Budget is a must. Liquidity not at issue with the Loan/High Yield plan. Regarding TSP Match: I'm still learning about the Military TSP, but it appears Navy only matches 1% for first two years, then on year 3, Navy matches an additional 4%-do I understand that correctly?
He has maxed out on his Roth IRA at Vanguard (Target Retirement fund 2060 ER=8bp) for all four years while at USNA (FYI USNA finance officer during Plebe Parrents Weekend, said he was not eligible for a Roth-but that is incorrect as the $ MIDN receive is "Earned Income" reported on a W2). LT savings plan is to save 18% in the TSP (his $ + Navy match). My money rules: 1. money in motion costs money. 2. money doesn't grow on fees, 3. trust but verify.
Sorry for the length that follows. A friend who is a mil finance-specific blogger, author, and speaker (retired Navy Officer) offered my daughter the following TSP/Roth/financial advice when she got her first assignment out of ROTC. I know everyone has different financial/investing thoughts but maybe something here will help your newly AD son.
Here’s the easy button in six steps, with the details below that.
1. Set up a contribution from MyPay of at least 5% of base pay per month to the Roth TSP. (This part has to be done now in order to get the full DoD BRS match on the next paycheck.) The servicemember’s contribution should go to the Roth TSP. By federal law, the DoD BRS agency and matching contributions will go into the traditional TSP.
2. On your TSP account, put both the Roth TSP contributions and the traditional TSP contributions into the same funds. L2050 is the easiest choice. Splitting the contributions among the C, S, and I funds will lead to slightly higher gains (and much more volatility). An asset allocation like 60% C, 20% S, and 20% I would be fine, while 80/10/10 would be a little less exciting. There’s no need to rebalance, and don’t try to time the market-- just make sure the TSP statements confirm that the TSP contributions end up where you told them to go.
3. From MyPay or your checking account, set up a $500/month contribution to a Roth IRA. (The contribution limit is $6000 in both 2021 and 2022, although it might rise in 2023.) Transfer the money from either your MyPay account direct to the fund company, or from your checking account to the fund company-- whichever is easier. Doing it from a checking account is much more flexible if your military pay gets screwed up.
4. Invest the Roth IRA contributions in a total stock market index fund. Vanguard, Fidelity, and Schwab are all great companies for this. Examples are VTSAX, FZROX, or SWTSX.
5. When your pay stabilizes (6-12 months after starting active duty) then consider maximizing your Roth TSP contributions. The 2021 limit is $19,500 and the 2022 limit is $20,500.
6. After you reach the contribution limits for your TSP and your IRA then contribute as much more as you can to taxable accounts. That’s a separate brokerage account with one of the big three companies, and it’s easier to have it at the same company as your Roth IRA. It's probably easier to set up monthly transfers from your checking account.
Spencer Reese at Military Money Manual has a great flowchart for the above steps, with minor differences:
https://militarymoneymanual.com/personal-finance-flowchart-military/#more-10600
After those six basic steps, you can spend the rest of 2022 focusing on getting qualified at your military career, knowing that your investments are on autopilot.
The details:
These are good to know if your troops have questions or if your command asks you to give personal-finance training.
1. The rule about the DoD BRS agency/matching contributions going into the traditional TSP is in paragraph 7.b.(12) of the policy document:
https://militarypay.defense.gov/Portals/3/Combined BRS Policy Document (Updated Oct 2020).pdf
It’s important to contribute at least 5%/month in every month (no front-loading before December) or you’ll miss out on the monthly DoD BRS match.
Military servicemembers are lightly taxed, and right now you might be in the lowest income-tax bracket of your life. The Roth TSP and Roth IRAs are better investments now, up until you’re an O-3 and maybe even an O-4. Contributing to a traditional retirement account now would only set you up to pay higher income taxes in your 60s and 70s.
2. If you’re comfortable with the volatility of an aggressive asset allocation like the C, S, and I funds, then over the long term (10 years) you’ll end up with more wealth. If the volatility is making it hard to sleep at night then the L2050 fund includes shares of the F and G funds, which reduce the volatility but also reduce the total return.
Rebalancing seemed like a good idea 20 years ago, but these days the research shows that it doesn’t make much difference when you’re investing in index funds. Rebalancing is more important if you’re picking individual stocks or alternative assets like cryptocurrencies.
3. Monthly contributions to an IRA make it much easier to automate the process. There’s no need to front-load the year’s contributions unless you have extra cash sitting around.
A Roth IRA not only lower income taxes now, but the contributions can be withdrawn at any time for any reason. This makes it a useful short-term emergency fund if your pay is messed up by travel expenses (lodging & transportation) or other DFAS problems.
4. You want to invest in passively-managed total stock market index funds with low expense ratios. They can be very volatile during recessions, but monthly contributions during your working years will generate higher long-term returns. The key is getting comfortable with short-term volatility (or ignoring it) in order to reap the long-term rewards.
5. Maximizing your Roth TSP contributions depends on your debts and your lifestyle. The key is to have a lifestyle that feels fulfilled by your frugality (“Winning!”) instead of deprivation. You might not be able to hit the contribution limits until you promote to O-2, especially with student loans or consumer debts.
The Roth TSP contribution limit ($20,500 in 2022) is all from your pay, and the DoD BRS agency/matching contributions are not counted against that limit.
Your TSP contributions are in percentages to make sure that you save more with each promotion, especially if you’re one of the servicemembers who doesn’t pay attention to TSP contributions. Make sure it’s at least 5% in every month of the year and low enough to hit the final contribution in December (no front-loading).
TSP contribution limits are much higher if you deploy to an area where you’re earning Combat Zone Tax-Exempt pay:
https://the-military-guide.com/maximizing-your-thrift-savings-plan-contributions-in-a-combat-zone/
6. You might not start investing in a taxable account until you promote to O-2. If you’re achieving a savings rate of 40% of gross income then you’ll maximize your Roth TSP & Roth IRA contributions and save the rest in taxable accounts.
