New USAF officer - retirement elections

[JeremiahWeed]

My daughter just started on AD, 2Lt, USAF. My retirement option was far simpler. All I really know now is there is a thing called TSP which can be a traditional 401k type vehicle or a Roth 401k. 
Anyone have some basic gouge I can pass along on how to get started and what might be the best option at her stage?

She already has a personal Roth IRA that she has regularly contributed to since she was in high school.  Thanks.  
 

Edited July 24, 2023 by JeremiahWeed

[Hunter Rose]

Max out TSP contributions or as close as possible (Currently $22.5K for 2023).

I'd recommend ROTH TSP contributions because her tax bracket is pretty low as a 2LT.

Put it in the C-Fund, which is a S&P 500 index fund Since the contributions go in monthly, she is dollar cost averaging in.

Wait 10 or 20 years and she'll have a nice chunk of money accumulated for retirement.

Edited July 24, 2023 by Hunter Rose

[FourFans]

Roth TSP 5-10% of base pay, 10% of bonuses.  Split 70%/30%(ish) C/S funds.  If not that, 100% C fund. Let it ride.  If possible increase 1% a year until hitting 25% and she'll have million in that by the times she's in her late 30s.  Should still be able to invest in the Roth IRA without hitting contribution limits (62,000 this year I think?). Definitely gotta get the match as bear minimum though.

I know the 1% increase a year sounds like a lot, and it is, so that depends entirely on lifestyle/marriage/living situation etc.  Just remember that you only get to contribute to the TSP while you serve, and the funds there are ones that financial analysts routinely drool over, especially the G fund for it's in-retirement value maintenance.

A little deeper: The C is basically an S&P 500, which covers major US and is, effectively, international in diversification because all major companies on the S&P are international in scope and investment.  Therefore no need for the I fund.  The G/B funds are great for later in life, but unless in youth. 

[FDNYOldGuy]

Congrats to your daughter! A couple of little extra pieces I'll add.

• As @Hunter Rose said, I'm also a bigger fan of Roth than Traditional TSP (or 401/403/457/whatever) because I'd rather pay taxes now over paying them later. Tax rates are historically low, US expenses: taxpayers are going to get worse, and most of us will earn more in later working years than in early ones. Also, if you have a Roth IRA going, you can roll-over the Roth TSP down the road and you'll not have RMDs. *Bonus of Roth TSP for those getting tax free.
• Try to not max out too early in the year. The match is per-month, not for the whole dollar amount, so they're maxing 5% per month and if you max out early ($22,500 is the 2023 max), you're missing out on their later-year matching.
• Everyone now is in BRS, which isn't terrible. It's a 40% pension if you make it to 20 for jelly of the month (over 50% of the old system), but you get the government contributions/matching if you leave before 20. So, it's not all all or nothing system like the old one.
• Agreed on the C being the basic best bet of the S&P 500 if you like it simple. I also like the S (small cap) and I (international) and hover around 60/20/20, but to each their own. 
• The TSP site said new folks get auto-enrolled within 60 days at 5% in the Traditional option, so I'd say she's probably already started down the road. Just have her adjust to the Roth, or the makeup of investments, if she thinks she wants something different.

[Danger41]

Good advice and 100 different strategies for her, but the one that gets missed most often is that if she does a full 20+, she will get 2% of base pay per year instead of 2.5% like the old system. So she won’t make as much in check form, but if she does the contribution matching, chooses right fund etc, she could do better. And if she doesn’t retire, she’ll have that TSP that can be rolled over once into a civil 401k type plan. 
 

Congrats to her on entering the AF and thanks for her service. Hopefully she has as successful career as her Dad.

[LiquidSky]

One thing to note is the BRS has 5% match. So you don't want to max out early in the year but forecast a percentage each month to allow for at least a 5% contribution in December. Make it roth since most our pay isn't taxed. And max out now. You can't miss what you n3ver had.

Lastly the I fund offered is terrible. Heavily weighted towards japan which has been stagnant for 3 decades and other allied partners who don't have much better track records. Use C and S only. 

[raimius]

TSP (to get matching at a minimum, max out if able), plus Roth IRA.  

Make sure to log in and select the funds desired (it used to default to the gov bonds fund).  

Neat strategy someone passed to me was to throw in half of any pay raise.  That way take-home increases with pay raises, but so do the investments.  In today's scale, that's an "extra" $1k+/mo by the time they get to O-4--and it will never seem like a sacrifice.

[JeremiahWeed]

I really appreciate the advice and sentiments.  I knew I could count on you folks.  The bro level gouge made my own research easier to digest as I'm not wondering if what I'm reading really means what I think it does.  I was able to forward research links to my new LT along with some extra info to put it all in context.  You guys really helped me and that's huge.

Cheers,

JW

[DonnieDucko]

Awesome! One thing I’d like to add is that she will get the automatic 1 percent matching after 60 days of service but she won’t get the full 5 percent matching till two years of service. Fully maxing her TSP might be difficult till she is around a 1 Lt. The additional matching in effect let’s you go over the contribution limit of 22.5k— but they are Traditional contributions by default for the matching. 
 

Good resource for the BRS plan summed up :

https://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/BRS New Accessions Course/Uniformed Services Guide to BRS.pdf

Edited July 25, 2023 by DonnieDucko

[TreeA10]

I invest most of my money in strippers and booze then go crazy with what's left.

[FDNYOldGuy]

13 hours ago, DonnieDucko said:

One thing I’d like to add is that she will get the automatic 1 percent matching after 60 days of service but she won’t get the full 5 percent matching till two years of service.

This is a pain in the ass that it takes that long to get the match, but there's one caveat to this: the two year point starts from enlistment/joining the service, not the first day you start orders. I think it's 2 years from the "Pay Date" section of the LES. Anyway, I expected my match to start a few months later that it did and realized it was my date of swearing in. I'm not sure if this backs up even further to those (few) that get paid for something during the recruiting pipeline, but it's possible. 

Guard folks swear in super early and Reserves can at least a couple months before they start getting orders officially, so it's good to do it ASAP if you want to set yourself up a little earlier on the retirement matching sooner. It helps a lot for being AD/on orders during the UPT pipeline, as you'll get more months/dollars of match than if you hold off. Nothing life changing, in reality, but worth knowing and could help get a few hundred extra bucks thrown in there. 

[ViperMan]

As other people said, use the Roth version of the TSP. Shelter as much of your future income as possible.

Not necessarily a financial strategy, but there is something she's probably eligible for, called the lifetime learning credit. Even if she just takes personal interest courses, I'd rather have my $2000 spent on me than some social project.

https://www.irs.gov/credits-deductions/individuals/llc

[CaptainMorgan]

3 hours ago, ViperMan said:

As other people said, use the Roth version of the TSP. Shelter as much of your future income as possible.
Not necessarily a financial strategy, but there is something she's probably eligible for, called the lifetime learning credit. Even if she just takes personal interest courses, I'd rather have my $2000 spent on me than some social project.
https://www.irs.gov/credits-deductions/individuals/llc

It’s 20% back, up to $2000. I don’t think racking up $10000 for personal interest courses to get $2000 back is a great idea.


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Edited July 26, 2023 by CaptainMorgan

[Day Man]

In addition to the advice here, one of the best things she can do is read and learn about saving/investing herself . There are so many different details/nuances in the different vehicles (stocks, bonds, CDs (nuts), ETFs, mutual funds, real estate, etc), she can set herself up for success with some basic knowledge. Also, have her sign up for the amex platinum while she's active duty (just make sure she knows she has to pay it off every month).

[ViperMan]

2 hours ago, CaptainMorgan said:

It’s 20% back, up to $2000. I don’t think racking up $10000 for personal interest courses to get $2000 back is a great idea.


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You are correct. The AOTC is the one that is 100% up to $2000.

https://www.irs.gov/credits-deductions/individuals/aotc