How To Max Out Your Thrift Savings Plan Contributions

by Hank

Like a 401-k retirement plan in the civilian sector, the Federal Government’s Thrift Savings Plan (TSP) has a contribution limit of $16,500 per year if you are younger than 50 years-old. I am here to tell you that you should max out your TSP or 401-k plan every year. $16,500 every year!?!? I know that you are thinking and saying to yourself. How in the world will you ever be able to save and invest that amount of money every year? It can be done, and I will show you how.

Start Small. How do you eat an elephant? Take one bite at a time of course. The same thing can be said for taking bites out of your TSP contributions. Take one bite at a time out of the Thrift Savings Plan. Let’s look at just a little bit of math. Stick with me. I promise that it will be easy. The magic number we need to get to is $1,375 per month ($16,500 divided by 12). A brand new Second Lieutenant in the Army currently earns $2,655 every month in base pay, not including housing and other allowances. If you start with just a 5% contribution, that Soldier will invest $132 per month or just under $1,600 per year. I know what you are saying…that’s not $16,500 by a long shot. And, your right. But, stick with me. We will get there!

Yearly Raises. Despite the paltry 1.9% the military can most likely expect this January, the military has received a pay raise each year since the end of World War II in order to close the perceived pay gap between the military and our civilian counterparts. Next year’s 1.9% will be actually be the smallest increase ever. So, what does that mean for our TSP contributions? It means that you can safely increase your TSP contributions by 1% or more each year in order to help you reach the goal of investing $1,375 per month. If our young Lieutenant in our previous example never got a promotion throughout his entire military career (I know…impossible or unlikely) but increased his TSP contributions by just 1% point every year, he would raise his investment from $132 per month in the first year to $641 per month by his 20th year of military service.

Years Of Service Raises. The military also enjoys a longevity raise every two years for their service and experience. While the percentages of the pay raises varies between 2% to 5%, the average raise is 3.5% every two years. So, that is another excellent opportunity to increase the amount of money that you invest in the Thrift Savings Plan. If you add 1% every year and other 1% in additional to that from your longevity raise, the same Lieutenant in our example will increase his monthly TSP contribution to $909 per month. We are getting even closer to our monthly contribution goal of $1,375.

Promotions. The average rank of military retirees is Sergeant First Class for enlisted members and Lieutenant Colonel for officers. That translates into approximately four or five different times in his or her career for a promotion. The average base salary increase per promotion is a 15% pay raise. If you factor this into the calculations, you can reach our target goal of $1,375 TSP contribution per month by implementing the yearly and longevity percentage increases throughout the promotions. You will actually reach the goal in your 15th year of service.

How It Grows. So, what is the payoff to all this sacrificing of our hard earned pay raises? Millions of dollars…that is the payoff. Like 401-k retirement plans for civilians, there are rules for the withdrawal of your TSP funds. You cannot withdraw them penalty free until you are 59 ½ years-old. So, if you leave the service at age 42 and just leave your TSP alone earning interest until you are 65 years-old following this plan, you can have $2.3 million in your account assuming an 8% annual rate of return.

By increasing your TSP contributions in this fashion when you earn pay raises and promotions, you do not feel the impact of increasing your investment contributions from your paycheck. You were living for a year or more without that extra money, and now investing a portion of your new raise should not affect your budget or lifestyle very much or at all. By using money from your pay raises, it is money that you did not have to start with, and it is money that you can “do without”.

{ 3 comments… read them below or add one }

Clinton Ty Crownover September 28, 2010 at 11:00 am

I am stationed at Hawthorne Army Depot in Nevada. I am a DOD civ employee. I am in Iraq at this time. I would like to contribute 70% of my pay till the 16,500 is covered. I can not seem to contact the right people in reference to updating, account number, password and PIN. I would like to start imediately because the year is almost over. Can you help me with this important matter?

Clinton Ty Crownover September 28, 2010 at 11:03 am

I am stationed at Hawthorne Army Depot in Nevada. I am a DOD civ employee. I am in Iraq at this time. I would like to contribute 70% of my pay till the 16,500 is covered. I can not seem to contact the right people in reference to updating, account number, password and PIN. I would like to start imediately because the year is almost over. Can you help me with this important matter?

Frankie Silverio April 6, 2013 at 10:00 am

These recommendations are good, however, it fails to point out that thru the years, living cost goes higher, living on post vs off post, and the purchase of a house or car. In the example giving, it expect for you to have the same living conditions for 15 or 20 years without changes & tax increase and the assume 8% increase is overly estimated when current rates are at all time low of 2.5 to 3.5%; is that a reality or wishful thinking?

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