In a perfect world, all investing options would be equal. The universe would understand your intent and spit out the results of your wish. Unfortunately, that is not the case. We must micro-manage our investing habits to get the best results.
The Thrift Savings Plan (TSP) versus a standard brokerage account is a touchy subject for us government folks. There is no doubt that TSP gives superior results on paper, but what are you sacrificing?
Before we get into the meat and potatoes, a quick disclaimer. If you are receiving TSP matching, please max out this resource. The matching element is not up for debate, as it always stands as a great deal.
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This article may be the first in a long line, so let’s start with some simple comparisons. Today, I want to talk about time, options, and flexibility. Let’s begin.
Time. Time is the one resource in life we cannot take for granted—once we use our time, it is no more. Many people do not want to spend their time dealing with money, investments, and dividends.
For these people, TSP is the best bet. Simply choose a fund or target-date fund, a percentage, and press the “I believe button.” I currently have all of my TSP allotment in the 2040 target-date fund. My returns have been great.
My biggest concern with TSP is the time between military retirement and age 59. I am currently 41 years old and plan to retire somewhere between 44 and 48. Once I retire from the military, I can no longer contribute to my TSP.
This concerns me because I cannot access this money nor take a loan against it. These years could be very stressful because of changing jobs, cities, adult children, etc. I would like to have more control of my money—but that’s just me.
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A brokerage account gives you 100% control of your money from day one. The main caveat is that you will be paying taxes from day one. I personally love to receive my dividends and re-allocate them as I see fit.
Yes, it takes time to get your various dividend growth and income portfolios moving, but I love to see behind the curtain. For example, I can adjust my portfolio to inflation rates, adding more high-yield investments with massive dividends.
Options. TSP has various options to customize your retirement. In fact, I remember being confused when I opened my TSP account back in 2001 (ish).
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For all intents and purposes, the funds are similar to index funds on the stock market. The target-date funds are different allocations of the standard funds. You can find matching funds and target-date funds at brokerages like T. Rowe Price, Fidelity, Vanguard, and Charles Schwab.
Again, TSP is very transparent and safe. I trust TSP, which says a lot about the program. Most people do not read more than their rate of return. You’re in good hands with TSP, especially if you do not like to tinker.
However, the amount of options on the stock market is overwhelming! The stock market is where you come for fun for the people who love to get their hands dirty.
You have securities like preferred shares, closed-end funds, business development companies, real estate investment trusts, baby bonds, dividend ETFs, bond funds, blue-chip companies, and high-yield blue-chip companies.
On top of these, you can trade stock options like covered calls to extract more value from the market. Yes, it takes a lot of reading and experimenting to understand the stock market, but variety is the spice of life.
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As I mentioned before, as inflation rises, I can double down on preferred shares and closed-end funds, giving yields that beat inflation. Once things cool down, I can invest in blue-chip stocks like McDonald’s and Starbucks.
Flexibility. My main concern with TSP is a lack of flexibility, especially after military retirement. TSP puts you in limbo from age 40 to 59. On top of this, my number one concern is the lack of dividends.
TSP does not pay dividends to the end-user. The program reinvests dividends back into its accounts. The end-user thus sees a growing stock appreciation.
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But wouldn’t it be nice at age 59 to receive dividends from your TSP? If you had $300,000, wouldn’t it be fantastic to pull out $1,000/month in dividends without selling shares?
As it stands now, you have to sell shares to achieve any income level. Again, you also can’t borrow against your TSP loan once you retire.
With my brokerage account, I never have to sell shares. I can live freely on my dividends! Yes, the government taxes me; however, I can use a Roth IRA to create a massive tax-free dividend machine.
I can also leverage my brokerage accounts to borrow at great rates. For example, I have $35,000 in my M1 Finance brokerage account. I can borrow up to 40% against this account at a current rate of 2%. This means I can borrow $14,000 today without loan agreements or credit checks.
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When you talk about investing, using leverage is an enormous benefit. So at age 41, I can use this $14,000 to buy a used car to parley into a rental car service. Or, buy a storage shed to rent out to customers. How about using that $14,000 to convert a garage into rental space for house hacking?
I have the flexibility to leverage outstanding loans against my investments. I can create money from thin air. I have become a bank and can diversify my investments versus the stock market at 2%.
With TSP, I would have to go to a bank, fill out a loan application, and pay 6-10% on a personal loan. I have little leverage, as my current job would hold more weight than my TSP holdings.
Conclusion. I wanted to keep this article simple to get our brains working. TSP is probably the best investment vehicle for those who do not wish to concern themselves with the stock market. The other alternative would be hiring a financial advisor.
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TSP is much better than a financial advisor, so it’s a big win if you access the TSP program. However, opening a brokerage account is a must for those who want more control and flexibility.
However, the stock market is the wild, wild west. If you are chasing capital gains, growth stocks, and meme stocks, prepare yourself for pain. If you can stay grounded in reality, invest for dividends, and manage expectations, you can create a fantastic nest egg that also produces income.
I use both TSP and dividends. It is a little loop-sided between TSP ($8,000) and dividends ($220,000), but I love dividends. If you don’t have the conviction to read about the stock market every day and follow interest rates, mortgages, and the Federal Reserve, then TSP is the way to go.
There is no shame in sticking with TSP. Based on the feedback from this article, I will hopefully start a series where we can examine the differences in more detail. As a military service member, I thought this comparison would be pertinent to the group. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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