Max Out Your TSP in 2012

We've just updated the "Max Out Your TSP" table for the proposed 1.6% military active duty pay increase for 2012. Here's the link.

Here's how you use it. In this example, a Major (O-4) with more than 18 years of service would go to MyPay.gov, select the TSP link, and select 19.8% as their monthly contribution.

Similarly, a Lieutenant Colonel with 16 years of service would contribute 18.2% of their base pay to max out their TSP for the year.

Here are a couple of notes. First, this table assumes that the Congress will approve the 1.6% increase and that the President will sign the bill into law. Second, it assumes that you will want to max out the TSP at $17,000 for the year. If you are older than 50 the max contribution is $22,500. This table does not account for the extra $5,500 catch up provision.

Should we change the military retirement system?

According to the non-partisan Pentagon Advisory Board only 17% of military veterans ever collect a pension for their military service. This small but vocal group is screaming to ensure that the current system is left untouched.

As a military member with more than 20 years of service, I am glad that they're fighting for the current benefits, but I also appreciate the great cost to the Nation for this plan, and the fact that many who have served, and some who have faced combat, only have basic veterans benefits and no retirement contributions. Fortunately we did gain access to the Thrift Savings plan about ten years ago, but before that we were completely left out.

So, do you think we should throw out the current system and install the system that the board recommended? This would have the government contribute about 16% of your base pay to a TSP account for each year of service. You would likely not be required to contribute, but would have to opt out formally with automatic enrollments deducting about 3% of your base pay to add to the government contribution.

While you would not be able to withdraw this money until you are 59 1/2 without paying a penalty, you would be able to borrow 1/2 of the value of the account, up to a limit of $50,000 with a pay-back period of 5 years, or as much as 15 years for the purchase of a home.

I see great value in giving all veterans a benefit for their service, particularly if it installs a habit of savings right from the very beginning of their careers. On the other hand, this move fails to account for the fact that military members pay a high personal price for serving, and we are unlikely to be able to continue to work into our 60's as military members.

What do you think we should do?

Military TSP participation Rises

Reviewing the announcement from Government Executive discussing the TSP, I took note of the military participation rate, quoted at 49.5% of active duty military personnel. This compares with 84.9% of government civilian personnel who usually receive matching contributions to their Thrift Savings Plan Accounts.

Military members are not eligible for matching funds, but as I've mentioned in this space previously, it takes 20 years of active service to be vested in this retirement plan. Military members, particularly junior personnel who are not yet certain if they will remain in the service for at least 20 years, should take the positive step today of saving a portion of their military pay in the Thrift Savings Plan.

Why is the participation rate so low? The first factor is that you actually have do take a few steps to sign up for the TSP. Federal Civilian employees are automatically enrolled and must opt out. This simple change dramatically increased the participation rate, of course. The automatic enrollment is a low 3% of pay, but this modest savings can grow as the pay increases come over time.

I have posted previously about adding the annual cost of living increases to the TSP savings. As many of you know we received a 1.4% increase last year and the President has suggested a 1.6% increase for 2012. If you added those increases to the 2010 initial deduction of 3% of military pay, you'd be at a respectable 6% of the initial sum within 3 years. If you continue to use this technique over time, you'll find that you have a significant retirement account as you leave the military whether it is after a 4 year tour, or a 30 year career.