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Military Retirement Planning Guide

Many financial experts agree that it's now harder to retire than at any time in the recent past, especially if you want to do so by the age of 65. Meaningful work in a stable industry seems increasingly hard to come by, and with inflation constantly eating away at the purchasing power of your money, the prospect of retiring fully can seem almost impossible.

If you intend to stay in the military for life, traditional retirement will be easier in some ways but more challenging in others. In this guide, we'll review basic retirement planning strategies and offer some tips on how to get started with various kinds of investments. We'll also briefly review the most common types of retirement accounts and investment products to help you decide which ones are right for you. (Note that the sections of this guide that deal with military-specific investments are accurate as of this writing, but retirement benefits change often, so be sure to check with a military financial planner for the most up-to-date information.)

Finally, we'd like to stress that investing is an incredibly dense and complicated topic, and there is no such thing as universal investment advice (except when it comes to the most basic principles and strategies). This article is intended only to provide a very broad and basic overview of your investment options and to help you decide which ones to research further. Always do thorough research before making major financial decisions.

Essential Strategies for Retirement Planning

There's No Such Thing as Starting Too Early

Albert Einstein famously said that the most powerful force in the universe is compound interest. He wasn't wrong; compound interest can turn a modest nest egg into a veritable gold mine, but it needs time — a lot of time — to work its magic. Starting a serious savings plan in your 20s is much more likely to lead to a comfortable retirement than waiting until your 30s or 40s.

Still, it's never too late to start. No matter how old you are, the retirement plan that you start working on today is always better than the one you keep putting off.

Use a Zero-Sum Budget to Keep Spending and Saving On Track

Not all budgeting philosophies are created equal. A budget that merely tracks your spending but doesn't strongly incentivize behavioral changes isn't really a budget at all. Zero-sum budgeting is designed to bring you face-to-face with the harshest realities about your financial behavior and to force you to confront them head-on. This is, by far, the most effective way to develop an accurate understanding of your money habits and to improve them. Click here to learn more about zero-sum budgeting.

Focus on Habits, not Numbers

Bestselling author and productivity expert James Clear makes an excellent point in his book Atomic Habits: “We don't rise to the level of our goals, we fall to the level of our systems.” Any complex, long-range goal is ultimately composed of many small steps, and to achieve the goal, you need consistent habits that make it easy to take each of the steps. Without the right habits in place, it's nearly impossible to make meaningful progress toward a major goal.

If you're just getting started in retirement planning, don't worry about how much money you set aside. Just focus on building a habit of setting aside some money on a regular schedule. Even if you can only afford to save $5 per month at first, don't feel silly. In the beginning, it's not the amount that matters. Building a consistent habit of saving small amounts will make it much easier to save larger amounts later on, once you have more disposable income.

Decide Whether to Work with a Broker or Financial Planner

Unless you intend to gain and continually update a great deal of knowledge, it's usually best to work with someone who does financial planning for a living. Hiring a financial advisor or broker out of pocket can be expensive, but trying to navigate the finance world on your own or with insufficient help can be even more expensive in the long run.

As a member of the military you have free access to financial counseling through Military OneSource. Military OneSource financial counselors are trained professionals who are intimately familiar with the issues that affect service members.

Keep Fees Down

Fees are an inescapable part of investing, but keeping costs down is one of the most important things you can do as an investor. Many of the fees you encounter might seem insignificant — 0.5% here, $20 there — but over a period of years or decades, they can really eat into your savings. For example, a 2% fee can cut a portfolio's value in half over 45 years.

Depending on the types of accounts and investments you hold, fees are typically charged in one or more of the following ways.

  • Assets under management (AUM) is a billing method based on the amount of assets you hold with a financial advisor or broker. Clients are charged a percentage of the total value of assets under the advisors' purview.
  • Expense ratios are fees charged on the investments funds you hold. These fees represent the total yearly cost associated with the fund expressed as a percentage.
  • Administrative fees are typically fixed fees charged by financial institutions or the companies that administer your retirement savings plan.

Several studies have shown that higher fees are negatively correlated with investment performance, suggesting that investment options with lower fees tend to perform better in the long run. When discussing fees with brokers or advisors, ask for a breakdown of total fees over the life of the account and make sure you can live with those numbers — they might be a lot higher than you were expecting.

Plan Your Savings with Respect to Your Military Pay Plan

Even in the military, not all retirement plans are created equal. Depending on when you first enlisted, you're assigned to one of four different pay plans, and each one offers different retirement options. The plans are:

  • Final Pay: DIEMS date (Date of Initial Entry into Military Service) before September 8, 1980
  • High-3 plan: DIEMS date after September 8, 1980 and before July 31, 1986 (unless you were still serving as of December 31, 2017 and opted at that time to switch to the new BRS plan—see below)
  • REDUX plan: DIEMS date between August 1, 1986 and December 31, 2018 (unless you were offered and accepted the option to be covered under the High-3 plan)
  • Blended Retirement System (BRS): DIEMS date on or after January 1, 2018

Each plan offers different benefits and imposes different obligations on the servicemember, and the details of each plan change often, so you'll want to make an appointment with a military financial advisor to ensure that you fully understand your responsibilities and entitlements.

As of this writing, most non-retired military personnel are on the BRS plan. The exact benefits of this plan will vary based on a few factors. If you're on this plan, the military will make an automatic 1% contribution to your thrift savings plan (TSP) account regardless of whether you make any contributions of your own. If you're otherwise eligible for retirement pay based on the number of years you serve, you'll receive 2% of your base pay per year. For example, if you retire after 20 years, you'll receive 40% of the highest base pay rate you received during those 20 years.

Needless to say, 40% of your base pay isn't a lot of money. Few military personnel can retire on this amount alone. Unless you're frugal and highly efficient with your budget, it's probably best to view this money as supplemental and to build a portfolio that can generate more income in retirement. This almost inevitably means taking advantage of non-military investment products.

Choosing the Right Investment Accounts

When researching retirement investing, it's easy to become overwhelmed with the seemingly endless amount of industry jargon. One key concept to understand is the concept of investment accounts vs investments. TSP, 401K, and IRA (as well as subtypes Roth & Traditional) are all types of investment accounts. These investment accounts hold investments such as stocks, bonds, mutual funds, EFTs and index funds. Investment accounts each serve different purposes. In retirement investing, the biggest difference is how the accounts are taxed.

Understanding the Tax Implications of Various Accounts

The tax implications of different retirement accounts are considerable and often nuanced, so it's important to make sure you understand exactly how they work. Most retirement accounts are funded with contributions that are either taxed or tax-deferred.

A tax-deferred account allows you to make contributions that directly reduce your taxable income for the current year. Those contributions then grow tax-free until withdrawn from the account in retirement. You'll pay income tax on both the contributions and earnings when you withdraw money from the account, at the then-current tax rate. This is typically referred to as a traditional account.

With an after-tax account, contributions are made with funds that have been taxed in the current year. Those contributions then grow tax-free, and they can be withdrawn tax-free in retirement. In some types of accounts, the contributions (but not the gains) can be withdrawn at any time without tax or penalty. These are typically referred to as Roth accounts.

An often overlooked third type of account is an HSA, or Health Savings Account. Contributions to these accounts are tax-free, assets invested in these accounts grow tax free, and when used for qualified medical expenses, withdrawals are tax free. Once you meet retirement age, withdrawals that are unrelated to healthcare can be made without penalty (however, they will be subject to income taxes). For these reasons, it's a common strategy to maximize yearly contributions to Health Saving Accounts and not necessarily use the funds for healthcare until later in life (unless you encounter a big financial emergency). There are, however, many other important considerations to make about your healthcare before choosing to participate in an HSA.

Military TSP (Thrift Savings Plan)

Civilian employers often offer some variant of a 401(k) plan, a tax-deferred retirement account usually composed of index funds and target date funds (more on those in a bit). The Thrift Savings Plan (TSP) is the military's equivalent of a 401(k) plan, and it works in much the same way. When you enroll, you can choose either a traditional or a Roth variant of the TSP.

  • In this context, a “traditional” account simply means a tax-deferred account. Contributions you make directly reduce your taxable income for the current year, up to a limit. You will pay taxes on the money in your account when you withdraw it, usually after age fifty-nine and a half, at the then-current tax rates. There is a risk that tax rates will be higher when you retire; keep in mind, though, that you may not need as much to live on in retirement, which often places retirees in a lower tax bracket.
  • A Roth account is essentially the inverse of a traditional one. Contributions to a Roth account are not tax-deductible; you must pay taxes on that money the same year you put it into your account. But when you eventually withdraw it, no further taxes are due. Roth accounts should be given additional consideration by members of the military for a few reasons: military members are often residents of tax-free states, they could receive tax-free compensation and they can expect significant pensions in retirement.

The traditional vs Roth argument is a topic endlessly debated by investors. Personal finance is just that — personal to your specific set of circumstances. This decision is also impacted by how tax law & tax rates may or may not change by your retirement date. For this reason, some investors choose to do both in what is called “tax diversification”. By contributing to both traditional and Roth accounts, the associated tax risks are reduced. For more information on traditional vs Roth, see this resource from the Bogleheads.

401(k) Plans and Individual Retirement Accounts (IRAs)

A 401(k) is, by definition, offered by an employer who may match or otherwise incentivize your contributions. An individual retirement account (IRA) functions in essentially the same way but is a type of product you must open and fund on your own. As long as you're in the military, the TSP is generally your best option for a 401(k)-type product, as it's the only way to get employer matching. You're free to open an IRA if you'd like, but for military personnel, such accounts are typically less advantageous. Most 401(k) and IRA products are offered in both traditional and Roth variants.

You may be wondering if you're eligible for a 401(k) sponsored by a civilian employer if you have a second job outside the military. The answer is yes — if you can get the job. Military regulations concerning moonlighting are complicated, and you may or may not be permitted to get a part-time civilian job, depending on the details. Check with your command if this is something that interests you.

Take Advantage of Employer Matching

Many employers offer sponsored retirement accounts and will match any contributions you choose to make (up to a certain amount). This can be an effortless way to double your savings, but it often comes with many strings attached, so be sure you understand what they are. If you choose to participate in the military TSP plan under the BRS, the military will match your contributions up to 5%. However, like most other employer matching plans, you'll have to comply with several requirements to be eligible.

Be sure to pay attention if your employer's contributions take time to become fully vested. Vesting schedules are typically created to encourage employees to stay longer. When you leave the company, you will forfeit any contributions that have not fully vested.

Carefully Consider When and How You'll Be Able to Access Your Money

Many retirement accounts strictly limit the conditions under which you can withdraw your money. Some also impose restrictions on how much you can contribute in a given year or penalize you for taking certain actions. Be sure to keep this in mind when deciding how much to contribute each year. You likey need to save some funds in a non-retirement account for shorter-term goals.

Selecting Investment Options

If you don't yet have much experience with investing, it's helpful first to concretize a few basic facts about investing in general. Once you've clearly identified your priorities, timeline and risk tolerance, it will be much easier to choose specific investment options.

Know Your Time Horizon

In investing, the time horizon is the period of time over which an investment is held before it is sold. Generally speaking, investors with longer time horizons are able to take on more risk. They don't need to be concerned with day-to-day changes in value and can withstand large downturns in the market (so long as the downturns don't happen close to your retirement date). For this reason, those retiring soon will typically adjust their investment portfolios to be more conservative.

Asset Allocation & Diversification

Most people don't put all of their savings into a single type of investment; that's extremely risky. Asset allocation refers to the percentage at which you hold different assets such as stocks, bonds & cash in your portfolio. The majority of investors have diverse portfolios — investments spread across many different kinds of assets — as a way of mitigating risk.

Diversification involves further spreading your investments within different asset classes (for example, investing in a variety of stocks in different industries and sectors as opposed to a single stock or industry). Because military personnel don't make a ton of money, risk management is especially important. Someone with lots of disposable income can recover from a total loss more easily than an E-5 making $3,000 per month. This is why military personnel tend to choose more diversified investment strategies.

Investors who follow an asset allocation strategy can also utilize the process of rebalancing — the process of buying and selling portions of your portfolio when market conditions cause it to stray too far from the desired asset allocation. This process gives the investor even greater returns, because they are effectively buying low and selling high.

Stocks and Bonds

Stocks and bonds are often referenced together, but they're very different products meant to serve different purposes. A bond is essentially a loan that you give to a company or government. Bonds aren't directly tied to the stock market; instead, the organization you're lending money to agrees to pay you back at a later date, plus interest, regardless of how the stock market fares between now and then. Most bonds are fairly low-risk, meaning you can expect modest profits.

When you purchase a stock, you become a partial owner of a company and are thus entitled to a proportionate share of its value. Stocks are higher risk investments, but can also yield higher returns.

Be warned that purchasing individual stocks can be extremely risky and volatile. Do plenty of research and use extra caution if you want to invest in individual stocks or bonds. Legendary investor and stock picker Warren Buffet actually advises against investing in stocks (so much so that he's even instructed the trustee of his estate to place 90% of his money into the S&P 500 upon his death for the benefit of his wife).

Mutual Funds and Exchange-Traded Funds (ETFs)

Mutual funds and ETFs are among the most common and popular retirement products, but it's important to understand that they're not technically investment products in and of themselves. Think of them as envelopes or boxes that hold an entire set of investments; the whole thing is then referred to as a mutual fund or ETF and is treated as a single package.

A mutual fund is a pool of money collected from many different investors. The money is then invested in securities such as stocks, bonds and short-term debt. Each shareholder is entitled to gains or losses proportional to their investment. Here's a super simple example: Say you and three other people are the only investors in a mutual fund (typically, there are many thousands of investors), and you each make equal contributions, so you own 25% of the fund. All of the investment products represented in the mutual fund cumulatively earn a profit of $1,000, so your share is 25%, or $250 (minus the manager's fee). Mutual funds typically have an option to reinvest dividends and capital gains automatically, which may not be available to an ETF investor.

ETFs, like mutual funds, typically track a particular industry, product or commodity. Unlike mutual funds, ETFs can be bought and sold on a stock exchange. Also unlike mutual funds, which trade only once per day after the market closes, ETFs are bought and sold all day, and their prices can fluctuate rapidly. This makes them more volatile than mutual funds, but potentially more profitable. Broker fees and commissions also tend to be lower for ETFs than those associated with mutual funds.

Index Funds

An index fund is a specific type of mutual fund or ETF designed to match or mimic a specific financial market index, such as the Dow Jones Industrial Average, Bloomberg Barclays Aggregate Bond Index or the S&P 500. They provide broad market exposure, which means low risk and low fees for the investor. This stability makes them an ideal cornerstone of many retirement portfolios.

Target Date Funds

Like index funds, target date funds are a specific type of mutual fund, but they serve a different purpose. These funds seek to grow in value over a specific period of time but reduce risk as the target date approaches. Target date funds do this by starting with an aggressive asset allocation when the investor is young, and automatically adjust the allocation to reduce risk as the investor reaches retirement age. Investing in a single target date fund is the ultimate set-it-and-forget-it retirement strategy: simply choose the fund's name nearest to your expected retirement date. Most of these funds have low to moderate fees (but be sure to watch out for high expense ratios).


An annuity is a contract between you and another party (usually an insurance company) in which they agree to make regular payments to you in the future in exchange for an up-front investment. Let's say that you buy a $1,000 annuity and make the entire $1,000 payment up front. The insurance company uses that $1,000 to make other investments or to service its own insurance products (which also generate income in a variety of ways). The company then begins making payments to you — payments that should cumulatively exceed your initial investment — and keeps any remaining profits. Annuities often require a substantial up-front investment, but they can be a good way to invest a one-time windfall, such as a large inheritance.

Real Estate

Like stocks, real estate investments are high-risk, high-reward propositions. The real estate market is often chaotic; profits and losses can both be large. Regular people (that is, those who aren't real estate speculators, developers or professional investors) usually invest in real estate in one of two ways: by becoming landlords or by buying vacation homes. Some people buy land and sell it to developers, but this usually requires more cash than military personnel are likely to have.

Being a landlord can be a more stable source of income than vacation homes, but it comes with its own set of headaches. Be prepared to deal with problematic tenants, constant repairs, legal restrictions on how you can manage your property and the hassle of working with a property manager (which you'll almost certainly need to do while you're on active duty). Vacation homes are easier to maintain, and, legally speaking, you maintain greater control over your property. Just ensure you can still make a profit if the home sits empty for half the year.

Precious Metals

In a sense, precious metals (especially gold) aren't so much investments as inflation hedges. Few people have made substantial profits in the precious metal market, but that isn't its intended purpose. Inflation is a constant threat in any mixed economy and it diminishes the purchasing power of your money by at least a few percent every year.

Most people who invest in precious metals do so as a way of guarding against high inflation. Because the amount of precious metal on the planet is fixed and limited, its monetary value is very stable, unlike that of fiat currency. Should we ever experience hyperinflation like that of Germany after World War I or Zimbabwe in 2007, precious metals will retain their purchasing power (assuming there are enough people and goods left to do any trading).

Investing and retirement planning are among the most complex challenges that most of us will ever deal with. Both can be especially hard when you're in the military, because active-duty service limits your free time and earning potential. Even so, if you take advantage of the financial benefits offered by the military and combine them with the non-military investments that best fit your needs, you can put together an effective retirement plan that will serve you well into your golden years.

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