Investing while in the military is necessary for your future financial life and starting the process to becoming a millionaire. Coming out of a 4, 8, or even 20-year career with no money saved is not the best place you could be financially, it could cause you to make decisions you otherwise would not make. Without any money invested, it is very unlikely you’ll be able to live on just your retirement pay if that is your plan. If you don’t retire from the military, having a large nest egg that is gaining you money while you sleep is a great place to be after giving your country years of your life. This allows you to make decisions based on what you want out of your life instead of what can make you money quickly. Not having the ability to survive even a few months when you separate from the military is not where you want to be financially. Let us fix that.
Here are 5 places that you could invest your money in 2021 to get ahead in your financial life. There are more options, but these are 5 solid ways to start investing.
TSP / 401k
The Thrift Savings Plan (TSP) is one of the best places to invest as a military member. If you’re under the Blended Retirement System (BRS) you will receive up to a 5% match on your money. This means if 5% of your paycheck is $50 then the government will give you a free $50 that they invest in your TSP account. Congratulations, you have just doubled your money with no work.
The matching contribution is one of the most powerful investing tools that millionaires use. TSP as well as many 401k accounts have matching. Other than matching the other main benefit is taxes, I cover this in heavy detail in my TSP article linked here: https://myminutemoney.com/2020/12/09/military-money-thrift-savings-plan-tsp-become-a-millionaire-with-5/ . In short, Roth TSP allows you to pay zero taxes on profits in that account but you pay taxes on the money you invest initially. Traditional TSP allows you to skip paying taxes initially, but you pay taxes on everything when its withdrawn from the account.
In 2021 you will be able to contribute up to $19,500. That means that throughout the entire year of 2021, you are able to invest a maximum of $19,500. Anything after that will be blocked from investing into the account until 2022. Some people will not want to invest that much into their TSP, but if you are not interested in opening new accounts or having to think about different ways to invest this may be a good option for you. This is probably the only thing you need to invest in to become a millionaire at retirement age, you don’t need to have 20 accounts and spend hundreds of hours each week looking at stock prices. Keep it simple! Keep it simple and stick with one account for as little stress and effort possible. You can enable auto-investing so you don’t even have to transfer the money yourself, it will happen each paycheck on automatically.
TSP has only a few main funds. You will automatically be put into the G-fund. Most people do not like this fund because it rarely has good return rates. Meaning it is unlikely your money will grow into a large sum from compound interest. The difference between the funds could be hundreds of thousands of dollars by the end of a 20-year career! So, consider the option of switching to a different fund.
There is a Roth option and a Traditional option. If you want to invest long term Roth may be the better option. If you have a high income Traditional may be the better option. It depends on the individual’s situation. Many advisors recommend Roth. Roth has better long term advantages for many people.
According to Chris Hogan’s study on millionaires, the 401k (like TSP) is the number one way people become millionaires.
See my TSP article for more information on everything TSP.
Roth IRAs are a great place to invest after getting your 401k or TSP match. These are Individual Retirement Accounts which allow you to get the same tax advantages as the 401k or TSP do, but they also have more flexibility.
IRAs can allow more options to choose from when investing for your retirement. TSP as well as most 401k options only offer a handful of choices for what you can invest in. IRAs can have dozens. For some people this is overwhelming, for others this is a way to maximize profits based on what they feel is the best sector to invest in.
TSP, 401ks and IRAs are some of the simplest ways to get a relatively save investment while still getting historically good results.
If you max out your TSP and Roth IRA, you will be investing $25,500. If you invest this much from age 25 to age 55 it will be worth 4 million dollars at a 10% return rate. 2.4 million dollars at a more conservative 7% return rate. Of course, maxing out both accounts is very difficult, but it is a goal to strive for. From 25 to 65 just maxing out the Roth IRA which is $6,000 a year. It is still likely you will become a millionaire.
The last thing to consider with an IRA is you can withdraw your CONTRIBUTIONS with no penalty. Unlike TSP or 401ks where you can only withdraw around age 60 for no penalty. IRAs allow you to withdraw what you put into the account. You cannot touch any of the investment gains, unless you want to pay heavy fees and taxes.
For example, if you max the account at $6,000 for 10 years and the account returns 10% per year, you will have about $95,000. You will be able to withdraw $60,000 with no penalty but remaining $35,000 cannot be removed unless you want to pay a penalty. Removing that money is probably not a good thing to do if you want to have as much money as possible for retirement. It’s best to keep that money in the stock market, but at least you have the choice. Removing that money will greatly reduce your retirement savings in that account. Many people don’t like locking their money up for decades without any ability to move the money around. This gives flexibility and maybe some peace of mind that if something catastrophic happens, you would have access to that money.
Overall, Roth IRAs are a great account if you want tax advantages by paying no taxes on your returns, have more flexibility on where to invest your money compared to TSP, and want to max out an account each year, and worst case scenario be able to withdraw that money.
Mutual Funds/ ETFs
ETFs are Exchange Traded Funds it’s a fund that trades on the stock exchange. You can buy these on websites or apps like Robinhood, or Webull, or even through your bank’s brokerage accounts. Many ETFs mirror the stock market or invest in other sectors, like energy, oil, or gold.
Vanguard has an ETF called VOO, this is a very popular ETF that mirrors the S&P 500. That means when you buy a share of VOO, you are buying a little piece of the top 500 companies in the United States stock market according to S&P. It is a very well-respected metric to see how the overall stock market is performing. You can buy ETFs in bonds, in commodities, in currencies, or even real estate.
Mutual funds are a little different. Mutual funds are usually actively managed by a company or person. That means that somebody is managing that fund actively and will be buying and selling stocks many times through the year to try and maximize gains for the fund. Some people have been able to do this with great success however most Mutual funds do not outperform the stock market. It is important to do lots of research when purchasing a Mutual fund, even if they are outperforming the stock market, you must check the fees that they charge because fees alone can diminish your portfolio value substantially. A 1% fee for example can bring that fund below the stock market return.
Both options are medium risk. They are usually good return rates similar or better than TSP or an IRA would be. But it really depends on what ETF or Mutual fund you choose.
Mutual Funds and ETFs are both taxed under capital gains. If you hold them for over 1 year your taxes will be reduced significantly.
This is considered the highest risk out of the 5 places to invest in this article. They also have the highest potential to make you the most money. If you want to be an investor over decades to slowly make consistent returns, this is probably not the best place to invest. Almost nobody is successful in making money through individual stocks over a lifetime.
If you buy an individual stock, and that company goes bankrupt. You will lose ALL your money, every penny. If that same company is in the S&P 500 and it fails but you have an ETF or mutual fund that had that stock, you will only lose a few percent of your money. The same goes for TSP, 401k, and IRAs.
Stocks are RISKY, very risky. Careers are made and destroyed through correct stock choices. If you feel the need to buy individual stocks you may want to limit yourself to a certain percentage of your overall portfolio. For example, maybe you’d want to do 50% in 401k/IRA/TSP, then 25% in Mutual funds/ETFs, then 15% in individual stocks and the last 10% in something else. (This is just an example, not a recommendation)
When you are buying individual stocks, you are just buying a small piece of that company. If you buy 1 share of Apple, you are now an owner of Apple. You may own only a small fraction of the company, but you are indeed an owner.
You can use the links below to sign up for an account to be able to purchase stocks as well as ETFs. Robinhood and Webull are very popular apps for people that are new to investing. The links below will give you some free stocks as well support the blog.
High Yield Savings Accounts
I hesitate to call this investing but in a sense it still is. A high yield savings account is the same thing as a normal savings account, the only difference is that you get a higher interest rate. As of December 2020, some of the best ones are Ally bank, and Citi bank as well as a few others. These return rates change a lot. In 2018 they were around 2% annual return, much better than the normal .01%. December 2020 they are about .5%, still much better than the normal .01% at many large banks.
Will this little bit of money matter? Probably not. Should you still do this? Probably. 2% on $10,000 is an extra $200 per year. Maybe that covers Christmas presents. The reason these accounts are good for many people is for emergency funds. This isn’t the place to invest your money if you are going for the highest returns, but it is a great place to invest your money if you are storing cash for something specific and you want that cash to try and keep up with inflation.
Some things you can use these accounts for include saving for a down payment on a car or house, emergency fund of 3-6 months of your income, or maybe a vacation. For most people this is not where you want all of your money to be. It just helps the the cash you have to keep up with inflation and maybe give you a little bit of earnings while you save.
REMEMBER that most people who become millionaires do it through the 401k, TSP or similar alternative according to Chris Hogan’s largest study on millionaires.
Some other options include real estate, crypto currency, and bonds investing. All with different degrees of risk. All of which require lots of research. It may be best to diversify everything in this post throughout your portfolio for a good balance of risk and reward, but every person has their own investment plan for their situation.
Chris Hogan: https://www.chrishogan360.com/