Thrift savings earn a bundle for retirement
By Chris Fowler, Stars and Stripes
Pacific edition, Sunday, March 18, 2007

Join the military and become a millionaire.

Not a pitch you'll likely hear from military recruiters. But maybe it could be.

No, you'll never become wealthy off your military retirement pension. But if you invest wisely in other areas, you might surprise yourself.

One investment option available is the Thrift Savings Plan, in which a percentage of each paycheck is dropped into a retirement program available to servicemembers and government civilians. Even the smallest contributions can add up to big bucks, says a financial expert who works closely with servicemembers.

"A military retirement is a great start," said Yokosuka's Fleet and Family Service Center Personal Finance Manager Collin Schriver. "But TSP could be the key to your financial future."

In contrast to your military retirement, based on years of service and rank at retirement, TSP is a federal government-sponsored defined contribution plan. The income you receive from a TSP account will depend on how much you contribute to the fund.

The power of a TSP account is found in the financial voodoo of compound interest. The compounding is the result of earning interest on your investment plus the interest the interest is generating. The growth becomes exponential.

"It is important for people to understand two things in order to get the most out of TSP: delayed gratification and dollar-cost averaging," Schriver said. "I think delayed gratification is the hardest for young servicemembers to accept. Many people don't look past next paycheck let alone look at the next 40 years."

Dollar-cost averaging allows investors to ride out the ups and downs of the market.

"With dollar-cost averaging, it's not the constant market fluctuation that you're concerned with, but rather the funds average price over the long-term," Schriver said. "When the markets are up, you buy fewer shares, when the markets are down; you buy more."

A lot can happen with a monthly investment of $200, with a 10 percent rate of return for a period of 40 years. According to a savings calculator at www.cnnmoney. com, after 10 years the principal and interest would total $39,972. After 40 years, the accumulated principal and interest could be more than $1.1 million.

Participants allocate how their contribution is distributed through professionally managed funds. (See box.) The plan is designed to minimize short-term risk, mitigate risk in the longer term and maximize returns across the board, said Schriver.

TSP became available to servicemembers in 2001. Those who joined early are already realizing the benefits of their decision.

"I didn't have any sort of retirement plan other than my military pension," said USS Kitty Hawk Chief Petty Officer Jason Chudy. "When it was offered, I jumped on it."

Chudy increased his contribution allocation throughout the last six years. "Now it is worth more than $40,000 and growing. I am preparing for my future now, and TSP is going to make it a lot more comfortable."

But what if a person is not going to make the military a career?

"Even if you are planning on getting out of the military after your first enlistment, enrolling in TSP is a good idea," said Schriver, pointing out that you can contribute to TSP only if you are on active-duty status or a government service employee.

According to Schriver, upon military retirement or separation you have three options: cash out, roll your TSP into a traditional individual retirement account or employee 401k plan, or leave the money in TSP and let is accrue interest tax free.

"If you cash out, you're going to pay a 10 percent penalty, and you will be taxed on the money as regular income," said Schriver. "So, if you retire, it's better to roll your TSP over into an IRA or 401(k). That way you can continue to contribute into the account."

According to the TSP Web site (www.tsp.gov), you may begin withdrawing your TSP with no penalty at age 59½, and must begin withdrawing your TSP no later than age 70½.

You are not taxed on your contributions or their earnings until you withdraw your money.

People who participated in TSP during tax year 2006 may be eligible for the Retirement Savings Contributions Credit, according to the Web site.