Military Saves Is All About YOU!

"I will help myself by saving money, reducing debt, and building wealth over time.  I will help my family and my country by encouraging other Americans to Build Wealth, Not Debt."  That's the Military Saves pledge you make when you enroll as a Military Saver.  When you enroll, you give basic information which includes your name, rank, service installation and email address.  Your service and installation get credit for your enrollment and you in turn get monthly email reminders from Military Saves and America Saves encouraging you to continue to save.

Military Saves is a social marketing campaign to persuade, motivate, and encourage military families to save money every month, and to convince leaders and organizations to be aggressive in promoting automatic savings.  The campaign is a growing network of organizations and individuals committed to helping and supporting military members and their loved ones build personal savings arsenals to provide for their immediate and long term financial needs.  When you make the Military Saves commitment, you can become a part of the growing movement by persuading others to save as well.

You can contribute individually by doing the top four things that Military Saves espouses:  developing a financial plan, creating an emergency fund, opening savings vehicles--automatic savings account and TSP--and reducing or eliminating debt.  These basic financial tenants will help you realize your retirement goals and tremendously reduce the stress that comes from living paycheck to paycheck.

You can contribute socially by helping to spread the savings message among your friends and your neighbors and within your unit or organization.  Peer pressure goes a long way in changing savings behaviors.  If you choose your purchases wisely, live within your means, and save automatically, you can be a model Saver to emulate.  Encourage those around you to get savings advice from the Personal Financial Managers at the Army and Marine Corps Community Services Center, Navy Fleet and Family Center or Air Force Family Readiness Center.  Military OneSource is also a very accessible, accommodating, and FREE resource available to servicemembers. 

Any step forward in a positive direction is good.  You can Start Small and Think Big!

 What Do Inflation and Taxes Have to Do with My TSP Account?

By Miriam Darden Settles, CFP, Federal Retirement Thrift Investment Board

Last month's article, "Why are Administrative Expenses Important?", covered the impact of fees on your investment returns.  Lower fees mean you get to keep more of your own money.  If you are investing in the TSP, you probably already know that you are paying less for your investments than just about any other investor. 

But administrative fees aren't the only thing that can chip away at your investment returns.  You must also take into account the effects of inflation as well as the certainty of income taxes.

Inflation

Inflation is the increase in the cost of living.  As prices of goods and services rise over time, your dollar buys less.  A common measure of inflation is the Consumer Price Index (CPI).

You should be concerned with inflation because it erodes the value of the money you are saving for your future goals.  Your TSP account is especially at risk because you will be relying on it to provide income throughout your retirement years.

At an average annual inflation rate of 3.2%, a $150 trip to the grocery store today will cost:

     $205.74 in 10 years

     $282.18 in 20 years

     $387.03 in 30 years

Inflation is devastating because you could end up with less purchasing power in the future than you have today.  In the above example, your purchasing power over a 30-year period is reduced by more than 50%.  This presents an enormous risk to your retirement portfolio.  In investment terms, it's called inflation risk.

A well-diversified portfolio is one of the best ways to offset inflation risk.  Keep in mind that as you decide how to distribute the money in your account among the TSP funds, you should consider your time horizon and your tolerance for risk. 

For more information, see "How Do I Figure Out What to Do with the Money in My TSP Account?" in the July 2009 issue of this newsletter.

Income Taxes

All of your contributions to your TSP account have been before tax (or, in some cases, tax-exempt) and tax on the earnings growth has been deferred.  This is the greatest advantage of tax-deferred plans like the TSP because over time, you accumulate earnings on:

• Your contributions;
• Your earnings; and
• The amounts you would have otherwise paid in taxes.

But eventually, the IRS is going to want its share.  Once you begin taking withdrawals from your TSP account, you will have to pay taxes at your ordinary income tax rate.  However, you will pay tax on the earnings portion only of any tax-exempt contributions (made while serving in a combat zone) that you withdraw. 

Depending on your income bracket and the prevailing rates at the time, the taxes you pay on your TSP withdrawals could be anywhere from negligible to significant.  Of course, it is impossible to know what tax rates will be or how tax laws might change in the future, particularly if the future is a decade or more from now.  But knowing that tax will come due when you begin withdrawing your TSP account can help you better determine how much you should save and how to allocate those savings among your investment options.

What matters most about investing for retirement is the money that you actually get to keep.  Inflation and income taxes, in addition to administrative fees, affect your retirement savings by either reducing the amount of your income or its purchasing power. 

Next month:  Stick to Your Savings Plan