October 26, 2012

When I was a reservist in the mid-1990s, I witnessed an unexpected event: A fellow soldier in my unit was approaching his 12th year in the military – a stint on active duty followed by a few years in our reserve unit – and it was time to re-enlist. The only thing was, he didn’t want to.

He was an E-7, Sergeant First Class, in a critical skill (he was a linguist). He was offered a nice bonus – not the bonuses of today, but a nice chunk of change at the time. And he was only eight years away from that magic number: 20.

At 20 years, he would be eligible for retirement benefits. Of course he would’ve had to wait for another 20 years or so to start to collect given that he didn’t have 20 years of active service, but still, a military pension as one enters semi-retirement is a nice source of income once it happens.

To further set the scene, this was the mid-1990s. We had just a few years earlier enjoyed one of the most spectacular military campaigns in the history of the United States in 1990-1991, with the successful completion of Desert Shield and Desert Storm. We had won the Cold War. With the exception of the Balkans, and the cat-and-mouse games the Iraqi regime was playing with weapons inspectors there, the world was seemingly a more peaceful place.

The thing was, my fellow reservist was finishing his Ph.D. He had used up his educational benefits. And he was ready to move on to his next career.

The retention NCO for the unit was aghast. So were some of the other lifers. Why would you give up 12 years of service? They pleaded with him. You gotta re-up! Get those next eight years in, and you’ve got it made! It seemed so easy back then. What could happen?

My father, who also had served in the Army, told me before I joined: When you are in the military, whether it is full-time or as a reservist, you have to be ready for war. You have to be ready to fight and to die for your country, if necessary. That’s what it means when you take an oath to support and defend the Constitution.

This fellow reservist knew that – there was always the chance that we would be called up to go to war. He served proudly, and now he was ready to move on.

I’ve often thought back to that moment. He made a difficult and courageous decision. He was ready to leave, and instead of being persuaded to stay just to put in time to get his 20, he decided to leave. He would get basically nothing beyond the benefits he already used, most notably educational benefits. But no monthly pension for life, no health benefits. And he was ok with that, because he had an independent mindset.

How many of us have seen when that’s not the case? It’s easy to get sucked into the idea of staying until “minimum retirement age,” or MRA in fed-speak. And that’s not a bad thing, certainly, when you love what you’re doing. But when you don’t, when it’s time to move on, how many remain in the same position, just to get to the MRA?

The TSP can provide an extra benefit in cases like these, when military personnel want to leave service before they are eligible for a monthly pension.

Uniformed personnel couldn’t participate in the TSP in the 1980s or 1990s, but let’s say we could have. Let’s say this sergeant had started to contribute 10% of his gross salary to the TSP when he first joined in 1983 and continued to do so until he left the service in 1995. This would be about a $60 contribution each month from that first year as an E-1 or E-2. Let’s say also that his pay increased about 5% a year, and his contributions increased the same amount, so that by 1995 he was contributing just over $100 a month.

His total contributions over that roughly twelve-year time frame would have come to just under $12,000. Calculating his possible contributions to the C Fund from 1988 (and a 10% annual return from 1983-1988, which is probably conservative for that timeframe), his total TSP account would have come to about $26,000.

And if he left that in the TSP’s C Fund from mid-1995 to August 2012, his account would have grown to $92,000. Not too bad, given all the tumult since 2001.

Assuming an 8% return over the next fifteen years – by which time he would have reached full retirement age – his account would have grown to about $292,000. According to Jeremy Siegel’s Stocks for the Long Run, stocks have returned on average 10.4% since 1926, so 8% could be on the conservative side, but who knows given recent market crashes. (This projection does not account for inflation, either.)

But even if his total TSP account had been half this amount, he still would have ended up with more money than he actually had when he left (that is, nothing). He would not have been rich in this example, but he would have a little something built up from his dozen years in the military. And this would have been from an original total contribution of just $12,000 – another example of how little contributions can have a big impact over the very long term.

Moreover, this is assuming that he would have made no further contributions after a change in career. With additional contributions each year through an Individual Retirement Account (IRA) and perhaps another employer-based defined contribution plan, he would have built more wealth over this time.

In short, steady contributions to the TSP can provide a little more independence for both uniformed personnel and civilian feds through the years, when the time has come to transition to another career.