The Power of Compounding Interest in Your Thrift Savings Plan

Military Transition

As most of you know, the uniformed services will start offering a new retirement system, called the Blended Retirement System (BRS), on January 1, 2018. For non-career servicemembers – those choosing to separate with less than 20 years of service – it can provide a retirement that would otherwise not be authorized under the current retirement system.

Currently, 81% of the servicemembers joining the military leave with no retirement benefit at all. Under the BRS, 85% would have some type of retirement with as little as two years of service. How is that possible?

Thrift Savings Plan

A large part of the new retirement system is based on the Thrift Savings Plan or TSP.  If not familiar with the TSP feature under the new retirement system, it is an investment plan where after 60 days of service, a servicemember can contribute a percentage or fixed dollar amount each month into an account that is then rolled into a TSP-managed investment plan chosen by the servicemember from several offered plans.

Also at the 60-day mark, the Department of Defense (DoD) contributes an automatic 1% into that account. After two years of service, the DOD then starts matching the servicemember’s contribution (which can be up to 5%) with a 4% matching contribution in addition to the automatic 1%.

Between the individual, automatic and matching contributions, the total contributed can add up to 10% each month. The servicemember could leave after two years of service and take the individual, automatic, matching contributions and earnings with him or her.

The power of compounding interest

With any investment plan, the longer the money is left in, the more it grows. To show the power of compounding, let’s use a new servicemember that will contribute to TSP for 12 years before getting out.

For calculation purposes, let’s use the following parameters:

  • The servicemember has an annual salary of $30,000
  • Gets a 2% salary increase per year
  • Contributes the maximum of 5% to TSP
  • Intends to wait 15 years before starting to draw on their TSP account
  • Has an annual TSP return of 7%.

While only $20,000 was contributed between individual, automatic and matching, as the table shows the value of the account almost doubled to $37,307.37 over the course of 15 years.

 

Year Contributions Contribution Growth Total Projected Balance
1 $1,500.00 $47.54 $1,547.54
2 $3,030.00 $204.37 $3,234.37
3 $4,590.60 $480.24 $5,070.84
4 $6,182.40 $885.63 $7,068.03
5 $7,806.00 $1,431.83 $9,237.83
6 $9,462.12 $2,130.96 $11,593.08
7 $11,151.36 $2,996.02 $14,147.38
8 $12,874.44 $4,040.95 $16,915.39
9 $14,631.96 $5,280.70 $19,912.66
10 $16,424.64 $6,731.40 $23,156.04
11 $18,253.08 $8,410.27 $26,663.35
12 $20,118.12 $10,335.81 $30,453.93
13 $20,118.12 $12,467.58 $32,585.70
14 $20,118.12 $14,748.57 $34,866.69
15 $20,118.12 $17,189.25 $37,307.37
NOTE: Contributions stop after getting out at year 12

Table data based on TSP Calculator.

Under the TSP portion of the BRS alone, this servicemember would have over $37,000 in retirement benefits where under the current system, s/he would have none.

TSP is just one feature of the new Blended Retirement System. In coming articles, we will look more in-depth into the pros and cons of BRS.

Kness retired in November 2007 as a Senior Noncommissioned Officer after serving 36 years of service with the Minnesota Army National Guard of which 32 of those years were in a full-time status along with being a traditional guardsman. Kness takes pride in being able to still help veterans, military members, and families as they struggle through veteran and dependent education issues.