TSP for Beginners: Navigating Your First 2 Years | Military Money Manual Podcast Episode 100

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Episode 100! Big thank you to all of the listeners and supports of the podcast!

In this episode, Spencer and Jamie go on a journey through the first two years with a Thrift Savings Plan or TSP. If you are new to the military or know anyone new to the military, this one is for you! 

Military Money Manual Podcast Episode #100 Links

Military Money Manual Podcast Episode #100

[00:00:00] Spencer: You now own a small piece of every publicly traded company in America, which is awesome, which is huge. And I don't think a lot of people recognize that when they say “Oh, I own the C and the S fund.” Think about what's actually inside those funds. It's not just numbers on a screen.

It's an Apple Store employee in New York City who just sold the new iPhone for $1,500. 

I'm Spencer Reese from militarymoneymanual.com joined today by Jamie. 

Hey Jamie. 

And we are sitting here on the beautiful island of Lana’i, little business trip, little corporate retreat for the Military Money Manual podcast.

And we're recording a couple episodes in person. Very excited about that. Yes. 

In this episode, we're going to take someone who just joined the military, whether you're enlisted or commissioned, we want to take you through your first two years with a Thrift Savings Plan or TSP. I know I ignored the TSP for a long time when I first joined the military because I didn't understand it.

And if someone had sat me down and had explained it to me, I think I would have realized what a great deal it was. And I would start investing in it a lot earlier.

[00:01:28] Jamie: Yeah, I remember starting out, I think maybe a year or two after active duty for me, I started with maybe a $50 contribution or something because someone told me you should be contributing to it, probably just in passing or I saw an article or something like that.

So I knew I needed to start but didn't really know what to do with it. So I didn't really have any guidance on where to go.

[00:01:49] Spencer: Yeah, I knew what an IRA was. I knew what a Roth IRA was, I was investing in that, but I, and at the time I wasn't in BRS, right? I wasn't in the  Blended Retirement System.

But now anybody who's joined the military after 2018 is in the Blended Retirement System. And so congratulations, you get matching on your TSP contributions. And in fact, you're going to get automatic TSP contributions, they're just going to be taken out of your paycheck and put into your TSP account. So it behooves you to understand where your money is going, right? And how you want to invest it. 

Now, if you're an old timer listening to this, you're going to remember the old TSP system. When you contributed, it automatically went into the G fund and that wasn't such a great deal. We'll get into that a little bit later in the podcast, but the new system is a much better deal for our military service members and everybody has to participate if you're in the Blended Retirement System. So it makes sense to understand the TSP because you're a participant. 

[00:02:45] Jamie: It affects everyone. So we're going to talk today about some of the basics of the TSP. What it is, what is the Blended Retirement System, where does money come from, whether it's from you or from the federal government.

What types of funds are available and maybe some strategies for how you can increase your investing potential over the years, whether you do a two year career or a 20 year career.

[00:03:07] Spencer: So Jamie, what's the difference between somebody in the reading the news or might hear about an IRA or a 401k? Where's the TSP fit into the  investing universe?

[00:03:17] Jamie: So when you hear TSP, it's Pretty much like a 401k. It is an employer sponsored retirement plan, an IRA, whether it's Roth or traditional. A lot of times people think an Roth IRA is its own thing and it is, but it's just a flavor of an IRA, Individual Retirement Account. You put your own money into that arrangement.

The I R S has certain benefits for that. You will have certain benefits for contributing to that over your lifetime. But the 401k or the TSP, the Thrift Savings Plan, is employer sponsored. That means it's through your company, your spouse or your cousins or anyone that's not in the military would go to HR to talk about their company's 401k and what funds are offered and things like that.

All of that is the TSP for people working for the federal government, like you military service members.

[00:04:04] Spencer: Yeah, and Jamie, you mentioned that there are two different flavors of IRA. There's also two different flavors of the TSP, right? 

[00:04:11] Jamie: Absolutely.

The two big flavors, if you want to think of them that way, are the Roth or traditional.

It just impacts when you pay the taxes and how your money grows and then is taxed or not taxed later on in the future. So if you're looking at Roth contributions in the TSP or in your IRA, it's the same thing. This is named after the senator that passed the legislation for this. So a Roth fund will give you the ability to pay taxes now.

And then it grows tax free and then when you pull the money out at retirement you don't pay any taxes on all that money where a large majority of that at a traditional retirement age is going to be growth. And you don't pay any taxes on the growth of those dollars because you pay taxes on them today and then 40, 50 years from now you take it out tax free.

[00:04:55] Spencer: And then the other one is traditional. So you're going to. You get tax benefits today, you pay your taxes in the future, so you don't have to pay your taxes now and that might be beneficial if you're expecting to have a lower taxable income or lower tax rate in retirement, which it depends if you're a high income earner, let's say you're making, quarter million or a half million dollars a year, you can probably make a pretty safe bet that your tax rate in retirement is going to be lower than what you're currently making.

But if you're in the military, we have the advantage that most of our income is tax free. Plus, with the standard deduction and everything else, military service members have a very low effective tax rate. So for 99 percent of military service members, especially if you just joined, you just enlisted, you just commissioned, The Roth TSP is going to be better for new military service members.

So I recommend that military service members make their contributions to the Roth TSP account.

[00:05:53] Jamie: And then the last basic that I want to cover is that inside of the TSP, it's really just like a bank account if you want to think of it like that. You still have investment vehicles or options inside of your Thrift Savings Plan.

So it's not enough to just send money to the TSP. without knowing where it's actually going. And so we're going to talk about that in a few minutes, but it's just an overarching theme with a lot of options underneath for how you actually employ and invest your money.

[00:06:18] Spencer: Okay, so let's take someone who just commissioned or enlisted in the military and let's take them through the first two years of their participation in the TSP plan.

Jamie, what's happening day one?

[00:06:31] Jamie: So on day one, for anyone that joined after October 1st of 2020, The military is automatically going to enroll you in the TSP Lifecycle Fund at 5 percent contributions. And it's funny because now you can opt out of that 5%, but now the military is going to re-enroll you at 5 percent every January 1st.

So it just goes to show you how important it is to at least get something there. And 5 percent is a good starting point for a lot of people that the military automatically enrolls you there and then wants you to be there again. If you ever turn it off every January, every calendar year, they're going to reset you at 5%.

[00:07:07] Spencer: Yeah. So for most people, like their first day in the military, it's probably at basic training, right? Some kind of basic military training we call it BMT in the Air Force or bootcamp or whatever. If you commission, you've probably completed all of your initial military training during your schooling during your college, or you went to OTS or something Officer Training School And so maybe if you're in boot camp, you probably don't have access to a computer to go create a TSP account But once you do have access to a computer or if you just commissioned and you have time you can go to TSP.gov. You can create an account and once you have a TSP account you can log in there, you can adjust how your money is allocated, where your funds are going, when TSP gets money from your paycheck, and then you can log into MyPay, which is the Defense Finance Accounting Service, or DFAS.

They're the guys who pay all of us, whether you're an Army, Marine, Navy. Air Force, you get paid through DFAS. The website, it's called MyPay, you can just Google it, it'll pop up, MyPay Military, and you can adjust the amount that you want to contribute and make any changes to your contribution, whether it's Roth or traditional contributions, you can make that through the MyPay website.

[00:08:25] Jamie: So eventually you'll need two accounts, one for tsp.gov and then your MyPay account. TSP is more for monitoring and making small adjustments inside of your account, but thinking more of statement balances. And MyPay is, you set the percentage you want of your pay, percentage of your basic pay, percentage of special pay, and whether you want it to Roth or traditional contributions.

That's all done in MyPay.

[00:08:46] Spencer: Okay, Jamie. So this takes us to day 60 now, which is another milestone in your first two years participating in the thrift savings plan. And this is when automatic 1 percent contributions kick in under the Blended Retirement System or BRS. So that's money that does not come out of your pay.

That is also known as an agency contribution. And basically, the Department of Defense says we are automatically going to kick 1 percent of your pay from a different pot of money. It doesn't come from your paycheck. So if you're paid $1,000 a month They're going to put $10 a month into your BRS just as your 1 percent on a Mac contribution that starts on day 60.

Then after 24 months now you finish your first two years in the military you are eligible to start receiving matching and what the matching does is it adds an additional 4 percent of your basic pay up to a total of 5 percent. So the 1 percent automatic you always get that whether you're contributing to your TSP or not, but if you want to get that additional 4 percent of matching, you have to contribute at least 5 percent of your base pay or special pay or whatever.

But you have to contribute 5 percent of your pay to the TSP in order to get the full agency matching.

[00:10:03] Jamie: Yeah, remember you can contribute more than 5%, which eventually you might want to work up to, but 5 percent if you're brand new to the military is a great place to start. Don't limit yourself to that even though you only get a 5 percent match.

And remember, the percentages are also based off of your base pay. So even if you get BAH, BAS, incentive pay for your career field or anything like that, it's only based off of a percentage of your base pay. 

Okay, so this money is going in from me and from the agency. Now, Spencer, do I actually get to keep all of that money?

I've heard a term called vesting. When am I vested in my contributions?

[00:10:38] Spencer: Yeah, so vesting means that you as a participant in the Thrift Savings Plan, the TSB, you're eligible to keep all the money from your accounts when you leave your job. For military service members, All of your contributions are automatically vested.

Anything that you put into the TSP, you get to walk away with at any point in time when you leave the military. Even if you only, I don't know, some crazy thing, you enlist and you only serve a year, you're still going to keep all of your contributions over that year. The 1 percent auto contributions, which start on day 60, You're eligible to keep those after two years of service and then the additional four percent matching contributions.

You're eligible to keep those Immediately, but remember that you don't get those four percent additional matching contributions until you've been in for two years of service. So you can think of it as okay. I get it immediately, but I already served two years. So basically vesting for anything that the DOD is kicking into your account not out of your paycheck, but on their own behalf, you're going to have to wait two years to get that vested.

But once you've served those two years, let's say that you get a whole year of contributions. You don't have to wait another two years. Those contributions in that third year, you get to walk away with as soon as you leave the military. So I left the military after 12 years. I was in the BRS for five of those years and all of the contributions, the agency matchings, which added up to several thousands of dollars.

When I left the military, they're all still sitting in my TSP, but if I moved that money to, let's say an individual retirement account or to a 401k account to consolidate my accounts, then I would keep all that money that the DOD kicked into my account. 

[00:13:10] Jamie: Okay. We mentioned earlier that there are options inside of the TSP of how to employ your money in different investment options.

We said that you're automatically enrolled in the lifecycle at 5%. So can we talk about a lifecycle fund? What is that, and then how are those adjusted over time?

[00:13:26] Spencer: So lifecycle funds are a great option if you just joined the military and especially if you're not a confident TSP investor. What they do is they're professionally managed portfolios that are made up of the five core TSP funds.

The C, S, I, F, and G fund. And we'll talk in detail about what all those letters mean in just the alphabet soup. But there are 10 lifecycle funds. And when, let's say you joined the military today in 2023, you would be put into the life cycle 2065 fund because basically what the government is guessing is that you're going to be accessing those funds sometime 40 years in the future.

So that makes sense. Let's say you enlist when you're like 20 years old or so and the traditional retirement age is 60 and for the TSP, you can access the funds completely penalty free and any tax penalty free after age 59 and a half. That's standard for 401ks and IRAs as well. So the L2065 fund you'll hear described, you can think of it as a target date retirement fund.

And basically what that means is that it's going to start out very aggressive. So while you have time to build your net worth and build your investments, it's going to be heavily tilted towards stocks. And then as you get closer to retirement age, it's going to tilt more towards bonds. And that's a pretty traditional method of portfolio management that has been developed by CFPs and Vanguard and Bogleheads and like all kinds of smart people. That's a pretty traditional way to do it. One of the main complaints about the life cycle funds early on was that they tilted very conservative and they had a lot more too quickly.

Yeah, they had a lot of bonds in there that people were like, I'm 40 years old. I I need my money working for me. I don't need this. I don't need this. Risk is interesting to define here because basically just means volatility, right? It means how much is it going to go up and down, but it doesn't mean like a Cryptocurrency where they can literally go to zero.

So the L 2065 fund for instance is 99 percent stocks and 1 percent bonds right now so that's Very aggressive. Most modern portfolio theory asset managers would usually even a very young person have at least 5 or 10 percent bonds in there. But I think that's a great fund to be in for a young person just joining the military.

You want to be heavily towards stocks.

[00:15:53] Jamie: Times on your side. So don't think of risk as a negative thing in this context, it's you're going to ride the waves of the market. Keep buying no matter what's happening. And then you're accessing these funds 40 or 60 years from now. So they'll have plenty of time to grow and recover.

The L 2065, for example, is going to get more conservative. It starts readjusting or reallocating the portfolio in around 2037. So about 15 years from now is when it starts to rebalance it's risk level, if you will.

[00:16:22] Spencer: And yeah, Jamie, like you said, if you're buying into this fund over the course of your military career, whether that's five years, 10 years or 20 years or 30 years, you're going to be dollar cost averaging into that.

And what that means is that sometimes you're going to be buying in and the L 2065 fund will be $26 a share. And sometimes it'll be $24 in share and sometimes it'll be $30 a share. But hopefully when you go to retire, it's much more than that. It's $50, $60, $70 a share. Okay, so we're initially enrolled in a lifecycle fund.

[00:16:48] Jamie: Let's say I've done a lot of research. I read The Military Money Manual book and I'm ready to invest in a more specific and tailored fund that matches my risk tolerance and what I'm trying to get out of across all my accounts. And I'm looking at these other funds that are in there. 

What are the other funds that are available in the TSP?

[00:17:05] Spencer: Yeah, we talked about the life cycle funds, so there's 10 life cycle funds. The most conservative one is the L income fund, and that's for people who are already retired. That's heavily in the G fund and in bond fund, the F fund. And then, basically, they're issued every 5 years. So there's a 2025 fund, a 2030 fund, a 2035 fund, and so on and so forth until 2065.

But the life cycle funds are just made up of the 5 core TSP funds. And we've mentioned them a few times now, C, S, I, F, and G. And we'll just run through them real quick. So the C fund is your 500 largest companies in America. So it's an index fund that tracks the S& P or Standard & Poor's 500. So if you're ever on like CNNMoney.com, or you hear somebody talk about, Oh, the S& P 500 was down today. This is what you're talking about. They're actually talking about the 500 largest companies in America, and that's what the C fund is made up of. So the C stands for Common Stock Fund. They should have hired someone to help them name these funds, but it's made up of the 500 largest companies in America.

So this is your Microsoft. This is your Apple, your Amazon. This is your ExxonMobil. Any large company, Nike's in there is going to be in the C fund. 

Next, you have the S fund. So the S fund is the small cap US stock market fund. So the We have to introduce the concept of cap here, capitalization here because I just said it but small cap basically is any company that's outside of the S&P 500.

[00:18:35] Jamie: Small to medium sized companies are a way to think of it. So not quite as big as Apple or Google but still in the stock market publicly traded companies.

[00:18:44] Spencer: If you take the C fund and the S fund and you combine them. You now own a small piece of every publicly traded company in America, which is awesome, which is huge.

And I don't think a lot of people recognize that when they say oh, I own the C and the S fund. It's yeah, but think about what's actually inside those funds. It's not just numbers on a screen. It's an Apple Store employee in New York City who just sold the new Iphone for $1,500. It's a Microsoft employee in Redmond, Washington, who's working on the newest version of Microsoft Word.

[00:19:18] Jamie: I think a lot of times people miss the risk of the stock market compared to crypto or other buzzwords that they hear. At a very basic level for our new service members, I want you to understand what Spencer just said is that when you buy these funds, you are literally buying a piece of a company.

Unless a company like Tesla and Microsoft and Apple and Google all go under the U. S. stock market. And a lot of these funds are still going to be performing. There's still going to be funds and companies that grow even if one of them goes down.

[00:19:47] Spencer: Yeah, people like to conflate, stock market trading, crypto trading, NFTs, all these, these recent buzzwords we have.

But there's really no comparison when you look at what you're purchasing when you're purchasing good, solid, global companies. As you are buying a small piece of that company and you now every person at that company, technically a very small part of their work is working for you.

[00:20:13] Jamie: That's a great way to think of it.

So we have a C fund for common US stock. We have the S fund for small cap stock. What about the international exposure? There's a fund for that too. Yep. 

[00:20:25] Spencer: So it's the I fund. The I fund allows you to invest in. Companies and stocks outside of the United States. So it tracks the MSCI, which is just a big index tracking company, but they call it their EAFE or Europe, Australasia, which is basically Australia and some of Asia and far east index.

So it's not a huge, it's not a complete representation of the total global economy, but it does get you some international exposure in your TSP fund.

[00:20:57] Jamie: Yeah, more than 20 total developed countries. So we're looking at developed countries that are already established and have a growing economy versus third world countries, if you will.

[00:21:06] Spencer: Yeah, so some of the 21 percent of the fund is made up of Japanese stocks, 15 percent United Kingdom, 11 percent France, 10 percent Switzerland, 8 percent Germany. So one of the arguments that people have against the I fund is that there's just not a lot of vibrant, like big growth countries in here.

Like for instance, China is not represented there and every time that the TSP, investment advisors are like, “Hey, we should probably have some Chinese stocks in here.” The politicians go nuts and they're like, no, we're not going to have our military investing in Chinese companies. So it's a political question, right?

I'm not going to completely dive into it. I think it's a bit foolish if you're not investing in what will potentially be one of the world's largest if not already is the world's largest economy one day But I can see why the TSP board and congress has decided that tsp funds will not be invested in chinese stocks.

[00:21:59] Jamie: Okay, so we talked about the C, S, and I funds. Let's transition to a slightly different type. We have to talk about bonds when we talk about the F fund.

So the F fund is Fixed Income Index Investment fund. That's a lot of I's right in a row, but it's a fund containing government, corporate, and asset backed bonds. So we talked about stocks earlier. 

What is a bond, and how does that differ from stocks?

[00:22:23] Spencer: Yeah, so a bond is basically a loan to a business or government, and either you purchase it where they pay you a coupon, so like every month or every quarter, every year, they pay you a certain percentage, or it might be all payable at maturity.

So you could buy, let's say, a 30 year treasury bill for $300 today, and in 30 years, the United States government will hand you $1,000. But along the way, you're not receiving any income for that, so you just have to hold it to maturity. So that can get complicated. And what the TSP has basically done is they've aggregated bonds into two funds.

So you have the F Fund, which tracks the Bloomberg Bond Index, which is a broadly diversified index of the US bond market. And what bonds are basically there to do is smooth the ride. So you're hoping that you're going to get Cash Flow from your bond, but you're not going to have the volatility that the stock market has hopefully.

[00:23:20] Jamie: So whenever I have less volatility though, at the beginner level that usually means less return or less reward for the risk.

[00:23:27] Spencer: We're not taking right and if you look at like the F fund lifetime performance It's 5 percent whereas if you look at the C fund lifetime performance, it's over 10% and I don't like to look too closely at the performance numbers, because sometimes if you look at the S fund, it doesn't look like it's performing as well as the C fund.

Look at the dates that the C fund started and look at the date that the S fund started. The C fund started in 1988. And the S fund started in 2001. And so whenever you start a fund, if you, when you start counting from that date, it's going to skew your performance numbers. So I think it's more important to think about what you're actually buying inside the fund and not look too closely at the performance numbers.

[00:24:12] Jamie: And then the last one out there is the G fund. It's Government Securities Investment Fund. And it basically is a fund that will not lose money and it's a relatively low investment return, but consistent small performance.

[00:24:26] Spencer: Yep, that's about it. They invest in government backed securities and it's basically as good as cash, but it doesn't have very good performance even in the long run because it's super safe.

It's super secure. It's super stable. It's not going to go down in value. So that's the five funds right there. C, S, I, F, and G

[00:24:46] Jamie: Okay, now that we know the basics and we know about the funds and the lifecycle options that are there I've heard people talk about this thing called expense ratios. What kind of fee structure because nothing's free.

What's the TSP fee structure like?

[00:24:59] Spencer: It's pretty cheap, there are cheaper options out there, if you look at it, you'll see it says like 0.067%, so expense ratio. So that's the average expense ratio of the L2065 fund or the Lifecycle 2065 fund. 

What does that actually mean? So let's say if you had $100,000 invested, every year you'd pay about $67 in fees.

But you don't even have to pay it. They just take it out of the performance or deduct it from your account automatically. So you never even really see the fees. You just don't have to worry about them really.

[00:25:32] Jamie: Especially at that small of a number, you're going to earn, in most cases, more than .067%.

So it's going to come out of your growth. What you want to avoid, especially when you're in the military, is a fee that has, say, a 5 percent fee to put in because then, If you earn 5 percent profit that year, you're only really breaking even. So expenses really impact your long term growth. So while you can find some funds that are more like 0.04% or sometimes lower, some banks even offer free investment funds, 0.067% is still a very cheap expense ratio overall.

[00:26:08] Spencer: Yeah, there's some Fidelity funds out there that are 0 percent.

[00:26:11] Jamie: Just to get you as a customer, get you in the door.

[00:26:13] Spencer: And they're good funds, Schwab has some very low funds.

Vanguard was the beginner, the champion of the low cost index fund, and so some of their funds are like .02%. But You can get obsessed with expense ratios, and some people do. I did initially when I first started investing, but what I've come to realize is that if you're paying less than 0.1%, you're probably going to be okay. That's getting into the realm of it's cheap enough that you're not going to notice the fees over the long time. If it's under 0.1%, we're not talking about 1%. And that's the problem, right? It sounds similar. Oh, it's just 1 percent a year.

That's not too bad. But if you look at over investing lifetime, you're giving up hundreds of thousands of millions of dollars of returns.

[00:26:57] Jamie: Okay, I just graduated from bootcamp. Let's say I had a friend invite me to this Facebook group about day trading in the TSP and strategies for that, not targeting anyone specifically, but there are some strategies out there that claim that you can really maximize your performance in the TSP.

What are your thoughts on that?

[00:27:13] Spencer: Yeah, it's just, it's a fool's errand. It's been proven time and time again that day traders lose money. Especially the TSP. The TSP is just, if you're going to do day trading. Do it somewhere else. Do it somewhere else.

And your TSP account is not set up for it.

It's for you to set money aside from your military paycheck so that you have money in a traditional retirement age, and you can draw it down or you can move it somewhere else to do something else with it, but don't do a trade in your TSP account, please. 

Another question I get a lot, Jamie, is does the TSP pay dividends?

And this one seems to confuse people because they're like, I can't see any dividend payments in my TSP account. So if you look at the underlying stocks and bonds that the TSP owns, and you're like, Oh, Apple paid a 2 percent dividend last year. Let's say. If you wanted to, you could do the math and you could trace that back.

Okay that went into my C fund, which the share price went up by 0.01 cents or whatever. So you can trace that, that dividend back. So yes, the TSP does pay dividends. It just doesn't pay them into a cash account. It just adds the value of the dividends to the share price.

And it's all built into the investment performance numbers that you see at the end of the year.

[00:29:28] Jamie: Okay, I know that most people who are new to the military are probably not going to be thinking yet about maxing out their TSP, but there is a limit of how much the IRS and congressional laws allow you to put into your 401k or any account like that, like your TSP per year.

[00:29:46] Spencer: Yeah, so in 2024, we're expecting the TSP annual elective deferral limit to go up to $23,000. Again, if you just join the military, you're like, I don't know if they're going to pay me that much this year. So you probably don't need to worry about that. But please know that as you continue on your investing journey, The TSP contribution limit is separate from the Roth IRA or traditional IRA contribution limits.

So IRA, TSP contribution limits are completely separate and don't impact each other in any way. So you could, and this is where people get caught up, is they'll max out their Roth IRA and think, oh, I can't contribute to my TSP anymore. Oh no, they're putting in 5% automatically for me. I'm going to get in trouble with the IRS.

Nope, don't worry about it. You can max out a Roth IRA. It's $6,500 in 2023 right now and might go up next year, but we'll have to see what the final inflation numbers are. 

And then for the TSP, you can do $23,000 in 2024. So you just don't have to worry about it if you're maxing one out. 

[00:30:50] Jamie: Future goals for sure.

And the other thing a lot of people get caught up on is that You have Roth and traditional options that we talked about earlier in both your IRA and your TSP. And you can do both Roth, you can do one of each, you can do both traditional, whatever works for your situation. The matching dollars that the government puts in are always going to go into the traditional side, but that does not mean that you can't contribute to the Roth side.

Like we said, most people are going to start out with Roth and then they'll get the contributions from the government on the traditional side. So you'll end up with a little bit of money on both types, which is good to diversify your tax game when you retire. That's a very future more advanced conversation to have, but it's good that you have a little bit of both.

[00:31:30] Spencer: Yeah, and again, you're not going to have to worry about, probably, if you just joined the military, you're not going to have to worry about maxing out your TSP, but if you don't worry, the matching doesn't count towards your contribution limit, it counts to a different limit called the Annual Additions Limit, and that's $66,000 in 2023.

And that's also the limit that affects you if you're deployed to a combat zone. But again, if you just joined the military, you probably don't have to worry about those numbers. We have some other great episodes. If you go back and listen to episode two, we talked about combat zones, tax exclusion, and contributions to the TSP in depth in that episode.

[00:32:03] Jamie: For now, all you need to remember is that if you deploy to come back and look up TSP stuff, because you can contribute more to your TSP than normally. Venture, what about the mutual fund window? 

I hear some friends at the break room talking about that.

[00:32:15] Spencer: Yeah, I just ignore the mutual fund window. I'm praying it's going to go away sooner rather than later.

But basically what they've done is they've allowed you to invest in some funds other than the five core TSP funds or the life cycle fund. It has so many fees. It's so complicated. It's just not worth it. Just don't go near it. Don't look at the mutual fund window. Hopefully it goes away soon and we can just get back to our five core TSP funds.

[00:32:41] Jamie: Okay, so we have this account, we have an investment account or bank account, a lot of times we want to make sure that our investment beneficiary is set up to who receives the money should something happen to you. With your TSP, it's relatively simple because you can fill out a form on tsp.gov that designates the beneficiary if you want it to go to your parents or cousin or girlfriend, partner, whatever you have at the time. If you are married, it's going to default to your spouse, but you can change that via the paperwork on tsp.gov. Just know that if you designate someone different, it's going to stay with that person until you change it, even if you get remarried or it's with your parents and then you get married later.

Designating a beneficiary is important in a lot of cases, especially as your pot starts to grow in your TSP.

[00:33:24] Spencer: All right, Jamie, any strategies that you found for increasing your contributions as you go along in your military career?

[00:33:31] Jamie: There's a few really good ones I'll mention today. 5 percent is a great starting point, and we'll give you a couple tips to help you start increasing that as you go.

The first one I'll say is a portion of your pay raise. So let's say at the beginning of the year, we get a 3 percent raise. Maybe you can bump up your contributions by 1%. So you're still getting more money into your pocket, but you also get more in your investment account. You can also look at your bonus pay.

If your career field ever pays a bonus or any special or incentive pay for your job, you can designate a portion of that. So let's say you go to dive school or something that's offering a $300 a month bonus. Maybe you set 33 percent of that and so you get $100 a month extra into your TSP while you're still actually getting more money into your account, into your budget month to month as well.

So what I would say is anytime a category goes up or you get a new bonus or a raise or anything like that at your two, four year, six year increment, whenever. Go ahead and consider bumping up your TSP as well, even if it's only by 1%, and if you keep doing this over the years, you'll find yourself going from 5 percent to 15 percent in no time.

[00:34:39] Spencer: Some great advice there, Jamie. 

So Jamie, you've been a supervisor before, you're a leader in the Air Force. Let's say that you were talking to a troop and they were like, Hey I was looking at my LES and, it's pulling out 5 percent for the TSP. What is that and what should I do with it?

What would you tell, let's say you only had a minute in the break room. What are you going to tell that troop? 

[00:35:01] Jamie: The TSP is good for future you. For now, just know that 5 percent is a great starting point and you're paying future you with your current dollars and some of the government's dollars as well.

The lifecycle fund where you are now is a fine place to be until you get more knowledge and smarter on it, then you might want to change it. 5 percent to the lifecycle is good for future you. Just know that it's a beneficial thing and you don't want to mess with it until you get more knowledge.

[00:35:27] Spencer: I think that's very well said.

The only thing I would add to that is if, just double check to make sure they're contributing to the Roth TSP. Smart, yeah. And I think also too, just having that conversation, like opening up that conversation with any troops you got. Especially if they're, if they bring it up to you, like use that as an opportunity to, say Hey, I, let me give you a hand here and let me look at your LES and just go over it with them and make sure that they know like where their money's coming from and where's it, where it's going to.

[00:35:52] Jamie: If I had more than one minute, the next thing I would do is I'd show them a compound interest calculator of, Hey, if you can get to the point where you're putting a hundred or $200 a month in and you let it sit for 40 years until retirement age, we're talking potentially millions of dollars here with these simple habits each month of this automatic investment.

You set it once in my pay. And you don't touch it and it's just going Roth dollars that you're not going to pay taxes on at retirement age and then next thing you know, you're going to have say 1.2 million dollars in your TSP because of these little habits that you started now.

[00:36:27] Spencer: I think it's a great place to wrap it up.

[00:00:00] Spencer: You now own a small piece of every publicly traded company in America, which is awesome, which is huge. And I don't think a lot of people recognize that when they say “Oh, I own the C and the S fund.” Think about what's actually inside those funds. It's not just numbers on a screen.

It's an Apple Store employee in New York City who just sold the new iPhone for $1,500. 

I'm Spencer Reese from militarymoneymanual.com joined today by Jamie. 

Hey Jamie. 

And we are sitting here on the beautiful island of Lana’i, little business trip, little corporate retreat for the Military Money Manual podcast.

And we're recording a couple episodes in person. Very excited about that. Yes. 

In this episode, we're going to take someone who just joined the military, whether you're enlisted or commissioned, we want to take you through your first two years with a Thrift Savings Plan or TSP. I know I ignored the TSP for a long time when I first joined the military because I didn't understand it.

And if someone had sat me down and had explained it to me, I think I would have realized what a great deal it was. And I would start investing in it a lot earlier.

[00:01:28] Jamie: Yeah, I remember starting out, I think maybe a year or two after active duty for me, I started with maybe a $50 contribution or something because someone told me you should be contributing to it, probably just in passing or I saw an article or something like that.

So I knew I needed to start but didn't really know what to do with it. So I didn't really have any guidance on where to go.

[00:01:49] Spencer: Yeah, I knew what an IRA was. I knew what a Roth IRA was, I was investing in that, but I, and at the time I wasn't in BRS, right? I wasn't in the  Blended Retirement System.

But now anybody who's joined the military after 2018 is in the Blended Retirement System. And so congratulations, you get matching on your TSP contributions. And in fact, you're going to get automatic TSP contributions, they're just going to be taken out of your paycheck and put into your TSP account. So it behooves you to understand where your money is going, right? And how you want to invest it. 

Now, if you're an old timer listening to this, you're going to remember the old TSP system. When you contributed, it automatically went into the G fund and that wasn't such a great deal. We'll get into that a little bit later in the podcast, but the new system is a much better deal for our military service members and everybody has to participate if you're in the Blended Retirement System. So it makes sense to understand the TSP because you're a participant. 

[00:02:45] Jamie: It affects everyone. So we're going to talk today about some of the basics of the TSP. What it is, what is the Blended Retirement System, where does money come from, whether it's from you or from the federal government.

What types of funds are available and maybe some strategies for how you can increase your investing potential over the years, whether you do a two year career or a 20 year career.

[00:03:07] Spencer: So Jamie, what's the difference between somebody in the reading the news or might hear about an IRA or a 401k? Where's the TSP fit into the  investing universe?

[00:03:17] Jamie: So when you hear TSP, it's Pretty much like a 401k. It is an employer sponsored retirement plan, an IRA, whether it's Roth or traditional. A lot of times people think an Roth IRA is its own thing and it is, but it's just a flavor of an IRA, Individual Retirement Account. You put your own money into that arrangement.

The I R S has certain benefits for that. You will have certain benefits for contributing to that over your lifetime. But the 401k or the TSP, the Thrift Savings Plan, is employer sponsored. That means it's through your company, your spouse or your cousins or anyone that's not in the military would go to HR to talk about their company's 401k and what funds are offered and things like that.

All of that is the TSP for people working for the federal government, like you military service members.

[00:04:04] Spencer: Yeah, and Jamie, you mentioned that there are two different flavors of IRA. There's also two different flavors of the TSP, right? 

[00:04:11] Jamie: Absolutely.

The two big flavors, if you want to think of them that way, are the Roth or traditional.

It just impacts when you pay the taxes and how your money grows and then is taxed or not taxed later on in the future. So if you're looking at Roth contributions in the TSP or in your IRA, it's the same thing. This is named after the senator that passed the legislation for this. So a Roth fund will give you the ability to pay taxes now.

And then it grows tax free and then when you pull the money out at retirement you don't pay any taxes on all that money where a large majority of that at a traditional retirement age is going to be growth. And you don't pay any taxes on the growth of those dollars because you pay taxes on them today and then 40, 50 years from now you take it out tax free.

[00:04:55] Spencer: And then the other one is traditional. So you're going to. You get tax benefits today, you pay your taxes in the future, so you don't have to pay your taxes now and that might be beneficial if you're expecting to have a lower taxable income or lower tax rate in retirement, which it depends if you're a high income earner, let's say you're making, quarter million or a half million dollars a year, you can probably make a pretty safe bet that your tax rate in retirement is going to be lower than what you're currently making.

But if you're in the military, we have the advantage that most of our income is tax free. Plus, with the standard deduction and everything else, military service members have a very low effective tax rate. So for 99 percent of military service members, especially if you just joined, you just enlisted, you just commissioned, The Roth TSP is going to be better for new military service members.

So I recommend that military service members make their contributions to the Roth TSP account.

[00:05:53] Jamie: And then the last basic that I want to cover is that inside of the TSP, it's really just like a bank account if you want to think of it like that. You still have investment vehicles or options inside of your Thrift Savings Plan.

So it's not enough to just send money to the TSP. without knowing where it's actually going. And so we're going to talk about that in a few minutes, but it's just an overarching theme with a lot of options underneath for how you actually employ and invest your money.

[00:06:18] Spencer: Okay, so let's take someone who just commissioned or enlisted in the military and let's take them through the first two years of their participation in the TSP plan.

Jamie, what's happening day one?

[00:06:31] Jamie: So on day one, for anyone that joined after October 1st of 2020, The military is automatically going to enroll you in the TSP Lifecycle Fund at 5 percent contributions. And it's funny because now you can opt out of that 5%, but now the military is going to re-enroll you at 5 percent every January 1st.

So it just goes to show you how important it is to at least get something there. And 5 percent is a good starting point for a lot of people that the military automatically enrolls you there and then wants you to be there again. If you ever turn it off every January, every calendar year, they're going to reset you at 5%.

[00:07:07] Spencer: Yeah. So for most people, like their first day in the military, it's probably at basic training, right? Some kind of basic military training we call it BMT in the Air Force or bootcamp or whatever. If you commission, you've probably completed all of your initial military training during your schooling during your college, or you went to OTS or something Officer Training School And so maybe if you're in boot camp, you probably don't have access to a computer to go create a TSP account But once you do have access to a computer or if you just commissioned and you have time you can go to TSP.gov. You can create an account and once you have a TSP account you can log in there, you can adjust how your money is allocated, where your funds are going, when TSP gets money from your paycheck, and then you can log into MyPay, which is the Defense Finance Accounting Service, or DFAS.

They're the guys who pay all of us, whether you're an Army, Marine, Navy. Air Force, you get paid through DFAS. The website, it's called MyPay, you can just Google it, it'll pop up, MyPay Military, and you can adjust the amount that you want to contribute and make any changes to your contribution, whether it's Roth or traditional contributions, you can make that through the MyPay website.

[00:08:25] Jamie: So eventually you'll need two accounts, one for tsp.gov and then your MyPay account. TSP is more for monitoring and making small adjustments inside of your account, but thinking more of statement balances. And MyPay is, you set the percentage you want of your pay, percentage of your basic pay, percentage of special pay, and whether you want it to Roth or traditional contributions.

That's all done in MyPay.

[00:08:46] Spencer: Okay, Jamie. So this takes us to day 60 now, which is another milestone in your first two years participating in the thrift savings plan. And this is when automatic 1 percent contributions kick in under the Blended Retirement System or BRS. So that's money that does not come out of your pay.

That is also known as an agency contribution. And basically, the Department of Defense says we are automatically going to kick 1 percent of your pay from a different pot of money. It doesn't come from your paycheck. So if you're paid $1,000 a month They're going to put $10 a month into your BRS just as your 1 percent on a Mac contribution that starts on day 60.

Then after 24 months now you finish your first two years in the military you are eligible to start receiving matching and what the matching does is it adds an additional 4 percent of your basic pay up to a total of 5 percent. So the 1 percent automatic you always get that whether you're contributing to your TSP or not, but if you want to get that additional 4 percent of matching, you have to contribute at least 5 percent of your base pay or special pay or whatever.

But you have to contribute 5 percent of your pay to the TSP in order to get the full agency matching.

[00:10:03] Jamie: Yeah, remember you can contribute more than 5%, which eventually you might want to work up to, but 5 percent if you're brand new to the military is a great place to start. Don't limit yourself to that even though you only get a 5 percent match.

And remember, the percentages are also based off of your base pay. So even if you get BAH, BAS, incentive pay for your career field or anything like that, it's only based off of a percentage of your base pay. 

Okay, so this money is going in from me and from the agency. Now, Spencer, do I actually get to keep all of that money?

I've heard a term called vesting. When am I vested in my contributions?

[00:10:38] Spencer: Yeah, so vesting means that you as a participant in the Thrift Savings Plan, the TSB, you're eligible to keep all the money from your accounts when you leave your job. For military service members, All of your contributions are automatically vested.

Anything that you put into the TSP, you get to walk away with at any point in time when you leave the military. Even if you only, I don't know, some crazy thing, you enlist and you only serve a year, you're still going to keep all of your contributions over that year. The 1 percent auto contributions, which start on day 60, You're eligible to keep those after two years of service and then the additional four percent matching contributions.

You're eligible to keep those Immediately, but remember that you don't get those four percent additional matching contributions until you've been in for two years of service. So you can think of it as okay. I get it immediately, but I already served two years. So basically vesting for anything that the DOD is kicking into your account not out of your paycheck, but on their own behalf, you're going to have to wait two years to get that vested.

But once you've served those two years, let's say that you get a whole year of contributions. You don't have to wait another two years. Those contributions in that third year, you get to walk away with as soon as you leave the military. So I left the military after 12 years. I was in the BRS for five of those years and all of the contributions, the agency matchings, which added up to several thousands of dollars.

When I left the military, they're all still sitting in my TSP, but if I moved that money to, let's say an individual retirement account or to a 401k account to consolidate my accounts, then I would keep all that money that the DOD kicked into my account. 

[00:13:10] Jamie: Okay. We mentioned earlier that there are options inside of the TSP of how to employ your money in different investment options.

We said that you're automatically enrolled in the lifecycle at 5%. So can we talk about a lifecycle fund? What is that, and then how are those adjusted over time?

[00:13:26] Spencer: So lifecycle funds are a great option if you just joined the military and especially if you're not a confident TSP investor. What they do is they're professionally managed portfolios that are made up of the five core TSP funds.

The C, S, I, F, and G fund. And we'll talk in detail about what all those letters mean in just the alphabet soup. But there are 10 lifecycle funds. And when, let's say you joined the military today in 2023, you would be put into the life cycle 2065 fund because basically what the government is guessing is that you're going to be accessing those funds sometime 40 years in the future.

So that makes sense. Let's say you enlist when you're like 20 years old or so and the traditional retirement age is 60 and for the TSP, you can access the funds completely penalty free and any tax penalty free after age 59 and a half. That's standard for 401ks and IRAs as well. So the L2065 fund you'll hear described, you can think of it as a target date retirement fund.

And basically what that means is that it's going to start out very aggressive. So while you have time to build your net worth and build your investments, it's going to be heavily tilted towards stocks. And then as you get closer to retirement age, it's going to tilt more towards bonds. And that's a pretty traditional method of portfolio management that has been developed by CFPs and Vanguard and Bogleheads and like all kinds of smart people. That's a pretty traditional way to do it. One of the main complaints about the life cycle funds early on was that they tilted very conservative and they had a lot more too quickly.

Yeah, they had a lot of bonds in there that people were like, I'm 40 years old. I I need my money working for me. I don't need this. I don't need this. Risk is interesting to define here because basically just means volatility, right? It means how much is it going to go up and down, but it doesn't mean like a Cryptocurrency where they can literally go to zero.

So the L 2065 fund for instance is 99 percent stocks and 1 percent bonds right now so that's Very aggressive. Most modern portfolio theory asset managers would usually even a very young person have at least 5 or 10 percent bonds in there. But I think that's a great fund to be in for a young person just joining the military.

You want to be heavily towards stocks.

[00:15:53] Jamie: Times on your side. So don't think of risk as a negative thing in this context, it's you're going to ride the waves of the market. Keep buying no matter what's happening. And then you're accessing these funds 40 or 60 years from now. So they'll have plenty of time to grow and recover.

The L 2065, for example, is going to get more conservative. It starts readjusting or reallocating the portfolio in around 2037. So about 15 years from now is when it starts to rebalance it's risk level, if you will.

[00:16:22] Spencer: And yeah, Jamie, like you said, if you're buying into this fund over the course of your military career, whether that's five years, 10 years or 20 years or 30 years, you're going to be dollar cost averaging into that.

And what that means is that sometimes you're going to be buying in and the L 2065 fund will be $26 a share. And sometimes it'll be $24 in share and sometimes it'll be $30 a share. But hopefully when you go to retire, it's much more than that. It's $50, $60, $70 a share. Okay, so we're initially enrolled in a lifecycle fund.

[00:16:48] Jamie: Let's say I've done a lot of research. I read The Military Money Manual book and I'm ready to invest in a more specific and tailored fund that matches my risk tolerance and what I'm trying to get out of across all my accounts. And I'm looking at these other funds that are in there. 

What are the other funds that are available in the TSP?

[00:17:05] Spencer: Yeah, we talked about the life cycle funds, so there's 10 life cycle funds. The most conservative one is the L income fund, and that's for people who are already retired. That's heavily in the G fund and in bond fund, the F fund. And then, basically, they're issued every 5 years. So there's a 2025 fund, a 2030 fund, a 2035 fund, and so on and so forth until 2065.

But the life cycle funds are just made up of the 5 core TSP funds. And we've mentioned them a few times now, C, S, I, F, and G. And we'll just run through them real quick. So the C fund is your 500 largest companies in America. So it's an index fund that tracks the S& P or Standard & Poor's 500. So if you're ever on like CNNMoney.com, or you hear somebody talk about, Oh, the S& P 500 was down today. This is what you're talking about. They're actually talking about the 500 largest companies in America, and that's what the C fund is made up of. So the C stands for Common Stock Fund. They should have hired someone to help them name these funds, but it's made up of the 500 largest companies in America.

So this is your Microsoft. This is your Apple, your Amazon. This is your ExxonMobil. Any large company, Nike's in there is going to be in the C fund. 

Next, you have the S fund. So the S fund is the small cap US stock market fund. So the We have to introduce the concept of cap here, capitalization here because I just said it but small cap basically is any company that's outside of the S&P 500.

[00:18:35] Jamie: Small to medium sized companies are a way to think of it. So not quite as big as Apple or Google but still in the stock market publicly traded companies.

[00:18:44] Spencer: If you take the C fund and the S fund and you combine them. You now own a small piece of every publicly traded company in America, which is awesome, which is huge.

And I don't think a lot of people recognize that when they say oh, I own the C and the S fund. It's yeah, but think about what's actually inside those funds. It's not just numbers on a screen. It's an Apple Store employee in New York City who just sold the new Iphone for $1,500. It's a Microsoft employee in Redmond, Washington, who's working on the newest version of Microsoft Word.

[00:19:18] Jamie: I think a lot of times people miss the risk of the stock market compared to crypto or other buzzwords that they hear. At a very basic level for our new service members, I want you to understand what Spencer just said is that when you buy these funds, you are literally buying a piece of a company.

Unless a company like Tesla and Microsoft and Apple and Google all go under the U. S. stock market. And a lot of these funds are still going to be performing. There's still going to be funds and companies that grow even if one of them goes down.

[00:19:47] Spencer: Yeah, people like to conflate, stock market trading, crypto trading, NFTs, all these, these recent buzzwords we have.

But there's really no comparison when you look at what you're purchasing when you're purchasing good, solid, global companies. As you are buying a small piece of that company and you now every person at that company, technically a very small part of their work is working for you.

[00:20:13] Jamie: That's a great way to think of it.

So we have a C fund for common US stock. We have the S fund for small cap stock. What about the international exposure? There's a fund for that too. Yep. 

[00:20:25] Spencer: So it's the I fund. The I fund allows you to invest in. Companies and stocks outside of the United States. So it tracks the MSCI, which is just a big index tracking company, but they call it their EAFE or Europe, Australasia, which is basically Australia and some of Asia and far east index.

So it's not a huge, it's not a complete representation of the total global economy, but it does get you some international exposure in your TSP fund.

[00:20:57] Jamie: Yeah, more than 20 total developed countries. So we're looking at developed countries that are already established and have a growing economy versus third world countries, if you will.

[00:21:06] Spencer: Yeah, so some of the 21 percent of the fund is made up of Japanese stocks, 15 percent United Kingdom, 11 percent France, 10 percent Switzerland, 8 percent Germany. So one of the arguments that people have against the I fund is that there's just not a lot of vibrant, like big growth countries in here.

Like for instance, China is not represented there and every time that the TSP, investment advisors are like, “Hey, we should probably have some Chinese stocks in here.” The politicians go nuts and they're like, no, we're not going to have our military investing in Chinese companies. So it's a political question, right?

I'm not going to completely dive into it. I think it's a bit foolish if you're not investing in what will potentially be one of the world's largest if not already is the world's largest economy one day But I can see why the TSP board and congress has decided that tsp funds will not be invested in chinese stocks.

[00:21:59] Jamie: Okay, so we talked about the C, S, and I funds. Let's transition to a slightly different type. We have to talk about bonds when we talk about the F fund.

So the F fund is Fixed Income Index Investment fund. That's a lot of I's right in a row, but it's a fund containing government, corporate, and asset backed bonds. So we talked about stocks earlier. 

What is a bond, and how does that differ from stocks?

[00:22:23] Spencer: Yeah, so a bond is basically a loan to a business or government, and either you purchase it where they pay you a coupon, so like every month or every quarter, every year, they pay you a certain percentage, or it might be all payable at maturity.

So you could buy, let's say, a 30 year treasury bill for $300 today, and in 30 years, the United States government will hand you $1,000. But along the way, you're not receiving any income for that, so you just have to hold it to maturity. So that can get complicated. And what the TSP has basically done is they've aggregated bonds into two funds.

So you have the F Fund, which tracks the Bloomberg Bond Index, which is a broadly diversified index of the US bond market. And what bonds are basically there to do is smooth the ride. So you're hoping that you're going to get Cash Flow from your bond, but you're not going to have the volatility that the stock market has hopefully.

[00:23:20] Jamie: So whenever I have less volatility though, at the beginner level that usually means less return or less reward for the risk.

[00:23:27] Spencer: We're not taking right and if you look at like the F fund lifetime performance It's 5 percent whereas if you look at the C fund lifetime performance, it's over 10% and I don't like to look too closely at the performance numbers, because sometimes if you look at the S fund, it doesn't look like it's performing as well as the C fund.

Look at the dates that the C fund started and look at the date that the S fund started. The C fund started in 1988. And the S fund started in 2001. And so whenever you start a fund, if you, when you start counting from that date, it's going to skew your performance numbers. So I think it's more important to think about what you're actually buying inside the fund and not look too closely at the performance numbers.

[00:24:12] Jamie: And then the last one out there is the G fund. It's Government Securities Investment Fund. And it basically is a fund that will not lose money and it's a relatively low investment return, but consistent small performance.

[00:24:26] Spencer: Yep, that's about it. They invest in government backed securities and it's basically as good as cash, but it doesn't have very good performance even in the long run because it's super safe.

It's super secure. It's super stable. It's not going to go down in value. So that's the five funds right there. C, S, I, F, and G

[00:24:46] Jamie: Okay, now that we know the basics and we know about the funds and the lifecycle options that are there I've heard people talk about this thing called expense ratios. What kind of fee structure because nothing's free.

What's the TSP fee structure like?

[00:24:59] Spencer: It's pretty cheap, there are cheaper options out there, if you look at it, you'll see it says like 0.067%, so expense ratio. So that's the average expense ratio of the L2065 fund or the Lifecycle 2065 fund. 

What does that actually mean? So let's say if you had $100,000 invested, every year you'd pay about $67 in fees.

But you don't even have to pay it. They just take it out of the performance or deduct it from your account automatically. So you never even really see the fees. You just don't have to worry about them really.

[00:25:32] Jamie: Especially at that small of a number, you're going to earn, in most cases, more than .067%.

So it's going to come out of your growth. What you want to avoid, especially when you're in the military, is a fee that has, say, a 5 percent fee to put in because then, If you earn 5 percent profit that year, you're only really breaking even. So expenses really impact your long term growth. So while you can find some funds that are more like 0.04% or sometimes lower, some banks even offer free investment funds, 0.067% is still a very cheap expense ratio overall.

[00:26:08] Spencer: Yeah, there's some Fidelity funds out there that are 0 percent.

[00:26:11] Jamie: Just to get you as a customer, get you in the door.

[00:26:13] Spencer: And they're good funds, Schwab has some very low funds.

Vanguard was the beginner, the champion of the low cost index fund, and so some of their funds are like .02%. But You can get obsessed with expense ratios, and some people do. I did initially when I first started investing, but what I've come to realize is that if you're paying less than 0.1%, you're probably going to be okay. That's getting into the realm of it's cheap enough that you're not going to notice the fees over the long time. If it's under 0.1%, we're not talking about 1%. And that's the problem, right? It sounds similar. Oh, it's just 1 percent a year.

That's not too bad. But if you look at over investing lifetime, you're giving up hundreds of thousands of millions of dollars of returns.

[00:26:57] Jamie: Okay, I just graduated from bootcamp. Let's say I had a friend invite me to this Facebook group about day trading in the TSP and strategies for that, not targeting anyone specifically, but there are some strategies out there that claim that you can really maximize your performance in the TSP.

What are your thoughts on that?

[00:27:13] Spencer: Yeah, it's just, it's a fool's errand. It's been proven time and time again that day traders lose money. Especially the TSP. The TSP is just, if you're going to do day trading. Do it somewhere else. Do it somewhere else.

And your TSP account is not set up for it.

It's for you to set money aside from your military paycheck so that you have money in a traditional retirement age, and you can draw it down or you can move it somewhere else to do something else with it, but don't do a trade in your TSP account, please. 

Another question I get a lot, Jamie, is does the TSP pay dividends?

And this one seems to confuse people because they're like, I can't see any dividend payments in my TSP account. So if you look at the underlying stocks and bonds that the TSP owns, and you're like, Oh, Apple paid a 2 percent dividend last year. Let's say. If you wanted to, you could do the math and you could trace that back.

Okay that went into my C fund, which the share price went up by 0.01 cents or whatever. So you can trace that, that dividend back. So yes, the TSP does pay dividends. It just doesn't pay them into a cash account. It just adds the value of the dividends to the share price.

And it's all built into the investment performance numbers that you see at the end of the year.

[00:29:28] Jamie: Okay, I know that most people who are new to the military are probably not going to be thinking yet about maxing out their TSP, but there is a limit of how much the IRS and congressional laws allow you to put into your 401k or any account like that, like your TSP per year.

[00:29:46] Spencer: Yeah, so in 2024, we're expecting the TSP annual elective deferral limit to go up to $23,000. Again, if you just join the military, you're like, I don't know if they're going to pay me that much this year. So you probably don't need to worry about that. But please know that as you continue on your investing journey, The TSP contribution limit is separate from the Roth IRA or traditional IRA contribution limits.

So IRA, TSP contribution limits are completely separate and don't impact each other in any way. So you could, and this is where people get caught up, is they'll max out their Roth IRA and think, oh, I can't contribute to my TSP anymore. Oh no, they're putting in 5% automatically for me. I'm going to get in trouble with the IRS.

Nope, don't worry about it. You can max out a Roth IRA. It's $6,500 in 2023 right now and might go up next year, but we'll have to see what the final inflation numbers are. 

And then for the TSP, you can do $23,000 in 2024. So you just don't have to worry about it if you're maxing one out. 

[00:30:50] Jamie: Future goals for sure.

And the other thing a lot of people get caught up on is that You have Roth and traditional options that we talked about earlier in both your IRA and your TSP. And you can do both Roth, you can do one of each, you can do both traditional, whatever works for your situation. The matching dollars that the government puts in are always going to go into the traditional side, but that does not mean that you can't contribute to the Roth side.

Like we said, most people are going to start out with Roth and then they'll get the contributions from the government on the traditional side. So you'll end up with a little bit of money on both types, which is good to diversify your tax game when you retire. That's a very future more advanced conversation to have, but it's good that you have a little bit of both.

[00:31:30] Spencer: Yeah, and again, you're not going to have to worry about, probably, if you just joined the military, you're not going to have to worry about maxing out your TSP, but if you don't worry, the matching doesn't count towards your contribution limit, it counts to a different limit called the Annual Additions Limit, and that's $66,000 in 2023.

And that's also the limit that affects you if you're deployed to a combat zone. But again, if you just joined the military, you probably don't have to worry about those numbers. We have some other great episodes. If you go back and listen to episode two, we talked about combat zones, tax exclusion, and contributions to the TSP in depth in that episode.

[00:32:03] Jamie: For now, all you need to remember is that if you deploy to come back and look up TSP stuff, because you can contribute more to your TSP than normally. Venture, what about the mutual fund window? 

I hear some friends at the break room talking about that.

[00:32:15] Spencer: Yeah, I just ignore the mutual fund window. I'm praying it's going to go away sooner rather than later.

But basically what they've done is they've allowed you to invest in some funds other than the five core TSP funds or the life cycle fund. It has so many fees. It's so complicated. It's just not worth it. Just don't go near it. Don't look at the mutual fund window. Hopefully it goes away soon and we can just get back to our five core TSP funds.

[00:32:41] Jamie: Okay, so we have this account, we have an investment account or bank account, a lot of times we want to make sure that our investment beneficiary is set up to who receives the money should something happen to you. With your TSP, it's relatively simple because you can fill out a form on tsp.gov that designates the beneficiary if you want it to go to your parents or cousin or girlfriend, partner, whatever you have at the time. If you are married, it's going to default to your spouse, but you can change that via the paperwork on tsp.gov. Just know that if you designate someone different, it's going to stay with that person until you change it, even if you get remarried or it's with your parents and then you get married later.

Designating a beneficiary is important in a lot of cases, especially as your pot starts to grow in your TSP.

[00:33:24] Spencer: All right, Jamie, any strategies that you found for increasing your contributions as you go along in your military career?

[00:33:31] Jamie: There's a few really good ones I'll mention today. 5 percent is a great starting point, and we'll give you a couple tips to help you start increasing that as you go.

The first one I'll say is a portion of your pay raise. So let's say at the beginning of the year, we get a 3 percent raise. Maybe you can bump up your contributions by 1%. So you're still getting more money into your pocket, but you also get more in your investment account. You can also look at your bonus pay.

If your career field ever pays a bonus or any special or incentive pay for your job, you can designate a portion of that. So let's say you go to dive school or something that's offering a $300 a month bonus. Maybe you set 33 percent of that and so you get $100 a month extra into your TSP while you're still actually getting more money into your account, into your budget month to month as well.

So what I would say is anytime a category goes up or you get a new bonus or a raise or anything like that at your two, four year, six year increment, whenever. Go ahead and consider bumping up your TSP as well, even if it's only by 1%, and if you keep doing this over the years, you'll find yourself going from 5 percent to 15 percent in no time.

[00:34:39] Spencer: Some great advice there, Jamie. 

So Jamie, you've been a supervisor before, you're a leader in the Air Force. Let's say that you were talking to a troop and they were like, Hey I was looking at my LES and, it's pulling out 5 percent for the TSP. What is that and what should I do with it?

What would you tell, let's say you only had a minute in the break room. What are you going to tell that troop? 

[00:35:01] Jamie: The TSP is good for future you. For now, just know that 5 percent is a great starting point and you're paying future you with your current dollars and some of the government's dollars as well.

The lifecycle fund where you are now is a fine place to be until you get more knowledge and smarter on it, then you might want to change it. 5 percent to the lifecycle is good for future you. Just know that it's a beneficial thing and you don't want to mess with it until you get more knowledge.

[00:35:27] Spencer: I think that's very well said.

The only thing I would add to that is if, just double check to make sure they're contributing to the Roth TSP. Smart, yeah. And I think also too, just having that conversation, like opening up that conversation with any troops you got. Especially if they're, if they bring it up to you, like use that as an opportunity to, say Hey, I, let me give you a hand here and let me look at your LES and just go over it with them and make sure that they know like where their money's coming from and where's it, where it's going to.

[00:35:52] Jamie: If I had more than one minute, the next thing I would do is I'd show them a compound interest calculator of, Hey, if you can get to the point where you're putting a hundred or $200 a month in and you let it sit for 40 years until retirement age, we're talking potentially millions of dollars here with these simple habits each month of this automatic investment.

You set it once in my pay. And you don't touch it and it's just going Roth dollars that you're not going to pay taxes on at retirement age and then next thing you know, you're going to have say 1.2 million dollars in your TSP because of these little habits that you started now.

[00:36:27] Spencer: I think it's a great place to wrap it up.

If you enjoyed the podcast today, you've got value out of it. Five stars on Apple or Spotify. And if you want to ask us a question about the TSP, you can reach out podcast@militarymoneymanual.com or DM us on Instagram @militarymoneymanual. Catch you in the next episode. [00:37:07] Jamie: The views and opinions presented here are those of the speakers and do not necessarily represent the views of the DoD or its components. Reference to any commercial products or services does not constitute DoD endorsement of those products or services.

If you enjoyed the podcast today, you've got value out of it. Five stars on Apple or Spotify. And if you want to ask us a question about the TSP, you can reach out podcast@militarymoneymanual.com or DM us on Instagram @militarymoneymanual. Catch you in the next episode. [00:37:07] Jamie: The views and opinions presented here are those of the speakers and do not necessarily represent the views of the DoD or its components. Reference to any commercial products or services does not constitute DoD endorsement of those products or services.

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