international markets have outperformed or underperformed vs the US stocks, represented by the S&P 500.

During much of the 1980s, for example, international markets dramatically outperformed U.S. stocks. In 1985 the MSCI EAFE Index returned about 57%, followed by nearly 70% in 1986, while the S&P 500 returned roughly 31% and 18% in those same years. International stocks again had a strong run in the early and mid-2000s. From 2003 through 2007, MSCI EAFE beat the S&P 500 in each calendar year.

Then the pendulum swung hard in the other direction. U.S. stocks dominated much of the period following the Global Financial Crisis. Vanguard notes that from 2014 through 2024, U.S. stocks returned roughly 13.1% per year, outperforming international stocks by about 7.7 percentage points annually.

And recently in 2025, international stocks came roaring back, with the MSCI EAFE Index returning roughly 32%, compared with about 18% for the S&P 500.

The point isn’t that international stocks are better than U.S. stocks. They aren’t. And it isn’t that the C Fund is somehow a bad investment. It isn’t. The point is that nobody knows which market will lead next.

That’s Why Diversification Actually Matters

Diversification is sometimes described as if it is simply about reducing risk. That is only part of the story. The real benefit is owning several investments that don’t move exactly together. The C Fund may be having a great year while the S Fund is struggling. Small companies may lead after large companies have been dominant for years. International stocks may outperform while U.S. stocks are flat, or vice versa.

If every investment in your portfolio moved up and down together, diversification would not accomplish much. That difference in performance creates an opportunity for something else that is extremely valuable: rebalancing.

Imagine that you decide your stock allocation should be 60% C Fund, 20% S Fund and 20% I Fund. If the C Fund has several great years while international stocks struggle, your portfolio might eventually become 70% C, 18% S and 12% I. At that point, rebalancing means trimming some of what has done well and buying more of what has lagged. That sounds simple when you read it on paper. In real life, people are terrible at it.

Nobody wants to sell the investment that is making money and buy more of the investment everyone says is terrible. Human nature usually pushes us in exactly the opposite direction – we buy what has recently done well and abandon what has recently disappointed us. That is where TSP Lifecycle Funds become interesting.

The Real Strength of Lifecycle Funds

Lifecycle Funds, or L Funds, combine the G, F, C, S, and I Funds into one portfolio. Instead of deciding how much belongs in each fund and then remembering to rebalance it, the TSP does it for you. That has several major advantages.

First, they are extremely inexpensive. TSP fund expenses are only a few hundredths of a percent annually. At an expense ratio around 0.04%, you are paying roughly $40 per year on every $100,000 invested. That is dramatically cheaper than most managed investment accounts.

Second, the diversification is built in. You aren’t relying entirely on large U.S. companies. You own large U.S. stocks, smaller U.S. stocks, international stocks and, depending on the Lifecycle Fund, some combination of the G and F Funds.

Third, and probably most importantly, the rebalancing happens automatically. When one part of the portfolio grows faster than the others, the Lifecycle Fund brings the allocation back toward its target. You don’t have to decide whether international stocks have fallen enough to buy more. You don’t have to wonder whether the C Fund has risen too far. The fund simply follows the plan. For an investor who does not want to manage a portfolio, that is a very attractive feature.

But There Is a Catch

I love the basic concept behind Lifecycle Funds. My problem is what happens as you get closer to the target date. The fund doesn’t just rebalance among C, S and I. It also gradually moves money away from stocks and into the G and F Funds.

Take a look at the glide path below.

Far away from the target date, the portfolio is overwhelmingly invested in stocks. That makes sense. Someone with 40 or 50 years before they need the money has time to recover from major market declines.

But look at what starts happening about 30 years before the target date. The allocation begins steadily moving toward the G and F Funds. By the time you reach the target date, the portfolio is dramatically more conservative than where it began. There is nothing wrong with becoming more conservative as retirement approaches. The question is whether the Lifecycle Fund does it earlier and quicker than you need it to.

Retirement Isn’t the End of Your Investment Horizon

This is where I think target-date investing can become too simplistic. Say you retire at 60. Your investment horizon didn’t just go to zero. If you live to 90, that portfolio still needs to work for another 30 years. If you live to 95, you have a 35-year retirement. That is almost another entire working career.

You obviously don’t want the same risk level at age 65 that you had at age 25, but becoming too conservative also carries risk. Inflation continues. Your spending continues. Healthcare costs continue. And the money you will not need for another 20 or 30 years still needs an opportunity to grow.

This issue may be even more important for military retirees and federal employees because many have a pension providing dependable monthly income. Add Social Security and possibly VA benefits, and a significant portion of basic expenses may already be covered before the TSP is touched. This means your TSP funds will be used for the gravy on top. Which also means it can be variable. So, in bad years you can spend less and in good years well its time to work on that bucket list. This allows for you to be a little more aggressive than those without steady COLA adjusted pensions.

The Lifecycle Fund does not know that. It simply follows its predetermined glide path. Eventually at Retirement it is 70% fixed income assets! In many cases, the opposite 30% fixed income would be more appropriate for those with large pensions.

Asset Location Adds Another Wrinkle

There is another issue that doesn’t get talked about nearly enough: asset location. Asset allocation answers the question, “How much should I have in stocks versus bonds?”

Asset location asks a different question: “Which accounts should hold those investments?”

Suppose you have $2 million divided among a Traditional TSP, Roth IRA and taxable brokerage account, and your overall plan calls for 70% stocks and 30% conservative investments. You do not necessarily want every account to be 70/30.

In most cases, there is a good argument for holding more of your lower-growth assets, such as bonds or F and G Fund-type investments, in tax-deferred accounts, while allowing more of your Roth money to remain invested in higher-growth assets.

Why?

Because Roth growth can potentially compound tax-free for the rest of your life, and qualified Roth withdrawals are tax-free. If I have money that I expect to leave invested for decades, I generally want to think carefully before intentionally putting my lowest expected-return asset in that account.

That does not mean “never put bonds in a Roth.” Your overall risk level still comes first, and every person’s situation is different. But it does mean that once you have several types of accounts, treating every account as its own little identical portfolio may not be the most efficient strategy.

And this is where a Lifecycle Fund can become less attractive as you get within roughly 30 years of its target date.

Once the Lifecycle Fund begins adding more G and F Fund exposure, you are no longer just getting automatic diversification and rebalancing. You are also accepting the Lifecycle Fund’s decision about your asset allocation and where your bonds are located.

If part of your TSP account is Roth money, that may not be what you want.

A better approach for some investors may be to look at all of their retirement accounts as one portfolio. Perhaps more of the conservative allocation sits in the Traditional TSP, while Roth assets remain more heavily invested in equities. The exact mix depends on taxes, withdrawal plans, risk tolerance and the size of each account, but the point is that account location matters. The problem is while funds are in the TSP, you don’t get a choice to have different allocations in your Roth vs Traditional funds.

You can also skip Lifecycle Funds completely and create your own combination of C, S, I, F and G. The tradeoff is that now you have to rebalance it. That gives you more control over both your stock/bond allocation but realize if your TSP has both Traditional and Roth, it doesn’t solve the asset location problem. Funds may need to be relocated in order to accomplish this. But talk with an advisor before doing this as there are other considerations.

So, Should You Use a Lifecycle Fund?

For many younger TSP investors, I think the answer is yes. Someone sitting in 100% C Fund because “the C Fund has always done the best” may actually end up with a more disciplined and diversified portfolio by moving into an appropriate Lifecycle Fund. You gain international exposure, small- and mid-cap exposure, automatic rebalancing and extremely low expenses without having to manage it yourself. That is a pretty good deal. You can also pick the Lifecycle fund with the highest year if you just want your TSP to stay 100% Stocks.

Where I become more cautious is once the Lifecycle Fund begins moving meaningfully into bonds and the G Fund. At that point, I don’t just want to know someone’s age. I want to know what their pension looks like. How much Social Security they expect. Whether they have VA income. How much is in Roth versus Traditional accounts. Whether they need withdrawals from the portfolio immediately. And how comfortable they are watching stocks fall 30% or 40% without panicking. Those answers tell me far more about the appropriate portfolio than the year printed on a Lifecycle Fund.

So, if you are sitting in 100% C Fund, don’t assume diversification means abandoning the C Fund. It may simply mean recognizing that the C Fund does not have to do all the work. And if you already own a Lifecycle Fund, don’t assume the TSP has solved every investment decision for you.

Lifecycle Funds do a very good job of diversifying and rebalancing. Just make sure their glide path, and where they are putting your investments, still makes sense for the rest of your financial plan.

Navigating TSP decisions does not have to be DIY. If you find this overwhelming, consider reaching out to a qualified professional. A fee-only fiduciary financial planner through the Military Financial Advisors Association (MFAA) can help structure the financial transition and provide professional guidance when you need it most.

Investing Taxes TSP

Which is Better—A Roth or a TSP?

Post author By Brian O'Neill, CFP®
Post date May 15, 2022

Which is Better—A Roth or a TSP?

If my math is correct, half of the readers of this article’s title are about ready to blow up my inbox, half would just like to know the answer, and half haven’t read this far. Clearly my math isn’t correct, but let’s dive into this question, and the real question that’s usually behind it— “Which is better—Roth or Traditional?”

If you’ve been in the military for a minute, you probably have heard that question, “Which is better—a Roth or a TSP?” It comes from the very real confusion cluster that is the financial world. Few primary schools teach personal finance and the topic is at best optional in college. Most of us learn it through trial and error if we learn it at all.

The answer to the question “Which is better—Roth or TSP” is the same as the answer to “Which is better—Tesla or cars?” There’s no direct comparison because one is a subset of the other.

TSP Basics

Let’s start with the TSP (Thrift Savings Plan) which is an employer-sponsored, qualified (read: tax advantaged) retirement savings plan. It’s similar to civilian 401(k) plans (Which doesn’t mean much if you’re still back at the Roth or TSP question, I know). The TSP allows you to defer part of your paycheck each month, receive preferential tax treatment, and grow the dollars through compounding until you need to use them in retirement.

If you joined the service after 2017, then you’re eligible for the government to match your contributions up to 5% after 2 years of service—which is free money!

The TSP limits your contribution to a certain amount each year based on IRS guidelines and it’s $20,500 in 2022. Participants over age 50 can contribute an extra $6,500.

What is Roth?

Roth is the last name of the senator that sponsored the legislation creating Roth retirement accounts. Roth is a synonym for “after-tax,” meaning that you’ll pay your typical income tax on the dollars that you contribute to a Roth account such as the Roth TSP. The benefit of Roth treatment is that contributions grow without being taxed each year. Then in retirement (generally after age 59.5), you get to access those dollars tax-free.

Roth treatment is incredibly powerful in that it allows savers to pay a generally low tax rate on dollars when they’re young or in the military and not making much and then avoid higher tax rates in retirement when their tax rates are higher after a lifetime of earning and saving.

Roth treatment can also be though of as “tax insurance.” We don’t know what future tax rates will be. Many experts predict that they will have to be higher to afford programs like Medicare and interest on the national debt. Roth dollars won’t be taxed in retirement, so savers can mitigate future tax risk.

What is Traditional?

Before Roth came along, there was just “TSP” and no need for the adjective “Traditional.” Traditional is a synonym for “pre-tax” or even “tax-deferred.” With a Traditional retirement account like the TSP, savers skip paying taxes on the contributions as the money is earned, but have to pay taxes when they access the money in retirement after age 59.5.

Savers are allowed to contribute to either or both Roth and Traditional “sides” of their TSP account in a given year, but they can’t exceed the IRS limit unless they’re in a combat zone. I.e., you can put $10,250 into Roth TSP and Traditional TSP in 2022, but you can’t put $10,251 into both.

Which is Better—Roth or Traditional TSP?

Now that we’ve got the right question squared away, we’ll look at the indigestible answer… it depends. The most general way to start answering this question for each taxpayer (or family if filing jointly) is to ask, “Do I want more money in my pocket this year, or in my retirement years?”

A contribution to the Traditional TSP puts extra dollars in your wallet this year. If you’re in the 22% bracket and you contribute $1,000 this year, you’ll have $220 extra in your pocket because you deferred the tax bill until sometime in retirement.

Moving past the most basic question, some families will want to evaluate, “Am I in a temporarily higher tax bracket this year?” Let’s say you receive a large bonus and will have outsized income in a certain year. It might be appealing to hold on to more of your pay by making Traditional contributions in a high-income year.

An even more sophisticated approach would be to evaluate whether a Traditional contribution might lower your tax bracket for the year. For example, in 2022, the cutoff between the 12% tax bracket and 22% bracket for a married-filing-joint couple is $83,550, which is really $109,450 after adding the $25,900 standard deduction. If income before a TSP contribution is $109,450 and the planned TSP contribution was $5,000, then taxable income becomes:

$109,450 – $5,000 – $25,900 = $78,550

$78,550 is squarely in the 12% tax bracket and the tax savings on the year is $600. So, by choosing to put at least part of the TSP contribution into the Traditional “side,” it’s possible to lower one’s overall tax bracket and tax bill.

Dialing up the sophist-o-meter a bit, let’s address capital gains. Capital gains tax is the tax we pay when we sell something for more than we paid for it. If you sell a stock at $100 per share, but you paid $50, then you have a $50 capital gain per share.

Uncle Sam taxes capital gains in one of two ways—long-term or short-term. Long-term capital gains receive preferential treatment in that they’re taxed at 0%, 15%, or 20%. These are lower than ordinary income tax rates for most people paying capital gains tax. Short-term capital gains are taxed at ordinary income tax rates.

It just so happens that the cutoff between the 0% and 15% long-term capital gains brackets is $83,350 for a married-filing-joint couple…essentially the same as the 12% to 22% transition for ordinary income.

The “so what?” is that by using a traditional TSP contribution to lower taxable income into the 12% bracket, one also can take advantage of the 0% long-term capital gains tax bracket. If you have stock with capital gains and need to sell some for a goal, you can do so right back up to the top of the 0% long-term capital gains bracket and pay $0.00 on those gains!

The Real Question

While it is important to evaluate the tax opportunities in a given year to assess Roth versus Traditional, the real question is this, “Am I in a higher tax bracket today, or will I be in a higher tax bracket in retirement when I access my TSP savings?”

Let’s say you’re in a 25% bracket this year and you also expect to be in a 25% bracket in retirement when you withdraw money, then there is no mathematical difference between Traditional and Roth TSP. Want proof? Plug the following formulas into Excel.

=FV(0.1,30,-1000,0,0)*0.75
=FV(0.1,30,-750,0,0)

The first is the future value of pre-tax contributions of $1,000 compounding for 30 years at 10% and then taxed at 25% upon distribution in retirement.

The second is the future value of after-tax contributions of $750. We use $750 to model the effect of a 25% tax as the money is earned.

They both return $123,370.52. But there’s a hidden twist here—would you really contribute less just because you had to pay tax on the dollars as you earned them? Probably not. Most of us will find a way to contribute the same amount regardless of the tax in the year of the contribution.

Thus, =FV(.1,30,-1000,0,0) = $164,494.02 and we can see that we end up with a significantly increased nest egg for choosing Roth.

But how do you know what tax bracket you’ll be in during retirement? The reality is you’ll need a crystal ball, time machine, or other imaginary tool. We can only make estimates. Estimating our income, spending, and savings seems daunting, but it’s likely the easy part. Estimating future tax rates, including state income tax rates is a bit more difficult.

A common technique is to just use current tax law and then revise projections as tax law changes. Using that method, let’s look at Figure 1. This example illustration incorporates a family’s projected income, savings, and spending over their remaining life time. The result is that we can see that the family will pay tax rates from the mid 20% range until retiring early at age 55. At that point, the expected tax rate is 15% until age 70 when Social Security kicks in and creates a new income floor and higher tax bracket.

This family has a couple of options. By contributing to Traditional accounts pre-retirement, they can hope to Roth-convert some or all of their Traditional dollars during their low tax years. They would skip paying 22% to 25% in hopes of paying 15%.

Any Traditional dollars remaining after age 70 would, at-worst, be taxed at about the same rate they would have been at the contribution. This choice requires an estimation not just of earning, saving, spending, and tax rates, but also how many dollars can be Roth-converted during the early-retirement window before ending right back up in a higher tax bracket.

If instead, the family contributes to Roth accounts prior to retirement, then several additional considerations arise:

From age 55 to 70, there could be a missed opportunity to “fill up” low tax brackets like 15%. The family might have unnecessarily paid 25% on some dollars.
After age 72, Roth IRA dollars don’t have to be distributed, but Traditional dollars do. These “Required Minimum Distributions (RMD)” create a higher income floor. (Note that Roth TSP/401(k) accounts do have RMDs. Roth IRAs don’t. Most people will rollover their Roth TSP/401(k) to an IRA prior to RMD age.)

Figure 2 shows a different family’s profile. Prior to retirement at age 67, the family earns in the mid-20% to low-30% tax rate range. They have a small “bathtub” from age 67 to 72 where they can do Roth conversions, but after that, they’ll be trapped in the 30%-plus range for their remaining years.

This family would likely want to mainly contribute to Roth accounts in order to minimize the impact of a high-income floor in retirement.

You can imagine that slight changes in a family’s planned earning, spending, saving, and estimated tax rates have drastic effects on their future tax profile. This brings us to the key questions that we must answer to make the Roth versus Traditional decision:

Do I need extra cash in my pocket this year? Is it worth the risk of higher taxes later?
Can I change my tax bracket with a Traditional contribution this year? What benefit do I gain?
Do I expect my tax rates to be higher or lower in retirement?
- If higher, more Roth dollars are your friend.
- If lower, you leave a tip for the tax man by contributing to Roth today.
Do I generally think tax rates will be higher in the future? Roth contributions are an insurance policy against those tax rates.

Cleared to Rejoin

The Roth versus Traditional decision can be complicated. We have to decide if we want more income this year, or lower taxes in a few decades. To be as accurate as possible, we need to have reasonable estimates of our lifetime earnings, saving, spending and tax rates. Ultimately, we have to answer, “What is the effect this year… and all of my retirement years?” That’s no small task.

A few additional concepts to consider may help:

The current tax brackets are very low by historical standards, implying higher rates at some time(s) in the future
Interest on the national debt and support of Medicare for the Baby Boom generation will require higher government revenue in the coming years.
30 years after you contributed, are you likely to regret having estimated wrong by a couple percent on your future tax rate, or are you more likely to really like that a sizeable chunk of your retirement income is tax-free?

Fight’s On!

Author’s Note: This article focused almost exclusively on Roth versus Traditional for TSP (and 401(k)) contributions. There’s a good deal more to know about IRA considerations, so please don’t extrapolate Roth TSP directly to Roth IRA without diving into the nuances.

Tags Roth, taxes, TSP

Financial Planning Military Pay Taxes TSP

How Much is Your Military Compensation Actually Worth?

Post author By Daniel Kopp, CFP ®
Post date April 16, 2021

Understanding Your Entire Military Compensation

For any servicemembers who are transitioning out of the military or perhaps daydreaming about what that might look like someday, many of them have never considered the full impact that transition will have on their finances and total compensation. Most of the servicemembers that I talk to are surprised after they separate and don’t have the same salary, benefits, or total compensation as they did in the military. So what can you do about this if you’re set to separate or are thinking about it?

Every year, usually in early April, DFAS publishes the Personal Statement of Military Compensation (PSMC) with the intent to help make servicemembers’ full compensation more readily visible. While DFAS states that this may be helpful in applying for credit or loans, the true benefit lies in understanding what your equivalent compensation would need to be outside of the military to maintain your same standard of living.

So what is compensation?

In this context, compensation refers to the entire sum of salary, benefits, and other financial support that servicemembers receive. The majority is “direct compensation” — money paid directly to you — while the rest is called “indirect compensation” — things that financially benefit you but aren’t a direct payment. Indirect compensation can either be financial compensation or non-financial.

One example of indirect financial compensation is healthcare. When an employer helps pay for your healthcare coverage, that’s indirect financial compensation since you otherwise would have to pay that amount. Indirect compensation can also be non-financial like leave.

Direct compensation is readily apparent because these are clearly listed on your LES while indirect compensation might not be as immediately clear. The goal of this post is to help you understand the full picture of all of your compensation.

It’s important to take a look at each detail of the PSMC since each analysis can differ based on personal circumstances. You can access your PSMC through myPay right underneath where you can view your LES. This article will probably be most helpful if you have your own PSMC to go through. We will look at an example PSMC for this post and show you how to analyze your own.

Navy members should note they will have to visit the PSMC website calculator directly at:
https://militarypay.defense.gov/Calculators/RMC-Calculator/

Direct Compensation

DFAS pre-fills in your basic pay, special pay and bonuses, expense allowances (OHA, COLA, etc.), as well as an estimate of the added value of indirect compensation which is usually based on the federal tax advantage of BAH and BAS. This provides the starting point for you to add in some personal analysis about all the indirect compensation and add your estimate back in at the end to get your total compensation figure.

To help illustrate some of these concepts more concretely, we will look at an example of a hypothetical O-3 compensation.

Basic Military Compensation: $85,047.96
Special Pay and Bonuses: $2,472
Total Direct Compensation: $87,519.96
Added value of Service-estimated indirect compensation: $3,275.21

Estimating Your Indirect Compensation

As you estimate the various forms of indirect compensation, don’t stress getting each figure down to the exact dollar amount. The goal is to gain a more complete understanding of what that benefit might cost you if you had to pay for it yourself so estimating is OK. It’s also usually best practice to estimate conservatively on these figures so you don’t have a highly inflated final compensation figure to compare against equivalent civilian compensation.

If you aren’t sure what a benefit is worth, ask friends or family for help especially if they aren’t in the military and they could give you a more realistic picture of what benefits are worth outside of the military. Below is an explanation of how you can go about calculating each of the indirect compensation categories on the PSMC.

Military Taxes

In the PSMC example above, DFAS has estimated that based on the current BAH and BAS, this person is saving $3,275.21 a year by not paying federal income tax on those two allowances.

Another thing to consider here is combat zone tax exclusion (CZTE). The PSMC doesn’t list this as part of the analysis, and it could easily be argued that this is a direct benefit to help offset some of the challenges of deployments. For many servicemembers however, a deployment might mean going down one tax bracket from 22% to 12%, but more senior servicemembers or dual-military could really reap benefits here if they own more significant taxable investments and drop from the 24% tax bracket to the 12% and its equivalent 0% tax rate on long-term capital gains and qualified dividends.

Junior servicemembers could also drop below the income threshold to be eligible for the Earned Income Tax Credit (EITC) which could mean quite a bit of extra money at tax time. For this example, we won’t consider CZTE in my calculation, but others might choose to do so, especially if you deploy on a more regular schedule.

Formula: (Projected) State Income Tax x Current Basic Pay = State Income Tax Benefit
CZTE Formula: # of Months Deployed x Monthly Federal Tax Deduction = Benefit

Military Medical Care

Tricare is undoubtedly the biggest indirect financial compensation for most servicemembers and their families. For servicemembers who haven’t had a full-time job outside the military, most are insulated from what almost everyone else in the country has been going through over the last several years. Medical insurance can be incredibly costly for many Americans so this area of compensation is critically important to understand.

As a financial planner who helps people find and evaluate health insurance on their own through the federal and state exchanges, I just cannot stress how amazing this level of medical coverage is!

How much is Tricare worth to you?

One way to measure this is to see how much it would cost you to buy Tricare Standard coverage without the military paying for any of it. This option exists as the Continued Health Care Benefit Program (CHCBP) provided by Humana. Similar to COBRA, this plan can give you temporary health coverage for 18-36 months when you lose eligibility for Tricare. Basically, it means that you pay 102% of the total insurance premiums which in this case were previously all paid for by the military.

In FY20, CHCBP premiums would be $1,599 per quarter for individual coverage and $3,605 per quarter for family coverage. In addition to these premiums, there will be yearly deductibles and cost-shares similar to Tricare Standard. That comes out to a minimum of $6.396 (individual) or $14,420 (family) respectively a year. Plus, consider that is also a tax-free benefit while on AD so it’s worth even more than just an equivalent cash payout.

Another way to compare the value of Tricare is to see what health insurance coverage would cost you on the healthcare.gov exchanges. This gives you a very good example of how much you could otherwise be spending given your specific family circumstances as healthy, young individuals can acquire more minimal coverage much cheaper than CHCBP while families might see some major sticker shock.

Many of my military clients who get out and suddenly have to pay the full costs of tens of thousands of dollars a year towards healthcare they purchased on the exchange experience DRAMATIC sticker shock. Even employer-provided health insurance will almost always be far more expensive than anything they paid on AD.

Practice expectations management prior to separating and don’t expect your health insurance to offer as much for as little as Tricare costs. The bottom line is this: don’t undervalue your Tricare coverage!

Pro tip: consider switching from AD to the Reserve Component to still have access to subsidized medical insurance through Tricare Reserve Select at still a low personal cost.

Formula: Expected Civilian Annual Health Insurance Cost – What You Currently Pay Annually for Tricare Prime/Standard = Your Benefit

Military Pension + BRS Match

The legacy military retirement benefits only consist of the High-3 system as an all-or-nothing pension that requires vesting at 20 years of service. As such, it’s a little harder to directly value compared to the Blended Retirement System (BRS) direct matches which are more straightforward.

For the BRS contributions and match, just add those percentage amounts based on the basic pay rate right into your calculation. The BRS matching rate is comparable to many civilian employers’ 401(k) matching.

One of the good friends of MFAA, Doug Nordman, has done a great job giving some estimates of what that military pension is worth. The trick of course is that the pension is still worth “nothing” until you actually vest in it so there’s no real way to say you’ve earned half of the pension’s value just because you have served 10 years. To quote Doug, “Stay in the military if you’re challenged and fulfilled, but don’t join just to stick it out for a pension. If the pension is your only motivation then you won’t last past the first obligation. When the fun stops then you should leave active duty for the Reserves or National Guard instead of grimly clenching your jaw and gutting it out for 20.”

Still, it is critical to understand just how incredibly valuable an active duty military pension can be as an E-7 pension can be worth around $1.4 million at the time of retirement and an O-5 pension could be worth as much as $2 million!

This part of the PSMC analysis doesn’t produce a number to add into your overall compensation, but it does help you think through the calculus of staying in or getting out. The more years of service that each servicemember has should also weigh heavily in this consideration as it’s easier to make the decision to get out after only 4 years vs. 15 years.

Thrift Savings Plan (TSP)

The TSP offers incredible cost savings as it is dramatically cheaper than the average expense ratio of traditional mutual funds or many employer-sponsored 401k plans. In 2021, the TSP had a net expense ratio of only about 0.05% while the average expense ratio of the civilian TSP equivalent of a 401(k) and average mutual funds are much more expensive!

That means that if your TSP balance is $1,000, you are only paying about $0.50 a year in fees while that same $1,000 in an average 401(k) would cost you $5 – 10 (per $1K) a year based on plan administration or investment expense ratios. Over time, that fee differential becomes a huge drag on investment returns — to the tune of tens of thousands or even hundreds of thousands of dollars — which you can see for yourself using this Vanguard tool.

Formula: (Amount Currently in TSP x 0.01) – (Amount Currently in TSP x 0.0005) = Benefit

Life Insurance (SGLI), Dependency and Indemnity Compensation (DIC), and Survivor Benefit Plan (SBP)

Let’s analyze SGLI, DIC, and SBP in the context of the actively serving member to apply this to the PSMC, but understand that these concepts also apply to retirees albeit with some differences. Many companies offer some type of group life insurance that is tied directly to employment and SGLI functions just like this. Although individual servicemembers pay for SGLI, this guaranteed insurance is still pretty low-cost, but most importantly helps ensure servicemembers can stay insurable post-military with VGLI should something happen to them while in the military. These are the other benefits broken out:

Should you pass away, your family or designated beneficiary will also automatically receive a death gratuity payment of $100,000 regardless of whether you have SGLI coverage or not.
If your death is determined to be in the line of duty and if you are married, your spouse will also receive monthly non-taxable Dependency and Indemnity Compensation (DIC) payments of at least $1,357.56 and an additional $336.32 for each surviving child are payable. DIC is generally adjusted annually for inflation.
The family will also receive one year of BAH based on the current rate they were previously receiving.
If you die while on active duty in the line of duty, your family is protected by SBP at no cost to you. The formula for this looks like this: SBP = 0.55 x (2.5% x YOS x average of the highest 36 months basic pay).
Due to some recent changes to how DIC and SBP work together, you should research the most current status to determine how much if any offset is given between these two payments.
For our example here, we will just assume a surviving spouse and one child at $20,316 a year.

So how much life insurance would you approximately need today in order to provide a $20,000 a year inflation-adjusted annuity for the rest of your spouse’s life? I plug the requirements into the calculator here (I used ~3% for the interest rate as inflation) which says that annuity is worth about $509,000 in today’s dollars given a spouse’s age of 30 and IRS expected life span.

That means I would need to carry an additional $609,000 ($509K + $100K death gratuity) in life insurance today to provide that same level of benefit to a spouse. For the sake of estimating, we’ll use the SGLI rate of $0.07 per $1,000 of coverage at $609,000 x $0.00007 = $42.36 a month or $511.56 a year. [Note: You could potentially get a lower term life insurance rate than this rate given underwriting characteristics]

The equivalent costs of term life insurance vs. SGLI are usually easy to compare and many servicemembers often carry life insurance through companies like AAFMAA, USAA, or Navy Mutual. Many people though don’t think about pricing out the income streams that their families could also earn through DIC and SBP when considering their life insurance needs.

Pay Raises

The PSMC next has you calculate the value of annual pay raises, longevity increases, and promotion raises. While the annual raises haven’t always tracked directly with inflation, the longevity increases, and promotion raises both offer standardized opportunities for increases in pay. This one is a lot more difficult to measure though and depends on you remaining in the military so we will skip it for this analysis.

One important consideration for you though might be the comparison here between regular raises in the military and whether or not your civilian career offers the same chances to regularly grow your pay.

Commissary and the Exchange

This category is very dependent on how much each family uses the Commissary and Exchange. Recent PSMC estimates list out that the average Commissary benefit is about $4,600 a year for a family of four with most people saving about 30% of their grocery purchases. Take into your purchasing habits to fully analyze this one for you.

Formula: [(Average Monthly Commissary Spending x 1.24) x 12] – [(Average Monthly Commissary Spending x 12] = Average Benefit
Note: To get a more accurate estimate, an older Stars and Stripes article breaks out the average savings by region and can range from around 19% to over 44% for OCONUS.

Federal Long-Term Care Insurance Program (FLTCIP)

This benefit primarily offers long term care insurance for those looking to help cover the cost of nursing home and other end-of-life care. The goal of FLTCIP is to help preserve your retirement savings should a long-term care need arise. Those eligible for the FLTCIP include all Federal Employees (Uniformed Service members), their spouses, adult children (including natural, adopted & step), parents, parents-in-law, and stepparents. Given my current age, current and projected savings rate, and expected financial independence long before my 60s, I don’t have a need for this. Your situation may be different especially if your parents could purchase through this benefit program.

Note that this benefit is not as good as it once was and is not necessarily something I would automatically recommend.

Formula: Other Annual Long Term Care Insurance Cost – FLTCIP Annual Cost = Benefit

Education Benefits

The military offers some pretty incredible education benefits through Tuition Assistance (TA), the GI Bill, ROTC scholarships, Academy appointments, job certifications, and numerous other opportunities. I’ve written about that using my own example here where I figured out how I turned $80,000 of education benefits into more than $2.1 million in lifetime value!

The primary education benefit to account for here is TA or service-specific associate degree program since it is a function of remaining on active duty whereas the 9/11 GI Bill vests after 36 months of qualifying service (ROTC scholarship and Academy grads take note that you must first finish your education commitment before starting to earn credit towards the 9/11 GI Bill).

If you are currently still serving towards the 36 months to earn 100% of your benefits or are still serving an ADSC because you transferred the benefit to a dependent, include a pro-rated portion in the calculation below. There will be lots of variation about how much the 9/11 GI Bill education benefits can be worth so you can personalize this to your own unique situation.

Service Activities

Everyone’s use of the services provided by their base will differ greatly so this is another highly personalized analysis. Among the most financially impactful is the child development center (CDC) since this cost is subsidized based on rank. For those that utilize the CDC, you can try to determine the cost of a similar daycare off base and compare the CDC cost to add up your benefit.

Other things to consider include the fitness center, auto facilities, hobby shop, outdoor recreation rentals, etc.

Counseling and Assistance Programs

The PSMC helps provide some figures here ranging from $30 an appointment up to more than $5,000 for transition assistance services to help you analyze the costs for free personal financial management counseling, relocation services assistance, transition counseling, spouse employment consultation, and assistance from a wide range of services available from their services’ community centers. Again, each individual circumstance will differ here. Note that some of these are given as an estimated hourly rate.

Personal Financial Counseling/Education: $ 250 – 375
Spouse Employment Counseling: $ 585 – 990
Transition Assistance Services: $ 5096
Non-Medical Counseling: $ 30 – 100

Legal Counseling

Military members and family members can get free legal assistance in a wide range of areas, including consumer law, landlord-tenant law, family law, estate planning, and tax assistance services. The PSMC again offers their estimates for costs associated with everything from notarization or powers of attorney to tax returns preparation and consultations with an attorney. Note that some of these are given as an estimated hourly rate.

Consultations with an Attorney: $ 150 – 175
Wills: $ 250 – 3,000
Notary: $ 10 – 20
Advance Medical Directives: $ 100 – 250
Client Correspondence: $ 125
Powers of Attorney: $ 60 – 250
Tax Return Preparation: $ 147 – 273

Space-A Travel

Space available travel for Uniformed Services members can provide substantial savings over commercial airline fares. Space available travel is defined by DoD policy as a privilege (not an entitlement), which accrues to servicemembers as an avenue for travel. This is again a highly individual element likely based on how close you are to frequent space-a travel opportunities.

Tricare Dental Program (TDP)

Tricare dental provides fairly good coverage, but is not quite the comparison as Tricare health insurance is compared to civilian counterparts. Based on equivalent quotes for comparable coverage, most people could be covered by a similar plan where you live for about $30 – 80 a month.

Other Military Benefits

The PSMC stops its analysis here, but there are a few other benefits to consider.

Leave

The average civilian job has much less paid time off (PTO) than the annual 30 days of leave a year each and every servicemember receives. Although I’ve never met someone who only uses that leave to take a month straight off each year, one way to think about it is that you are getting paid 12 months’ worth of salary for 11 months of work.

Military life demands many more sacrifices on your time (TDYs, deployments, long shifts, etc.) and there’s certainly no such thing as overtime so perhaps this issue ultimately is a wash. However, don’t discount the amount of paid time off you do get lest you be surprised when your civilian job starts out with only around 5 days a year. Expectant or future mothers should especially value the longer military maternity leave as it outpaces most companies in the country as this is a rarer benefit.

Disability Insurance (DI)

At most other jobs either your company offers some small level of disability insurance or you can purchase this on your own. While most people might not know what disability insurance covers, they have probably seen this product advertised somewhere thanks to a famous quacking duck.

Disability insurance is coverage that will help pay a reduced portion of your previous salary if you were to get hurt or otherwise be unable to work anymore. In the military, this is provided by the VA if you were to become seriously injured or disabled while serving in the military. You would be evaluated and given a disability rating which would then be used to determine how much you get paid.

You would otherwise have to purchase a DI policy on your own to provide this coverage. The average cost for a disability income insurance policy is around 1% – 3% of your annual income (take note that most policies will only allow you to purchase around ~60% of your previous salary). You would have to get a personalized quote from an insurance agent to get more details.

VA Benefits

Outside of the VA benefits specifically mentioned already, there are a host of other benefits available such as the VA loan, education and career counseling, VA medical resources, and other support. Evaluate what services you already use or might expect to use when you separate for an estimate here.

Military Discounts

You may never have considered this one, but this perk can really add up as long as you remember to ask about it wherever you shop. This benefit again is highly dependent on how much you spend and if the places you shop offer it.

Invaluable Camaraderie and Leadership Experiences

This consideration isn’t here to try and put a financial number on this one. However, one of the biggest trend items from separating veterans is how they miss the close bonds of friendship that are often more like family for most. You need to have realistic expectations that your average civilian employer will have a different (not inherently bad) culture in this area.

Summary

Let’s add up some example numbers to see what the total estimated annual compensation is:

Basic Pay = $85,047.96
Special Pay = $2,472
Total Direct Compensation = $87,519.96

PSMC estimate of indirect compensation (federal income tax benefit of BAH/BAS) = $3,275.21

State Income Tax = $2,000
Tricare = $16,000
TSP = $310
DIC and SBP = $511.56
Pay Raises = $0
Commissary and Exchange = $800
Federal Long-Term Care Insurance Program = $0
Education Programs = $180
Services Activities = $400
Counseling Assistance = $300
Legal Help = $400
Space-A = $0
Tricare Dental = $216
Leave = $0
Disability Insurance = $1,740
VA Benefits = $0
Military discounts = $2,000
Total Indirect Compensation Estimate = $24,857.56

Example Total Estimated Compensation = $87,519.96 + $24,857.56 = $112,377.52

Service in the military can bring with it quite a lot of financial benefits that are often underappreciated or not considered when evaluating total compensation. In fact, most servicemembers earn more in total compensation than their civilian counterparts when you consider similar levels of education and experience. After this article, I trust you are better able to understand and analyze your PSMC. This can then help you evaluate equivalent civilian employment opportunities or perhaps even come to the realization that you’re better off staying the military for now. In any case, make sure to appreciate each of these benefits now whether you’re getting out soon or will stay for a whole career. In this case, it’s pretty interesting to realize that the total compensation is significantly higher than what the LES says!

Investing TSP

TSP Lifecycle Fund Changes

Post author By Katie Cannon, CFP®
Post date June 16, 2020

What’s the Deal with TSP L Funds and their new updates?

Unicycles, bicycles, lifecycles – The Thrift Savings Plan (TSP) Lifecycle (L) Funds are evolving again. Beginning on July 1, 2020 the L Funds are going through some changes. Here’s the lowdown on what the L Funds are, how they are changing, and a bonus benefit you might not have considered.

TSP has core funds and lifecycle funds you can invest in. The five core funds are:

Government Securities Investment (G) Fund – invests in short-term U.S. Treasury bonds.
Fixed Income Index Investment (F) Fund invests in government, corporate, and mortgage-backed U.S. bonds.
Common Stock Index (C) Fund – invests in large companies that trade on U.S. Stock Exchanges.
The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund.
International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries.

Each of the TSP L Funds, sometimes called target date funds, are designed to meet your needs based on when you plan to tap your TSP retirement savings. If you plan to start spending your TSP savings starting in 2030, the L 2030 Fund is designed for you. You can choose whichever L Fund that matches your situation. New servicemembers in the Blended Retirement System that do not make a choice will automatically be put in an L Fund based on their age.

When choosing an L Fund year, pick a fund target date that matches the year you plan to start spending your TSP savings. This will most likely NOT be the year you could retire from the military. In most cases, if you draw from TSP before age 59 ½ you will pay a 10% penalty. Very few servicemembers will be allowed to serve long enough to retire after that age. Your fund target date maybe the year you plan to finish second career or when you become eligible for Social Security in your mid-sixties.

Each L Fund is made up of the five core TSP Funds—G, F, C, S, and I—in different proportions. The L Funds are target date funds, meaning the proportions of the core funds in each L Fund automatically adjust (also called a “glidepath”) as you get closer to the year you plan to retire (your target date). The L Funds are set up based on the idea that when your retirement is far in the future, you can take more risk (market ups and downs), while seeking greater reward (higher growth in value). You have time to recover from any market downturns before you’ll need your money. When your target date is close, you may want to be more conservative (lower risk, lower rewards) with your investments.

To make the gradual adjustment from riskier to more conservative investments on your own, you can regularly shift some of the money in your TSP account from the more aggressive C, S, and I Funds to the more conservative G and F Funds as you approach retirement. The beauty of the L Funds is that TSP does all that work for you, it’s “fire and forget”.

What is changing?

More choices! TSP is introducing six new L Funds to the lineup.

Right now there are four L Funds in ten-year increments – L 2020, L 2030, L 2040, L 2050 and the L Income Fund. When a target year arrives, it is rolled into the L Income Fund, the most conservative L Fund designed for your retirement years. So, July 1, 2020, the L 2020 is being retired. On that date TSP is also adding five new funds: L 2025, L 2035, L 2045, L 2055, L 2060, and L 2065. The five-year intervals give you more options to more closely match your investment time line. Also, the new L 2055, L 2060, and L 2065 are designed for our youngest servicemembers with long saving horizons.

As you can see in this chart, L 2065, L 2060, L 2055 will be invested 99% in higher risk/higher reward stocks (C,S,I Funds) and just 1% in less risky/lower reward bonds (G and F Funds). L Funds with sooner target dates have less risk. The L 2025 Fund will be invested in 50% stocks (C,S,I Funds) and 50% bonds (G and F Funds). Each month, TSP adjusts the proportions of each L Fund to gradually become less risky as the target date approaches. For example, the investment proportions of the L 2050 Fund will gradually change over time so that in 20 years it will look like the L 2030 Fund in the chart above.

More aggressive. In the past, the TSP L Funds were sometime criticized for being too conservative compared with outside target date funds and didn’t consider service members may also get a pension. In response, beginning July 1, 2020 all the TSP L Funds proportions will gradually change to invest a bit more in stocks (C, S, I Funds) and a bit less in bonds (G and F Funds). The percentage of stocks in the L Income Fund will gradually rise from 20% to 30% over a 10-year period. For the funds in between L 2055 and L Income, the stock allocations will not increase on July 1, 2020, but they will be frozen until they eventually come in line with the glide path planned for the newest L Funds.

More international. Starting April of this year, all the L Funds now have a slightly higher allocation of international stocks (I Fund) than they used to. One planned change to include stocks from less developed (emerging market) countries in the TSP I Fund had been put on hold. Watch for more news on that later this year.

Bonus L Fund Benefits

Hands-off rebalancing. Another great feature of the L Funds is that by design they are constantly taking advantage of changes in the market to buy low and sell high. As we’ve already seen, each L Fund has a certain target proportion of the five core TSP Funds. As markets go up and down, the value of each core fund changes. For example, this year when markets initially reacted to the Coronavirus, the C, S, I Funds’ values dropped significantly, while the G and F Funds held pretty steady. In order for the L Funds to maintain their target proportions, the L Funds had to sell some G and F Fund bonds to buy the now lower priced C, S, I Fund stocks.

A few months later, when the markets went back up, they sold back some of the C, S, I Fund stocks at a profit and put that money back into G and F Fund bonds. This is known as “rebalancing”. The TSP L Funds make these buy and sell adjustments every day. Over time this maintains the funds target riskiness (proportions of the core funds), while earning a higher return than if they had just bought once and held those investments. If you own just the core TSP Funds, you can log into TSP and do your own rebalancing. But you can only rebalance among all the funds two times a month. The L Funds do this for you every day, hands off.

Overall, TSP L Funds are a great choice for anyone who just wants to choose a plan once and let the TSP experts do all the work. Decide what year you think you will begin spending your retirement savings and choose an L Fund closest to that year. If your plans change or you decide you want to be more hand-on, you can log on and make changes to your TSP anytime.

Do you have questions or wonder how best to optimize your TSP? Contact one of our advisors to maximize your retirement savings!

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Investing TSP

Military Thrift Savings Plan Essentials

Post author By Katie Cannon, CFP®
Post date June 5, 2020

Understanding the military thrift savings plan essentials

The Thrift Savings Plan (TSP) is the government long-term retirement savings and investment plan, similar to a civilian 401(k). Together TSP, Social Security, and military pension make up the three pillars of the military retirement system. Service members can make voluntary contributions to TSP through automatic payroll deductions. If you are in the Blended Retirement System (BRS), you will receive contributions paid by the military into your TSP account as well. These contributions are invested for you and are intended (but not guaranteed) to grow over time and provide you with income in retirement.

Contribute

Service Contributions – BRS members (only) receive an automatic contribution by the military to their TSP account every month equal to 1% of your basic pay, regardless of whether you make any contributions yourself or not. This money becomes yours (vested) after two years in the service.

Payroll deduction – BRS members who began or rejoined service on January 1, 2018 or later are automatically enrolled in TSP. 3% of your basic pay is automatically deducted from your paycheck every month and deposited in your TSP account. You can change your contribution if you want. Everyone else must proactively elect their own TSP contributions. For 2020 you can contribute up to $19,500 to your TSP. Service members age 50 or older can make an additional $6,500 Catch Up contribution each year.

Service Matches – BRS members (only) also receive matching contributions (additions to your TSP account) on the first 5% of the pay you contribute each month.

TSP Essentials Tip – Steady Wins the Prize. Matching contributions for BSR members are made month-to-month. If you elect to make large payroll contributions int the beginning of the year and hit the annual limit early, you could lose out on matching contributions later in the year. Consider spreading your payroll contributions out evenly to the end of the year to get all your due.

TSP Essentials Tip – Don’t Leave Money on the Table. BRS members should consider increasing your contributions to at least 5% so you get the full-service match.

Pay Taxes – Or Not

There are two kinds of TSP accounts, Traditional and ROTH. Services will make the automatic and matching contributions for BSR members to their Traditional TSP account. You can choose to make your contributions to a Traditional or ROTH TSP account. The main difference between the two is how they are taxed.

Traditional TSP -Traditional TSP contributions that you make reduce your taxable income, so the amount of taxes that come out of your paycheck now are less. When you withdraw money from TSP, usually in retirement, the entire amount (contributions and investment earnings) is taxable as regular income. For many people their tax rate in retirement will be less than when they’re working and they would pay less taxes overall with a Traditional TSP.

ROTH TSP – With ROTH TSP you pay taxes now on your contributions just like regular income. But when you withdraw money from your ROTH TSP it is completely tax-free (including earnings) as long as it’s withdrawn at least five years after your initial Roth contribution and you are at least 59 1/2 years old, permanently disabled, or deceased.

Tax-exempt contributions – Contributions you make to Traditional TSP while earning tax-exempt pay in a combat zone are not taxed when you make the contribution or when you withdraw it. However, the earnings that grow in your Traditional TSP will be taxed as normal income when you withdraw it. For contributions you may make to a ROTH TSP with tax-exempt pay, the contributions AND the earnings are completely tax-free as long as you meet the withdrawal requirements in the ROTH TSP paragraph. Servicemembers 50 and older can make catch-up contributions with tax-exempt pay only to a ROTH TSP. Catch-up contributions to a Traditional TSP cannot be made with tax-exempt pay.

TSP Essentials Tip – Pay Now, Pay Less. Service members with lower income, such as early in your career, should consider making ROTH TSP contributions. If your tax bracket is lower now than when you retire, you will pay less tax in total with the ROTH.

TSP Essentials Tip – Pay No Tax. You should consider making your TSP contributions to ROTH TSP while you’re deployed to a combat zone. As long as you meet the ROTH withdrawal requirements (59 ½ and 5 years), both the contributions you make to ROTH TSP with tax-exempt pay and the earnings that grow over the years are not taxed. Ever.

Invest Two Ways

TSP offers you two ways to invest your money. The first way is with “Lifecycle” L Funds. These funds are a professionally designed mix of stocks, bonds, and government securities. You select your L Fund based on your “target date,” the year in the future that you plan to start withdrawing your money. Depending upon your plans, this may be as soon as you leave the service or further in the future. The second way is to invest in individual TSP funds. This way you make your own decisions about your investment mix by choosing from any or all of the individual TSP investment funds (G, F, C, S, and I Funds).

When you start TSP contributions, you designate which TSP Funds you want your contribution to go to. If you are a BRS member and do not make a selection, all contributions TSP receives for you will go into an L Fund appropriate for your age.

L Funds – Your target year is when you will expect to start withdrawing money from TSP. For example, the TSP Fund L 2040 has a target year of 2040 and is designed for those who will begin withdrawals in years 2035 through 2044. L Funds assume that if you who won’t need your money for quite a long time, you are able to tolerate more risk (ups and downs) while seeking an overall higher return (increase in value).

The L Funds invest in mix of individual TSP investment Funds (G, F, C, S, and I Funds) and automatically adjust the mix to reduce risk (and returns) as you get closer to your target year. If the target year is a long time from now, that L Fund will be more exposed to risky assets, such as stocks in the C, S, and I Funds. The L Income Fund is designed for those who are already withdrawing from TSP and offers lower risk and lower growth. As the value of stocks and bonds go up and down, each of the L Funds is automatically rebalanced to restore its intended investment mix. In practice this rebalancing forces the L Funds to “buy low and sell high” for you each business day, boosting your return and while maintaining the same level of risk.

TSP Essentials Tip – Rebalance. For those of you in L Funds your set, TSP rebalances for you. If you choose to invest in the individual TSP Funds, you can rebalance among any of the TSP funds yourself up to 2 times a month. Determine what target percentage of each fund you want to maintain, then periodically log into TSP and do an inter-fund transfer by typing in your target percentages.

Individual Funds – TSP has five individual funds you can invest your TSP dollars in. The Government Securities Investment (G) Fund is invested in short-term U.S. Treasury securities. This is the only fund that guarantees you will not lose money. Your contributions (principal) and interest are guaranteed by the U.S. Government. The trade-off is the growth in value will be quite low and might not keep up with inflation.

Each of the other four individual funds (F, C, S, and I Funds) are invested to track separate market indexes. For example, the Common Stock Index (C) Fund seeks to invest in the same stocks as the Standard & Poors (S&P 500) Stock Index. This index includes 500 large companies that trade on U.S. Stock Exchanges. One dollar you invest in the C Fund buys you a tiny portion of each of those large companies. This helps reduce (but not eliminate) your overall risk by diversification, that is “putting your eggs” in many, many baskets.

The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund, and tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index. The International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries and tracks the MSCI EAFE (Europe, Australasia, Far East) Index. The Fixed Income Index Investment (F) Fund invests in a government, corporate, and mortgage-backed bonds U.S. Bonds and tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

TSP Essentials Tip – All L Fund or None. The L Funds are already made up of the five individual TSP funds (G, F, C, S, and I Funds), so you will duplicate your investments if you invest in an L Fund and the individual TSP funds at the same time. Consider choosing only an L Fund for simplicity and hands-off investing, or build and mange your own custom portfolio from among the other G, F, C, S, and I Funds.

TSP Essentials Tip – Early Bird Gets the Worm. Making and maintaining investment choices can seem intimidating. Don’t let that keep you from getting started. You can start now with an L Fund, let the pros work it for you, and start watching your nest egg grow. As your knowledge and confidence grows, you can always make changes and take more control if you want to.

Withdrawals

Retirement – TSP is a qualified retirement plan designed for long-term saving for retirement. You will be able to make retirement withdrawals from TSP once you reach age 59 ½. Generally, if you withdraw money before that time, you will be hit with a 10% penalty, in addition to any taxes due. When you are eligible, you will be offered a choice of regular “installment” payments from your balance, a single lump-sum payment, or purchasing an annuity that guarantees a set monthly benefit for life to you (or your survivor).

In-service – There are two types of withdrawals you can make while you are still in the service, financial hardship and age based “59 ½”. You can make a financial hardship withdrawal if you
can certify you have a financial hardship as a result of a recurring negative cashflow, legal expenses for separation or divorce, medical expenses, or a personal casualty loss. You can only withdraw contributions you made and earnings on those contributions. You can request $1,000 or more; but, the amount cannot exceed the actual amount of your certified financial hardship.
You can make age-based in-service withdrawals any time after you reach age 59½. You can withdraw it all, or part of your account balance up to four times per calendar year.

TSP Essentials Tip – Don’t Eat Your Seed Corn. Early TSP withdrawals can have steep penalties and taxes due. Even penalty-free withdrawals permanently deplete your retirement savings and any future earnings those saving would have made. Consider building an emergency fund and separate accounts for short-term savings that you can tap when you need it. Then your retirement savings will still be there when you need it.

Loans – You can borrow up to $50,000 of your contributions from your TSP account while you are still in the service. There is a $50 processing fee and most loans must be paid back with interest within 5 years. You can get up to 15 years to pay back a loan for a primary residence. If you don’t pay your TSP loan back on time, there will be a 10% withdrawal penalty and the IRS will charge you income tax.

End Note

It’s never too early to start saving for retirement. The key to growing a mighty oak from a seed? Time. Even small amounts put away now will have a major impact on your financial future. Start by tracking your income and expenses, making a spending/saving plan (budget), and then carving out some TSP contributions to seed your future.

One “Final” TSP Essentials Tip – Name a Beneficiary. A beneficiary is the person (or people) that will receive your TSP funds when you die. If you have not designated someone as your beneficiary for your TSP, government law determines who gets it. You can designate the beneficiary you want with TSP, just be sure to update it with life changes like a marriage or divorce.

For more information on TSP, go to www.tsp.gov