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Save now and you could have a $462K - or more - retirement nest egg

Sep. 28, 2010 - 11:42AM   |   Last Updated: Sep. 28, 2010 - 11:42AM  |  
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Does saving $462,000 sound impossible?

If you put away $2,000 a year for 10 years $166.66 a month and then let it grow for another 35 years, you could do it.

It's the miracle of compounding.

If your money earned 8 percent, $20,000 invested would grow to $462,647 over 45 years even if you stopped saving after 10 years, according to an example provided by the Financial Industry Regulatory Authority.

When you're just 20 years old, having $462,647 by age 65 might not seem like a high priority, especially when you're focused on things you want right now. But the odds are pretty good you're going to live to be at least 65.

You may or may not retire from the military and have a pension. Even if you do, it may not be enough money to live the lifestyle you want. If you save beyond an expected pension, that gives you an extra cushion.

At that 45-year point, if your money continued to earn 8 percent returns per year, you could draw that $37,012 in extra annual income without touching the principal of $462,647. Even at a return of just 4 percent a year, that would be about $18,506 a year in income.

Planning and saving in your early years will benefit you later on. But it's never too late to start.

Begin with an estimate of how much you think you'll need at retirement. FINRA has a http://apps.finra.org/investor_information/calculators/2/retirementcalc.aspx">calculator where you plug in your individual information to determine how much you need to save each month to have the kind of retirement lifestyle you want.

Maybe you'll find a way to retire 10 years earlier than you planned.

Thrift starts with TSP

Make it easier on yourself and save the money in your government Thrift Savings Plan or, for civilian spouses, your company-sponsored 401(k). (Unlike company-sponsored 401(k) plans, the government won't match a portion of your TSP contribution.)

The money you contribute from your paycheck into these retirement plans is not taxed until you withdraw it, so the bite out of your paycheck is smaller because you're reducing the amount of federal taxes withheld.

Yet only about 38 percent of active-duty members were taking part in the Thrift Savings Plan as of July, according to the Federal Retirement Thrift Investment Board, which manages the TSP for government employees.

The Navy has the highest participation rate, at 57 percent. The Army has the lowest, at 29 percent. The other services were in between, with the Air Force at 37 percent and the Coast Guard and Marine Corps at 32 percent.

Stay the course

When it comes to saving for retirement, it's important not only to start early, but to stay the course. Think carefully before taking money out of your TSP or civilian 401(k), whether as a hardship withdrawal or a loan.

"The best course is not to tap into retirement savings," said Gerri Walsh, vice president for investor education at FINRA. "But if you need the money and can't access it from anywhere else, often borrowing is a better option, compared with taking a hardship withdrawal."

TSP, IRA or both?

In FINRA's travels to military installations to provide financial education seminars, troops often ask about the differences in contributing to TSPs and individual retirement accounts.

"Sometimes service members do not realize that they can contribute to both an IRA and the TSP. It is not an exclusive choice," Walsh said. Most service members are under the income thresholds required for deductibility of an IRA, she said, unless the spouse makes a great deal of money.

Some things to consider:

Annual contribution limits are more than three times higher for TSP than for an IRA you can contribute up to $16,500 in a TSP, and up to $5,000 in an IRA. Those contribution limits increase for those over age 50.

TSP has lower administrative costs. "A 1 percent difference in the annual expense ratio can add up to tens of thousand of dollars over a long period of time," Walsh said.

TSP deposits are taken out automatically from each paycheck, while those investing in IRAs must be disciplined to make contributions.

With the TSP as well as an IRA, you'll need to make choices on how you invest your money.

For help in choosing the kinds of funds you want to invest in, visit FINRA's website at www.saveandinvest.org. It offers tips specifically for service members, as well as tools for figuring out how much you need to save for retirement and other savings calculators, tips on investing for retirement, and other information.

For more details on the TSP and the funds it offers, visit the TSP https://www.tsp.gov/index.shtml">website.

To be eligible for a hardship withdrawal from your TSP, your need must result from at least one of four conditions:

Recurring negative monthly cash flow.

Unpaid medical expenses not covered by insurance.

Unpaid personal casualty losses not covered by insurance.

Unpaid legal expenses related to separation or divorce from your spouse.

If you make a withdrawal and you're younger than 59, you'll have to pay taxes on the money you withdraw, plus an additional 10 percent penalty to the Internal Revenue Service.

That means if you withdraw $2,000 and you're in the 25 percent tax bracket, you'll have to pay $500 in taxes plus an additional $200 penalty.

If you take a loan from your TSP, you don't pay taxes you pay yourself back. You pay interest, too, based on the current TSP G Fund's interest rate, which, as of early September, was 2.125 percent. That interest also goes into your account.

If you take a general-purpose loan of up to $50,000, you must pay it back within five years. If you're borrowing to buy a home, you have up to 15 years to repay. A TSP residential loan is not a mortgage, so the loan interest payments are not tax deductible, as they might be for a mortgage loan or a home equity loan.

While you are repairing your balance after taking out a loan, the balance will always be lower than if you kept the money there, Walsh said. "The reality is, you get no earnings on the amount of money you took out," she said.

Be sure you can swing the payments, which are automatically deducted from your paycheck. If you separate from the service and are unable to pay back the loan, the IRS will count it as a withdrawal, and you'll pay taxes plus the 10 percent penalty.

The basic differences between a traditional individual retirement account and a Roth IRA:

Traditional IRA contributions are tax deductible, and you can contribute up to a maximum of $5,000 a year. You're taxed on the money when you later withdraw it in retirement after age 59 at that future tax rate. There are no income limits, but beyond certain income thresholds, your contributions may not be tax deductible.

Roth IRA contributions are not tax deductible, but your money is not taxed when you withdraw it after age 59. It's hard to predict what future tax rates will be, but if you'd rather pay the taxes now, consider a Roth.

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