Save Today, Enjoy Tomorrow
Consistent Retirement Contributions are Key, Despite Challenges
June 17, 2014 by Mark Dye
We recently partnered with the National Foundation for Credit Counseling (NFCC) and Harris Poll to conduct a financial survey of military members. The survey revealed that worries about military cutbacks could lead to a reduction in retirement savings. This can be a bit short-sighted, however, as contributing early and often is the key to making the most of your golden years. This blog shows just how much you might have if you follow a consistent strategy.
In the civilian world, only around 70 percent of people save for their retirement. In the military, that number is an impressive 87 percent. But as concerns about federal budget cutbacks start to increase for military families, it is possible that some families might reduce how much they set aside each month. Saving for retirement should be one of those “no brainer” decisions in our lives—something everyone really should do no matter their income level.
Where to save
Military families have a great long-term savings tool in the Thrift Savings Plan (TSP), a federal-government-sponsored savings and investment plan, just as civilians do with a 401(k) plan. Some other options for long-term savings include Money Market accounts, Individual Retirement Accounts (IRA), and even simple Certificates of Deposit and savings accounts.
Each one of these has different rules, offers different amounts of interest, and has different requirements for withdrawal and how you can access the money. Which one you choose will depend on what kind of return you want, and how often you will need to get to the money.
One way to make sense of these options is to talk to someone at a bank or credit union, or with a financial advisor. They can provide more information about savings options, and even assist in developing a plan to help reach your financial goals.
When to save
Starting early, with a consistent amount, and staying disciplined, will eventually unleash the power of compound interest: interest that is added to interest.
The following chart shows the power of compound interest. It lists the age the saving starts, the total amount contributed through the years if $100 is invested each month, and the amount that will be available at age 65 (the civilian retirement age, not the military retirement age of 40). As the numbers show, starting early is the key. (Note: This assumes a 10 percent rate of return, which is the average annual return on stock market investments over the past 60 years. Individual results may vary.)
Starting Age Total contributed Amount at age 65
18 $56,400 $1.102 million
25 $48,000 $559,000
35 $36,000 $207,000
45 $24,000 $72,000
If a person waits just seven years to start saving, it will cost them nearly half a million dollars in the long run, even though they invested just $8,000 less than if they had started earlier. That is the power of compound interest, and why saving now pays off big time later.
How to save
Many families may think they don’t have any extra money to dedicate to their retirement. After all, if they are finding it hard to pay their bills each month, worrying about their finances 50 years from now doesn’t seem all that important. But these families may be surprised how much money is hiding in their budgets.
The military also gives you a chance to build up savings quickly thanks to bonuses and specialty pays. Consider putting any reenlistment bonus, increased monthly pay due to tax-free earnings status, or specialty pay into a TSP account. In fact, a reenlistment bonus itself, when invested in the TSP and allowed to compound, can get a service member very, very close to what he or she needs to retire comfortably.
The key point is that every budget has room for savings. While it may take an effort to find it sometimes, the effort is always worth it.
How to move forward
Once a TSP is set up and contributions are being made, it’s important to consider the options available within the TSP. There are several different types of funds, each with its own level of risk and return on investment. Which one to choose depends on a service member’s financial goals, but there are three strategies to keep in mind:
- Be patient and aggressive when young—There have always been ups and downs in the market, but it averages out to be a net positive over time. Those who are younger can afford to be more aggressive since they have more time to make up any short-term losses. They can also be more patient since compounding interest works in their favor.
- Be diverse as time goes on—As retirement gets closer, it’s important to be less aggressive to ensure stable income. Branching retirement savings into CDs, bonds, annuities, and other lower-risk instruments may not offer very high rates of return, but they are more stable and can offer consistent payments when needed. This is important because any declines in the economy close to retirement age means there is less time to make up that loss.
- Be consistent—Once joining the civilian ranks, it is important to continue contributing to a retirement fund of some sort. This will greatly increase the probability of a financially secure retirement, and the opportunity to have $1 million ready for your golden years.
Now stick with it
With a little smart budgeting and some good savings habits, it really is possible to have a secure retirement. It takes a commitment to the goal, a willingness to make hard choices when necessary, an adaptability to changing conditions, and an ability to not panic when times get tough.
For more information on the TSP program, visit www.TSP.gov.