New to the service and want investing advice.

[gloryoftheson]

I'm a brand new LT who just got stationed overseas. I really want to set myself up financially to secure my future. When I got here I had about 20k saved up and bought a used beater car for $5.5k cash. I decided to Iive on base because I hate traffic, want to save gas, and like to be close to work, the gym, commissary, etc. I'm currently doing 15% into the Roth TSP C fund as it is comparable to the S&P 500. I don't get 5% match until 2 years active duty. Should I lower my contribution and max out a Vanguard Roth IRA of $6500. Should I max out the TSP? Should I keep it where it's at now and not max to enjoy travel and hobbies (currently at Hickam and would like to pickup surfing, travel the other islands, and visit some Asian countries). I'm a pretty frugal guy and mainly spend money on food and workout supplements. I would like some good advice to guide me in the right direction. Thanks!

 

[almunday]

@gloryoftheson If you can max the tsp max the tsp then anything above that put into your Roth IRA. You’ll see a lot of people suggest your Roth IRA first then TSP because there’s more options . If you can put 22k away in a Roth so it and the up doesn’t much matter at this point. The only thing is I’m not sure all it in your S fund is the best bet. But at your age you can probably afford the risks. I’d recommend the furthest out L fund just because it’s self adjusting and carries less risk but with less risk there’s less reward.

There definitely is something to be said though about enjoying your early years while you’re in paradise though. Only you can make that decision though

 

[job3315]

@almunday Any reason you’re recommending the furthest out L fund instead of his actual L fund based on his age? Wouldn’t the appropriate-year L fund do a better job adjusting his portfolio as he nears his actual retirement age?

 

[everyman]

@job3315 There isn't a single L fund that has beaten the S&P 500 over the long run. Just invest in that, IMO.

 

[job3315]

@everyman The whole point of the L funds are that they adjust your portfolio’s risk as you get closer to retirement. If you put the whole thing in stocks, what happens if the market happens to be particularly down when you need to start drawing? Put it all in stocks when you’re young maybe, but as you move closer to retirement you need to move into less volatile investments and that’s what the L fund does.

 

[everyman]

@job3315 He can move into an L fund 30 years from now then, but right now? No way.

 

[job3315]

@everyman I really don’t think you understand the point of an L fund or how it works.

 

[everyman]

@job3315 I 100% understand the theory and how they work, and have also seen their performance since they were first introduced, and there is zero reason a 20 year old needs to be in them.

The Vanguard Target date fund for the year I plan to retire is up 98.53% since I entered service, the S&P Index find is up 301% over that same time. Thank god I didn't use the Target date fund or I couldn't afford to retire in my 40s...

Edit: Even being in 100% stocks, I can survive a MASSIVE downturn in the economy, and still have way more money than the dude that only returned 98%.

 

[almunday]

@job3315 Op absolutely can and since he just got in the furthest out is probably their retirement group anyway. The furthest out will stay into the C and S funds longer and keep risk on longer

 

[nothinges]

@gloryoftheson

I'm currently doing 15% into the Roth TSP C fund as it is comparable to the S&P 500. I don't get 5% match until 2 years active duty. Should I lower my contribution and max out a Vanguard Roth IRA of $6500. Should I max out the TSP?

I think a good goal for a newly minted O-1 is to max the IRA and get to 50% of the TSP, with the goal of maxing TSP as an O-2. This means investing roughly 25% of your paycheck, and keeping the other 75% for yourself. Note that keeping it for yourself doesn't mean just blowing it on hookers and blow, it means starting up a get out of the military and go to graduate school fund.

Tweak the numbers based on these two financial goals. You don't want to find yourself in 4 years with a 6-figure IRA and not enough liquid savings to make the transition out of the military. But understanding what that transition fund needs to be will allow you to then determine how much more you can devote to your retirement fund.

I will caveat the above with the fact that inflation exists, so a completely valid investment strategy is to max your TSP / IRA the first two years, then dial it down the next two years as you more aggressively save for a transition fund. Which one is "better" will really depend upon what the market does short-term in those first two years.

As far as investing into the IRA: the advantage of the Roth IRA is that you can withdraw your previous contributions penalty free, whereas with TSP you need to take a loan. The other advantage is that it offers a wider array of funds, so you can customize your portfolio with finer granularity than TSP. The advantage of TSP is really in retirement when you have access to the G fund - this is essentially the social security fund, and if the net assessed value goes down the federal government pays back the difference.

Write a lump-sum check if you can. Many of the lower cost fee funds require a $3,000 initial investment. Once you get over 15k into the IRA is when you can really start to tweak your portfolio, until then you're going to be stuck in 1-2 funds tops.

Roth is a good choice for you considering your early aggressive investment plan, which would incur tax penalties later on as your income increases from the compound growth.