Financial planning for police and firefighters is a topic that is not often discussed, but should be. If you’re a police or fire professional, you may think your financial situation is straightforward. Unlike most, you’ve got a pension, so you’ve got guaranteed income. Finances in your retired life should be simple, right?
Like it or not, nothing in life is truly guaranteed. Your pension hopefully will be there as long as you need it. However, the fact is that many pension funds are underfunded. And, life is unpredictable. Over the course of your retirement, unexpected events may throw curveballs that put a dent, or worse, into your financial nest egg.
You Can’t Just Rely on Your Pension
If you’ve followed what is happening in Dallas, an otherwise prosperous area, you’ve probably seen how pensions may not be the sure thing many hoped they would be. Dallas’s pension fund is now undergoing some cuts, but no one knows how many more will be needed in the future. Even California, which has long maintained that pension benefits are not to be rolled back, has rumblings of future potential cuts due to very real shortfalls.
So, it’s important to realize that there’s more to retirement planning than just reading your pension statements and planning to spend less than what comes in.
Instead, you need to be actively preparing for the unexpected. One of the possibilities is reductions to your pension benefits in the future. But that’s not the only potential threat:
- If you’re still working, you have a higher likelihood of injury or disability on the job
- You have a lower than average retirement age, so you will likely spend more years in retirement
- Divorce can mean that your single income may need to provide full or partial support to multiple households in the future
- Serious illness may also increase your costs or derail your plans
On top of these factors, people are living longer, so for that reason alone, you might be retired for more years than you anticipate.
In all of these instances, you’ll need more money to stop these events from impacting your ability to maintain your lifestyle in the future.
Preparing for an Uncertain Future
To make sure your future is a good one no matter what happens, you need to reduce your reliance on your pension. So what should you do?
- First, you’ll need to determine the amount you’ll likely need in various scenarios. Part of this is determining what you want your retirement to look like and how much it will cost to maintain your lifestyle each year. This should take into account amounts for inflation and other things that change over time.
- Then you’ll want to run through various scenarios to ensure that you and your loved ones will have enough money to sustain your lifestyle should one of those events occur (disability, death, divorce, pension cuts, etc).
- Based on those factors, you should have a target amount of assets you’ll need to sustain you.
- You will need to determine how to get from where you are now to that target level. Usually this will be through a combination of saving more, generating reasonable investment returns, avoiding losses and keeping your spending within a certain budget range.
- That plan should involve frequent (i.e. quarterly) checkups to make sure you’re on track. When obstacles arise or your situation changes, the plan will need to revised to adjust for the new factors.
This is all part of a comprehensive financial planning process.
In the old days, many of our parents may have gotten away with not doing this level of detailed planning. But people didn’t live nearly as long then, and interest rates were high so retirees could get reasonable returns without too much risk.
Today, you may live as long retired as you spent working. Or maybe more. And as we know, interest rates continue to dwell at or near generational lows.
It’s one thing to plan five or ten years out, but those retiring today will likely have retirements that span decades. And over the course of those decades, things may change. Inflation has been very tame over the past few decades but what if it jumps up and our everyday costs soar? We’ve already seen and felt the impact of that in health care costs. What if it happens across the board, with everything that we buy on a monthly basis?
Plan Today for Success Tomorrow
Financial planning lets you plan to have enough even if some of these things happen. The key is to start planning now, instead of later. Because as you get older, your ability to deal with unforeseen obstacles drops. You may not be able to find work easily or your health may prevent you from working at all. Or if you are investing, you’ll need the power of compounding over time to help you build wealth. So you don’t want to find yourself running out of money unexpectedly at age 80, when you don’t have many options.
Financial Planning for Police and Firefighters: Achieving a Higher Purpose
Financial planning serves an even better purpose: helping you achieve your real goals.
We all have dreams for our life, whether it’s to travel, play the world’s great golf courses, turn your hobby into a business, start a nonprofit organization, or any other of the myriad things people would love to do. How many of your family and friends actually live their dreams? Sadly, most don’t. Simply because while it’s easy to set goals, achieving them is another matter.
But financial planning with a professional is a secret weapon: you have someone who will hold you accountable. If we’re not taking the action steps identified in the plan that will get you to your desired end point, your financial advisor is going to point that out. And he or she should help you get back on track. Accountability is a magical thing.
Maximizing What You’ve Got
Financial planning can also help you make the most of what you got. Maybe you plan on working after you retire, which is one of the best ways to make sure you’re not totally dependent on your pension. If you’re working, there’s strategies that can help you sock away more and save on taxes at the same time. These include Roth IRA’s, Health Savings Accounts, Solo 401(k)s and other retirement accounts that provide tax-favored benefits.
Avoiding Bad Mistakes
Another extremely important part of financial planning is helping you avoid the common mistakes that set people back. When asked about his success, Warren Buffet provides two rules:
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
Most of us at one time or another have experienced a financial loss that set us back. We’re only human, but this happens all too frequently. Think back to 2008, or to the dot com crash….how many of your family and friends made money, then gave it all back in the crash?
The average investor tends to do well during bull markets, then watch gains turn into losses when the markets get volatile. Then instead of continuing to add money during bear markets, those investors get fearful and don’t start buying again until prices have returned to high levels.
This is another significant benefit of working with a good advisor. Part of our job is to keep you from making these big mistakes that set you back in life. While you may not get the ‘home runs’ since we don’t advocate taking outsized risks, you can build wealth the right way, and keep it.
Do-It-Yourself or Outside Advisor?
For most people, hiring an outside professional makes sense, since this is a specialized field and mistakes can be costly. But many people think it’s too expensive to have a financial advisor, or think they don’t have enough money for it.
That’s a mistake. Everyone can benefit from getting outside financial advice, as long as you choose carefully. (Learn more about how to hire a qualified and honest financial advisor with our free ebook, available here: (LINK).
You can –and should–control your costs, too. Here’s how you can do that:
- Only work with advisors who are transparent about their fees. Good, honest advisors want you to know exactly how much you’ll be paying for their services. If it seems complex, they probably don’t want you to understand.
- Not all financial advisor fees can be easily seen. If you choose to work with a broker, for example, you’ll be charged commissions. Even more dangerous though is the fact that higher fee products will pay more commission, so you’ll probably be steered to buy higher-fee products. So the commissions you are paying are hiding the real expenses: overpaying for mutual funds or ETFs. While a percentage here or there may not sound like much, this can cost you literally hundreds of thousands of dollars over the span of your career. Best to stick with “fee-only” advisors who don’t charge any commissions.
- Ideally, find a firm that has familiarity with the unique opportunities and challenges faced by police and fire professionals. That way you spend less time and money getting them up to speed and can get more personalized attention to your specific needs.
Of course, you can do your financial planning yourself, if you’re willing to get educated and consistently set aside time to do it right. However, you won’t get the benefit of an outside professional holding you accountable to your own goals. You also will lose the outside second opinion which can help you from making costly mistakes.
Whatever you do, do something! Your future is far too important to leave to chance. And don’t procrastinate….as taking action now will allow you the time to improve your financial situation, so you can look forward to a retirement without worry.
For tips on how to find and monitor the performance of a financial advisor, download our free eBook.
Mike Haney and Dan Watson provide assistance to fellow police and fire professionals at Arroyo Investment Group, LLC. Mike had 30 years of service, most recently as Fire Battalion Chief at City of Glendale, California. Dan joined Arroyo after a career of more than 41 years with the Los Angeles Police Department, and later as Police Chief for South Pasadena the City of Mammoth Lakes.