I want my money, and I want it now! Or at least have access to it when I retire…
The military is a young man’s game. Humans were not made to conduct battle drills in their 60’s. That’s why the military still allows for a 20-year retirement with pension. It encourages you to get out in your late 30’s to early 40s because it knows your body is most likely broken (not you Chair Force, your bodies are still probably in good condition) and continuing combat actions as an old man is not what is in the best interest of warfighting and readiness. But the military still makes us wait until we are 59 ½ to take money out of our TSP (without having to pay taxes and penalties). But you’re not going to believe this…there is a way to solve this! Did you know firefighters, police officers, and other first responders can actually draw their retirement savings out early? That’s because they are invested in a 457(b).
What the crap is a 457(b)? Well, I’m glad you asked. In the U.S. we have several different types of retirement saving plans that both public and private sector employers can choose from, to provide retirement benefits for their employees. The most popular is a 401(k) named after section 401(k) of the IRS tax code. Each of these different types of accounts have advantages and disadvantages for both the employer and employee. A 457(b) is just another type of retirement savings plan that an employer can elect, but they are generally only for employers who are state or local governments, or certain tax-exempt organizations. The BIG difference in the 457(b) vs the 401(k) is when the employee can take out the contributions. In a 401(k) (or in the case of the TSP a 403(a)), the employee can only take out the money once they turn 59 ½. Otherwise, the money they withdraw is subject to ordinary income tax, plus a 10% early withdraw penalty! [1] In a 457(b), once you retire you are immediately eligible to withdraw the funds tax and penalty free! [2] Whoo hoo! You can now access YOUR MONEY without the government unduly taxing you.
So, then, what is the solution? The solution is to change the TSP from a 403(a) to a 457(b) (or something similar) so that those who retire from the military can access their retirement funds [get this], WHEN THEY RETIRE! What a concept! I don’t have to wait till I have one foot in the grave and another on a banana peel before I can get MY MONEY THAT I SAVED! If planned properly (or if someone has read FUBAR 6’s articles on early retirement) you should be able to quite easily live off of your pension (plus VA disability compensation) and supplement the difference in your active duty pay with your TSP. It’s a simple math equation.
Fun example: say you are an E8 who retired with 25 years of active service, whose lifestyle costs $100,000 a year (mortgage, car payments, entertainment, etc.). If you make $50,000 in your pension and are 60% disabled (VA rating) making another $20,000 a year from the VA, you would need $30,000 a year to supplement your lifestyle. Starting at the beginning of your career (big assumption but stick with me), if you saved $610 a month for 25 years at a 10% interest rate (average rate of the S&P 500 or C fund) you would have $752,000 which using the 4% rule would yield you $30,000 a year. Now, instead of having to get another job to supplement your income and maintain your lifestyle, you could simply withdraw from the $752,000 in your TSP and sip Rum Runners on the beach! But under the current TSP rules, you must find a way to make that extra $30,000 a year until you turn 59 ½ since you can’t access before that age.
Just another hypothetical in this same scenario, let’s say you were 18 when you joined the military. 25 years later you are now 43 years old. And because the TSP is essentially a 403(a) and not a 457(b), you now have to wait 16 plus years to access your money. Its criminal! That means for 16 more years, you have to find employment to supplement that additional $30,000, when you could have just taken it out of your TSP the whole time.
So contact your member of congress today. Tell your professional association (AUSA, NGAUS, MOAA, etc.). Write to TSP itself and tell them you want to see a change. You worked hard and served your country honorably. You should have access to your money when you need it, not when you are old and on death’s doorstep.
Love this article? Great! Let me know and I’ll produce more. Hate this article? Well, it’s probably ‘cause you don’t save for retirement anyway. Why don’t you go ahead, respond, and let me know why I am wrong.
*This article was written by FUBAR 6. All opinions expressed in this article are that of the author. This article is not endorsed by the Department of Defense, the United States Army, or any other state or government agency. This article does not constitute financial advice. Any actions taken by the reader are at their own discretion. Comments to the author can be submitted below.
[1] Note that exclusions apply for various different scenarios.
[2] Depends on Roth vs Traditional contributions for taxes, but in general this is correct.