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.

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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 (opens in new tab) 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 (opens in new tab) about the new retirement system for more information.

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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 (opens in new tab).

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 (opens in new tab) page at the Defense Finance and Accounting website for more information.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.