Clark A. Kendall and Carol L. Petrov, financial advisors and authors of the book “Middle-Class Millionaire Government Employees,” have dedicated their careers to demystifying the financial challenges faced by government workers, including firefighters and other public servants. The following excerpt comes from Chapter 6 with advice on savings and pension plans available to firefighters.
If you work for a state or municipal government, you likely have a pension similar to CSRS (Civil Service Retirement System) or FERS (Federal Employee Retirement System). It would be based on the length of time you work, and you would contribute a percentage of your salary. Pensions offer a fixed payment when you retire and take the worry and guesswork out of investing your money, which can offer a great deal of comfort and peace of mind.
However, living on a fixed income can be a challenge, especially when the cost of everyday items continues to go up. Sure, your pension will likely have a cost of living adjustment (COLA), but that might not be enough. Plus, what do you do when you encounter a sudden extra expense, such as a furnace repair or property tax bill? How do you save for those types of expenses? That’s why it’s important to go beyond your pension with additional savings.
It became clear that employees would have to contribute to their own retirement savings accounts and choose from the many mutual funds and annuity options offered by the investment industry. Like it or not, employees had to learn about these options and make their own investment decisions. At Kendall Capital, we think this is a great way for people to grow their own fortune so they are able to supplement their pension and have the flexibility to withdraw funds for that family vacation or cruise around Australia. They potentially could have far more to spend in retirement than if they relied only on a pension. The idea is to help you understand the supplemental retirement savings options offered by your government employer. It’s up to you to decide whether, when, and how to take advantage of them.
Generally speaking, keep the following five points in mind when deciding where to save for your retirement. Remember, you’re in the driver’s seat now, and the supplemental retirement plans are optional. If you’re young and just starting your career, you may prefer to open your own IRA or Roth IRA, giving you the utmost control and easy access to your savings. These accounts allow you to make pretax contributions or after-tax contributions, a decision that will depend in part on your current income and expected income in retirement. They offer additional flexibility and access that the government supplemental retirement plans do not. For that reason, they’re often the best place to start saving. By setting up monthly contributions, you can “pay yourself first,” with contributions automatically deducted from your checking account.
When evaluating your options, consider these five points:
- Will my employer match my contribution to the workplace retirement plan? An employer match is like a bonus. Why not take that full bonus?
- Who are the providers or custodians of the plan? The financial stability or strength and reputation of those financial institutions could affect your confidence level.
- Are my investment options liquid or easy to change if I leave this job? Flexibility and ease of access are important considerations. You shouldn’t face unnecessary restrictions in managing your money.
- Do I plan to save more than $6,500 or $7,500 per year? If you seek to save more than the annual limit in an IRA or Roth IRA, understand that a 403(b) or 457(b) plan will provide that additional savings opportunity.
- Should I contribute on a pretax or an after-tax (Roth) basis? A key factor could be your current level of income and stage of your career. Ultimately, you should aim to get the biggest tax break. It’s also important to have a balance of tax-free and taxable withdrawals in retirement. That can give you the greatest room to maneuver when considering tax efficiency. These are complex questions that a financial advisor and an accountant can help you answer.
State and local government employees also have defined contribution plans they can contribute to: 401(a) plans, 403(b) plans, or 457(b) plans. Some of these also have an employer-matching contribution and may even offer a Roth option. Some people even have access to both a 403(b) plan and a 457(b) plan. That means they are allowed to save up to twice as much as other people, in tax-advantaged savings plans. There are even “special catch-up” contribution options available to some 403(b) participants over age 50, depending on their employer. So, it’s all the more important to review your options not just at the beginning of your career but throughout your working years and particularly toward the end, when your income is typically highest.
Many government employees have yet another special opportunity to boost their retirement contributions. If you have access to both a 403(b) and 457(b) plan, you are allowed to contribute to both at the same time. That doubles your contribution limit for 2023, for instance, from $22,500 to $45,000. And if you’re 50 or older, add another $7,500 for the 403(b) catch-up and $15,000 for the 457(b) catch-up, for a grand total of $67,500.
But wait, there’s more! There are also powerful catch-up provisions for each of these plans. For 403(b) plan participants with 15 years of service, you can contribute an additional $3,000 a year for up to five years (or $15,000 in one year if you have not been taking advantage of this “special” catch-up contribution). Similarly, 457(b) plans allow a potential doubling up of contributions in the final three years before retirement age if you hadn’t maxed out previous years’ contributions.
If you are nearing retirement and in catch-up mode, these are all worth looking into and considering in your savings strategies. It may sound absurd, but if you’re a dual-income family and have fully launched your kids so they’re no longer eating you out of house and home, you could benefit from these catch-up provisions and have the cash flow to take advantage of them.
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“Middle-Class Millionaire Government Employees”
Mascot Books
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