Traditional vs Roth TSP for Retirement

There has been a long-standing debate between military members regarding which of the two TSP retirement options would be best – the Traditional or the Roth.

In this post, I’m going to discuss why I think the Roth option takes the cake, and why I personally invest in it myself.

In short, I think the question of which is best requires a few factors to be understood prior to arguing for one or the other.

While not everyone’s situation while on active duty – or that of their retirement – will be the same, I think it is important to start with some basic assumptions to help explain why I’ve chosen the Roth option and think it would ultimately be the best option for most if you play your cards right.

You’re relatively young, or at least not nearing retirement already

The first assumption is that the military member is not near retirement when they begin saving.

We’ve all heard that saving for retirement – or anything really – early is better than waiting because of the advantage of compounding interest over time.

So, with that being said, we’re assuming that the member has likely started in their 20s, or at least in their 30s.

Assuming you’ll be retiring at 60, this gives you 30-40 years to let your money grow.

Without time for your investments to grow, I don’t know that the Roth would be better. The main reason for this leads us to the second point – you’re expecting to make more in retirement from your investments and pension combined than you do on active duty.

You’re expecting to save enough to actually have more money in retirement than you have during your working years

I think at first read this may come as a shocker to many, but hear me out.

Even though many people get nearer to retirement with what they believe not to be enough, I think this points to a lack of savings and investment discipline throughout their lifetime, not a lack of income.

Even with a moderate salary throughout life like you’d have as an enlisted member of the military, regular savings and investments over a long period of time will result in large nest egg for retirement that should produce more income in your retirement years than you even earned on active duty to accumulate it.

Take me for example.

As a Chief in the Navy, I earn a base pay rate of about $4,562 per month. Since TSP contributions are mainly taken from your base pay, we’ll just use it as an example.

Contributing the recommended 15% of my income, I would be saving coming out of pocket just over $684 per month, or $8,211 per year. With the upfront tax rate I pay of 12%, I would see an actual contribution amount of just over $602, or $7,226 per year.

This might seem like a lot to some, but with your finances given proper attention, you should be able to save at the 15% rate with fair ease. Not to mention, it’s what many finance experts recommend anyway.

But say we only average $250 per month, less than half of what we should be doing at that point.

Using the TSP fund that has seen the best average annual returns over the longest period of time since inception – the C Fund – we can expect to earn approximately 10% per year on average.

If I complete a 25-year career in the Navy (because everyone is split on whether 30 is worth it or they should only do 20), and save an average of $250 per month over time, I’ll leave the Navy with a TSP balance of $331,708.

That’s a decent amount of money. But it doesn’t have to stop there.

Being that you’d be around 43-45 years of age, assuming that you entered the military around age 18-20, you’d still have 15-17 years of work left that could help boost your savings until you reach 60, assuming you want to keep working.

But let’s say that you don’t. A quarter century of the Navy was enough for you.

Even still, your contributions made over that time to the TSP will continue to grow even without further contributions being made up until age 60.

Taking our balance of $331,708, leaving the Navy at 25 years, and letting it grow at 10% for approximately 15 more years to age 60, with no additional contributions, would result in an account balance of $1,477,400!

That’s insane! And again, that’s with no additional contributions from about age 43-45. Remember that compounding interest thing we talked about?

Now let’s add what your income would be at age 60, combining your pension and a 4% withdraw from your Roth TSP. A 4% withdraw rate is widely regarded as a very safe amount to last you through retirement.

25-year E-9 retirement pay (as of the date of this post): $4,350 per month / $52,200 per year

TSP withdraws at 4% (tax free!): $59,096

Total annual retirement income: $111,296

As you can see, you definitely benefit from over half of your retirement income being tax free since you already paid taxes on them up front when you contributed. You’ll still pay taxes on your $52,200 pension, but you could imagine what it would be if you had to pay just as much or more in addition with the Traditional TSP option.

You might not be able to – or want to – work after leaving the military

In our example above, I assumed that we would not be working after the Navy, and that the monthly income of $4,350 would be sufficient for 15-17 years until age 60.

Again, this example is if you can’t or don’t want to work after the Navy, but imagine if you did and continued to contribute to an additional Roth 401(k) plan with another employer.

Continuing to work for those 15-17 years after leaving the military and contributing to a 401(k) could result in tens of thousands of dollars – if not hundreds of thousands – in additional retirement money in your nest egg.

Conclusion

What I’ve described in this post made a few assumptions, but after explaining them, I hope I’ve made a clear case for how early saving and investing – along with a pension from the Navy – can really set you up to benefit from tax-free withdraws in retirement.

In my mind, understanding that it is completely possible to make more money in retirement than you made in your working years to get there is necessary to see how the Roth option benefits you over the Traditional one.

*The opinions expressed in this article are my personal opinions and do not represent those of the Department of the Navy, Department of Defense, or any other military organization.