When you join the armed forces after January 1, 2018, you’ll be automatically enrolled in the Blended Retirement System (BRS). After 60 days—about the length of basic training in most branches—regular contributions will begin to flow into a Thrift Savings Plan (TSP) account that’s been established in your name.
Part of the contribution comes from a payroll deduction from your base pay each pay period, and 1% comes automatically from the DoD.
If your first reaction is, “Hey, I need that $28.50 today not 50 years from now!” you’re not the only one who thinks that way. Retirement is a very long way off and it may be hard to keep up with your bills on what you’re earning.
But consider this: If $1,596 a year was added to your account every year for 45 years, and the earnings compounded at an average annual rate of 6%, you’d have an account worth about $451,000.*
And this: If you had used the $28.50 to buy pizza, you’d have an empty box.
* This simplified hypothetical example assumes 45 years of equal-dollar contributions. The DoD matches contributions through 26 years of service but not longer.
One of the main benefits of automatic enrollment is that you get an early start on investing for retirement. It would probably be tempting, if it were up to you to enroll, to put off signing up. In fact, planning for something that’s not likely to happen for forty or fifty years might seem like a waste of time.
But waiting is a big mistake. That’s because the longer you’re part of a plan like TSP, the longer you have to benefit from the power of compounding.
In a bank savings account, compounding occurs when the interest you earn on your principal, or account balance, is added to that principal. The result is a larger base on which future interest is figured. So over time the dollar value of your account increases. Of course, if you take money out, you shrink the principal and slow down the accumulation process.
Compounding works a little differently in an investment fund like those available in the TSP. The contributions you and the DoD make every pay period are used to buy shares in the fund. All the earnings those shares produce are likewise reinvested to buy more shares. So over time the number of shares you own always increases. That’s the good news.
But investment accounts are different from savings accounts. If you have $100 in a savings account, the value of the account is $100 plus any interest you earn. The value of an investment account, though, depends on two things: the number of shares you own and what each of those shares is worth, as measured by the share price.
What can make you nervous as a new investor is that share prices change. They can and often do go up, but they can also go down before they go back up again. Since you have lots of time before you’ll need to withdraw the retirement money in your account, you can ride out those ups and downs. That gives compounding plenty of time to work in your favor.
Automatic Enrollment