Personal Finance

Thursday, July 28, 2016

Millennials are Reshaping Military Benefits

Millennials now make up the largest generation: 83.1 million “Generation Y” 18-to-34-year-olds are entering the workforce and joining our armed services.

As it stands today, 81% of our enlisted men and women leave the military before 20 years of service, which means walking away from valuable retirement benefits. The military understands that retirement benefits are something we should provide for those who choose to selflessly serve our country—and they want to make sure more of our enlisted men and women receive those benefits.

The current pension plan benefits military personnel who serve for 20 years or longer. They receive a 2.5% multiplier on their years of service, which is then multiplied by their highest earnings over 36 months to calculate their pension benefit. Service men and women who enlisted prior to 2006 will be grandfathered into this old pension plan. Those who enlisted between 2006 and 2017 will have a choice to make when the blended retirement plan launches in 2018. Starting January 2018, all new service members will automatically be enrolled in the new blended plan.

The new DOD plan has four main components:
  • Pension: For those who wish to serve their 20 years, they will continue to receive a pension benefit. Instead of a 2.5% multiplier, they will be given a 2% multiplier on their years of service. This will reduce future pension benefits by about 20%. For example, under the current plan someone who earns an average of $100,000 and served 20 years would receive $50,000 per year in pension benefits ($100,000 x 20 x .025). Under the new plan, the benefit would be $40,000 ($100,000 x 20 x .02).
  • Automatic Thrift Savings Plan Contribution: After 60 days of service, all service members will receive an automatic 1% contribution to their Thrift Savings Plan (TSP), which is similar to 401(k) plans in the private sector. After 2 years of service, members will be vested in this automatic contribution.
  • Matching Contributions: Similar to the private sector, the military will begin matching what service men and women are contributing to their TSP after 2 years of service. Starting in year 3, service members will receive their 1% automatic contribution plus up to a 4% match.
  • Continuation Pay: One of the biggest objections to the new plan is that it disincentivizes those close to 20 years to “push through” and make it to 20 years. The DOD plans to offer cash bonuses to service members who have completed 12 years of service and sign up for an additional 4 years. They are projecting those bonuses to be at least 2.5 months of basic pay for active military and ½ month’s pay for reserve members. These bonuses will likely be larger for in-demand positions.
If an enlisted member decides to leave prior to reaching 20 years of service, they will now be able to roll their TSP into another employer-sponsored plan or IRA, or leave the funds in the TSP. This feature is becoming more important because of the demand for mobility—and the fact that many service members working in specialties (like cyber and medical) leave the military for private sectors because of their specialized skillset before attaining 20 years.

What decision should you make?
  • I enlisted prior to 2006: These changes will not impact you. You will be grandfathered into the old plan.
  • I enlisted between 2006−2017: You will have a choice to make before 2018. If you plan on completing 20 years of service, continuing with the existing plan will likely be your best choice. If you would like the option to leave the military prior to 20 years of service, the new plan will give you that flexibility, while still providing some retirement benefits. You should speak to your financial advisor about how this choice will impact your personal financial plan.
  • I plan to/my child plans to enroll after 2018: You will be automatically enrolled in the new, blended retirement plan. It’s a good idea to seek financial guidance on how to get the most out of your retirement benefits, and learn how to be a good long-term investor.
If you’re choosing to enroll in the new blended retirement plan, it is important to understand that major financial decisions are being shifted onto your shoulders. Your retirement readiness will largely depend upon how much you take advantage of the matching and tax deferral benefits within the Thrift Savings Plan. Additionally, your TSP balance will be invested in stocks, bonds, and cash, just like other retirement plan balances. Market volatility will impact what you see on your account statement. It will be important to understand how your TSP funds should be invested, in order to match your risk tolerance.

Educating yourself on how to invest successfully for the long term will be important, so you don’t get concerned during market downturns and make the mistake of “selling low.” Your Janney advisor can help walk you through how to make solid financial decisions and avoid common pitfalls.

The military plans to help with these decisions by offering financial education. They currently plan to launch three educational programs for the three groups that will be impacted, as mentioned above. They are also considering educational opportunities and refresher courses after a promotion is received, or after a service member experiences a “life event” (i.e., gets married, divorced, or has a child).

As always, speaking with your personal financial advisor is a great resource for information. They can help you understand how these opportunities impact your personal situation. Please call your Janney advisor to see how we can help.

Contact us for more information, and to schedule an appointment with a Janney advisor.



Jessica Landis
Director of Financial Planning

Jessica Landis is Janney’s Director of Financial Planning. In this role, she is responsible for the day-to-day management and operations of the internal Wealth Planning team. In addition, she plays a critical role in process improvement initiatives focused on enhancing Janney’s financial planning offerings. 

Jessica recently joined Janney after serving as a financial advisor with Legacy Planning Partners. During her seven-year tenure at Legacy, she was part of an advisory team with a focus on comprehensive financial planning. Her role included designing financial plans, determining product solutions, and educating clients on the most suitable options. She specialized in working with pre-retirees and on multi-generational plans, with a focus on strengthening the customer relationship through the financial planning process. 

Jessica graduated West Chester University with a Bachelor of Arts in Communication Studies and a Bachelor of Science in Finance. She holds her Series 7, 66, and Life Accident and Health licenses, and is also a CFP®.

This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within.

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