1 percent rule can reap big rewards

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 1 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 Thankfully, the change was later repealed.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 1 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 1 percent can have a huge impact over time.

So, I turned my frustration into a constructive idea: Make 1 percent your friend and ally. Consider these small changes that could make a big difference in your financial security.

Increase your Thrift Savings Plan contribution by 1 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 3 percent per paycheck. If she committed to raising her contribution 1 percent per year for her remaining 14 years in the military, the results would be dramatic. With a hypothetical return of 7 percent, she’d have an extra $300,000 in retirement savings at age 60. Now I’ve got your attention! If you’re really looking to make a difference, don’t stop at 1 percent. Use every promotion or pay increase to save and invest more.

Cut your expenses by 1 percent. To save more, you’ve got to spend less. With a $50,000 income, a 1 percent cut is a mere $500 a year. That’s about $40 per month of belt tightening. That’s manageable, right? Figure out things you can cut out or cut back on and start using that money to pay off debt, build savings or pad your TSP.

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. Lower fees and expenses mean more money in your pocket compared to saving through other programs. Let’s say you set up an IRA and have $250 a month to invest for 30 years. You’re looking at two investments, each expected to earn a gross return of 8 percent. One investment has a 1.5 percent expense ratio and the other 0.5 percent. That 1 percent difference would take more than $50,000 out of your pocket. That’s a big deal!

Say no to $30,000. Signing up for the Career Status Bonus and the accompanying REDUX retirement plan is a great example of how 1 percent packs a powerful punch. Among other differences, CSB/REDUX locks you in to a 1 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.

We may not be able to control what happens in Washington, but we can take charge of our own finances. Take my challenge and turn the power of 1 percent to your advantage.