Take the 1 Percent Challenge

06/21/2014   
 

Even if you aren’t usually glued to the news coming from Washington, the budget deal in December may have captured your attention and had you steaming. The reduction of retirement pay — a one percent cut to inflation adjustments for military retirees until they reach age 62 — was a shock for all those who wear and have worn the uniform. Thankfully, the change was later repealed.

Still it raised a question: How big a deal is one percent? At the time, I created my own spreadsheet to crunch some of the big numbers being tossed around by military advocates. I found that seemingly minuscule one percent can have a huge impact over time.

Make one percent your friend and ally. Consider these small changes.

Increase your Thrift Savings Plan contribution by one percent per year. If you’re already enrolled, bump up what you’re putting in. If you’re not, sign up now. A simple commitment to increase your contribution each year could result in hundreds of thousands of dollars when you retire. For example, let’s say that Jane, an E-6, has a $15,000 TSP balance and contributes three percent per paycheck. If she committed to raising her contribution one percent per year for her remaining 14 years in the military, the results would be dramatic. With a hypothetical return of seven percent, she’d have an extra $300,000 in retirement savings at age 60.

Cut your expenses by one percent. To save more, you’ve got to spend less. With a $50,000 income, a one percent cut is a mere $500 a year.

Watch your investment fees and expenses. Expenses definitely matter — especially if you’re paying more than you should. One reason I’m a fan of the TSP: It has dirt-cheap expenses that are hard to match. Say no to $30,000. Signing up for the Career Status Bonus and the accompanying REDUX retirement plan is a great example of how one percent packs a powerful punch. Among other differences, CSB/REDUX locks you in to a one percent lower inflation adjustment to your military retirement over your lifetime. That’s like a $30,000 loan that ends up costing you a solid six figures — and you pay it back over your entire lifetime. Not good.

Take my challenge and turn the power of one percent to your advantage.

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