Especially for firefighter families and couples, transitioning into retirement requires some careful thought and planning. After all, your career has required you to spend lots of time away from your family while “on call” to protect our homes and neighborhoods. Retirement is going to be a time when you begin spending more time than ever on our own terms and your own schedule. That, all by itself, is a big adjustment.
There are also a number of important financial adjustments that you’ll make as you enter the “retirement glidepath.” Let’s take a look at several important things you should consider as a couple, several years in advance of your actual retirement, that will help make the financial transitions smoother and more stress-free.
1. Beef up your retirement accounts
Most firefighters enjoy the benefit of having a solid pension plan, and that’s great. But in addition to your pension, it’s a good idea to save as much as you can in other tax-advantaged accounts, especially with the special benefits available to firefighters and other public servants. Remember that many public safety officers have access to 457 and 401(a) plans that feature favorable provisions for withdrawal. Under the IRS rules for 2022, you can contribute up to $20,500 of your salary to a 457 plan (up from $19,500 in 2021), and the funds accumulate tax-free until withdrawal.
If your employer offers a 401(a) plan, you can contribute to the plan according to the schedule stipulated in the plan document and, again, your contributions grow tax-free until withdrawal, at which time they are taxed as ordinary income. A big advantage of both 457 and 401(a) plans is that you can begin taking distributions much sooner (age 50) than a traditional IRA (age 59 ½).
Of course, as you look toward retirement, you’ll want to carefully weigh your anticipated tax situation for when you start taking distributions. This is where a qualified financial advisor can be of huge benefit to your planning.
2. Start thinking about your rollover options
Speaking of 457 and 401(a) plans, you may be able to roll over a portion of any proceeds you received from a Deferred Retirement Option Plan (DROP) into your plan, typically with no penalties or tax consequences. Also, as mentioned above, you can access the funds in your account at a much earlier age. If you’re participating in a DROP, it’s a good idea to talk to a financial planner about the options you have for taking the proceeds.
3. Think about your debt
Most retirees try to enter retirement with as little debt as possible. The more debt you can shed prior to retirement, the more of your retirement income you’ll be able to spend on what is most important to you.
4. Your retirement budget
And while we’re on the spending topic, it’s not too early to start looking ahead at your sources of retirement income, estimating your monthly income, and evaluating your budget. Don’t forget about Medicare insurance premiums, taxes (local, state, and federal, as applicable), and savings. Yes, even in retirement, you’ll want to set aside something regularly so you can build up and maintain an emergency fund, not to mention having ready cash for things like last-minute travel urges or even hobbies that you may want to allocate more time to, once you enter retirement.
5. Social Security
Even though you are covered by a pension, you may also be entitled to certain Social Security benefits if you or an employer have paid Social Security taxes outside of your public safety employment. If you haven’t already done so, create your own free online account at MySSA.org. This will allow you to estimate benefits for yourself and a spouse, and it also makes it more difficult for identity thieves to set up a fraudulent account and claim benefits in your name.
You can also find out about the Windfall Elimination Provision (WEP), which can reduce benefits for persons who are covered by both Social Security and a pension plan if contributions were made to Social Security from any employment you had that was outside the public safety sector. If you have more than 40 quarters of paid Social Security taxes from employment outside your public safety career, the WEP may apply to you. You can learn more on the Social Security website, or from a qualified financial advisor.
At Mathis Public Safety Retirement, we are laser-focused on helping our clients prepare for a satisfying and stress-free retirement. We work with them to determine their most important priorities, and then we help them craft investment and other planning strategies to make their goals a reality. To learn more, please click here.
*This article is for educational purposes and is not to be considered individualized advice*
