retirement

Saving for Retirement When You're in the Military

Even if you stay in the service long enough to qualify for the pension, it’s important to save on your own, too. The military offers special benefits to make it easier.

I've been in the Army for 12 years, and I'm hoping to stay long enough to qualify for the pension. What's the best way for me to save for retirement?

Many service members who stay in the military for 20 years can benefit from a valuable pension that can start paying out as soon as they retire -- even if they're much younger than 65. But unlike most civilian pensions, there is no partial vesting under the current retirement system; if you stay for 19 years, you'll get nothing. Most service members don't stay long enough to qualify for the pension, so it's important to save on your own, too.

Even if you do get the pension, it usually covers only 50% or less of your base salary if you retire at 20 years (it’s more if you stay in the service longer). You can use the Department of Defense's military compensation calculators to estimate your pension payouts under several pension systems. The military retirement system is scheduled to change in January 2018 to a new "blended retirement system," which will feature partial vesting. People who joined the service after 2006 will have the choice to stay with the current plan or join the new one. See this FAQ from the Defense Department about the new retirement system for more information.

Take advantage of special ways to save while you’re in the military, including low-cost investments and special tax breaks that civilians don't have.

Save in the low-cost Thrift Savings Plan. The TSP is like a 401(k) for federal employees and members of the military, but the fees tend to be much lower than civilian retirement-savings plans (the TSP charges an annual expense ratio of just 0.029% of assets). The TSP lets you choose among five index mutual funds or a target-date fund, which automatically becomes more conservative as your retirement date gets closer. You can generally invest up to $18,000 in the TSP in 2016 (or $24,000 if you’re 50 or older). For more information, see TSP.gov.

Boost your retirement savings while deployed. If you're receiving tax-free income in a combat zone while deployed, you can contribute up to $53,000 to your TSP in 2016 -- a huge opportunity to catch up on your retirement savings. Even if you can't afford to max out your TSP at that level, you may still be able to contribute more than usual because your income will be tax-free while in a combat zone and your take-home pay will be higher. Contribute some of that extra money to your TSP before it's added to your paycheck.

Get a double tax break in a Roth IRA while deployed. You usually contribute after-tax money to a Roth IRA; you can then withdraw the earnings tax-free after age 59½ (you can withdraw contributions tax- and penalty-free at any time). But service members who are receiving tax-free pay in a combat zone get an extra benefit: Their money goes into the Roth tax-free, and their contributions and earnings come out tax-free, too -- a double tax break. You can contribute up to $5,500 to a Roth for 2016 (or $6,500 if you're 50 or older) if your modified adjusted gross income is less than $117,000 if single or $184,000 if married filing jointly in 2016. (You can make a partial Roth contribution if your income doesn’t exceed $132,000 if single or $194,000 if married filing jointly.) If your spouse doesn't work, you can contribute up to the maximum on his or her behalf, too.

Get a 10% guaranteed return on your savings. This is not a scam; it's a special benefit for deployed service members. The military's Savings Deposit Program lets deployed service members invest up to $10,000 in the program each time they are deployed. You receive 10% annual interest, compounded quarterly. The program lasts for up to three months after you return. This program isn't specifically for retirement, but it can be a good way to accumulate extra money you can use for anything -- even to boost your TSP or IRA contributions. See the Savings Deposit Program page at the Defense Finance and Accounting website for more information.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
11 Best Healthcare Stocks for the Rest of 2021
healthcare stocks

11 Best Healthcare Stocks for the Rest of 2021

The 2020s could be the decade of healthcare stocks. Here are 10 companies and one ETF to watch not just for the remainder of this year, but well beyon…
July 13, 2021
What Is the Social Security COLA?
retirement

What Is the Social Security COLA?

For the average recipient, the 2021 monthly increase doesn't even cover a fill-up at the gas station — but it beats nothing.
July 14, 2021

Recommended

13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
July 26, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
July 26, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
July 26, 2021
10 Most Tax-Friendly States for Retirees
retirement

10 Most Tax-Friendly States for Retirees

If you want your retirement savings to last longer, consider moving to one of these states that impose the lowest taxes on retirees.
July 26, 2021