G.I. Jobs Virtual Job Fair   |   June 27

Virtual Job Fair   |   June 27

How to Plan for Retirement in the Civilian World

Retirement isn’t something most service members consider while they’re in the military. One of the big selling points for military service, indeed, is the guaranteed retirement payouts once you hit 20 years.

However, less than 25 percent of military members ever make it to earning a military retirement, and so-called “defined-benefits” plans like the military has (also called “pension plans”) are few and far between in the civilian world. So if you are transitioning, and want to make sure you have some retirement money by the time you get in your 60s, check out this advice.

The Federal Retirement Account (Thrift Savings Plan, or TSP) is the best you’ll ever find. The TSP is a retirement investment account run by the federal government and offered to federal employees, with the government matching employee contributions up to 5 percent of their salary. It’s offered to military members too, but the feds don’t match a service member’s contributions. The government also pays all fees for the account, meaning it’s absolutely free to the people who use it. There is no better retirement investment plan than this.

If you got a TSP account while you were in the military, well and good. You can open one even on your way out of the military, however. And it might be a good idea to have it in your back pocket, so to speak, in case you find yourself working for a company which doesn’t have its own retirement plan.

You can still receive military “defined-benefits” retirement if you transition out…but only if you complete your 20-year commitment in the reserves. This works a little differently, of course. If you make it to 20 years and retire while active duty, your benefits start immediately. But if you leave active duty and complete 20 years of service in the reserves, then your benefits start at 60 years of age. Also, you have to complete your 20 years within 24 concurrent years, meaning that you can take some time off before going back into the reserves, but not too much. Otherwise you’ll hit 24 years from your first day as a service member before you complete 20 years of actual service, and you’ll get booted.

Still, that’s not too shabby, if you want to play the one-weekend-a-month, two-weeks-a-year warrior for the remainder of your 20 years. But it’s not a lot for retirement, so you probably still want an investment account.

If the TSP is so good, why would I consider anything else? Many companies have their own retirement investments for employees, usually called 401(k) plans after the section of federal law which establishes them. The benefit to using one of your company’s plans is that your company may “match” your contributions, meaning they will also contribute free money to your account as long as you do. Most companies only match up to 3 percent of your salary, but that’s still free money that you wouldn’t get otherwise. However, it may not be worth it if you have to pay annual fees to use the account–unless the company match is greater than the fees, you’re better off in the TSP.

What is a retirement investment account? Well, many people live 30 or more years after traditional retirement now, which was not the case even 50 years ago. The problem with that is that their pensions were bankrupting their companies, especially during economically hard times like the 1970s and the early 2000s. And if the company that owes you a pension goes out of business, well, so does your pension. Also, more workers’ careers didn’t include staying at one company for 40 years, which was the usual requirement for a pension in the first place. So Congress created laws to allow retirements based on investment, which is a lucrative and very certain way to make money, if you’re willing to wait a while (like you might be for retirement).

As permitted by law, these accounts are called Individual Retirement Accounts (IRAs) and are tax-deferred, so it’s free to contribute money to your own retirement. Essentially, any money you put in an IRA is not taxed. So if you make $60,000 a year, and contribute $5,000 a year to your IRA, then your taxable income is only $55,000. This tax-deferment means it’s a better deal for you to contribute money to retirement than stashing it in a savings account. And the earlier you contribute money, the more it will grow.

You will pay taxes, however, when you withdraw money. But you only pay taxes on the money you use, while the rest of what you’ve saved and grown in the IRA remains tax-free. A regular IRA is often referred to as a “Traditional IRA.”

There’s also a type of investment account called a “Roth IRA.” It is not tax-deferred, meaning you put money into it after taxes have been assessed. However, it carries a different tax benefit: you don’t pay any taxes, including capital-gains taxes (which are for the money you make investing in stocks), when you withdraw money in retirement — money which has potentially grown significantly.

Usually, you must reach the age of 59 1/2 to withdraw money. If you try to take out money before, there’s a stiff financial penalty in addition to taxes. So when you contribute, don’t expect to see the money again unless it’s an absolute emergency.

Are retirement investments safe? Some people are nervous about investing in the stock market because they remember crashes, like the housing bubble crash (which drastically affected the markets) in 2008. However, history has shown that the market grows over time at about 6 percent per year. You might have to postpone your retirement if a crash hits, but within a few years your account will have very likely recovered its value.

How much will my money grow in an IRA? That depends on how long it’s in there. If you’re a 22-year-old starting an IRA for the first time, and you contribute $450 a month until you’re 65, you will contribute $232,200 in your lifetime. But if the money you contribute grows at 6 percent a year — the market average — your account will be worth $1.09 million! That’s more than $850,000 of growth. By comparison, if you start your IRA as a 30-year-old who suddenly has a sense of responsibility, and do the same thing ($450 a month until 65), then you’ll contribute $189,000 and end up with an account worth just over $641,000…only a little more than half of the guy who started only eight years earlier.

You can play with these calculations using an online investment calculator, and remember that the example above does not account for higher contributions later in life (when you make more money, typically), or higher-than-average stock returns by your account manager. The big takeaway is that starting early means much bigger dividends.

Should I go with a traditional IRA or a Roth IRA? There are several opinions on this one. A traditional IRA lessens your tax burden today, which is very good. And though you pay taxes later, you only pay them as you use the money, so it’s manageable. For example, if you begin withdrawing $4,000 per month for your retirement, then your withdrawals will be taxed accordingly, and your yearly income tax will be on your “income” of $48,000 (which is pretty low). However, if you withdraw your full $1.09 million, you’ll pay income tax that year on the entire amount…which would likely be more than half the total.

A Roth IRA, on the other hand, is taxed when you contribute. So your tax burden applies to your whole income while you’re working. But once you retire, you can withdraw tax-free. Essentially, you can choose either to take the tax break early in life or late.

When should I have my retirement figured out? The short answer, is right now. In fact, it would have been better to have it figured out when you first started earning a paycheck. But it’s not too late to begin. It’s harder in the civilian world without the defined-benefits of a military retirement backing you up, but it’s possible. You just have to make sure you contribute money on schedule, or better yet set up automatic withdrawals from your paycheck. That way you’ll never even miss the money, and surprise yourself with a tidy sum when it’s time to stop working for good.