In our opinion, firefighters are overworked and underpaid, especially considering the risks involved in the profession—both immediate and long-term risks to health, like higher cancer rates. With average salaries of about $53,000, higher medical expenses, and generally earlier retirements, firefighters have to be acutely aware of their finances to achieve long-term financial success. In this article, we’ll review some basic steps to get your finances on track.
Establish a Budget
A significant amount of Americans, including firefighters, don’t have a budget in place. How do you properly allocate your paycheck if you don’t know how much you spend on bills, food, mortgage, and entertainment?
One way to create a budget is with the 50/30/20 rule.
50% of your net income (what’s left after paying taxes and contributing to your pension) should go to your necessities. If your paycheck is $4,000, you shouldn’t spend more than $2,000 on your mortgage, utilities, bills, food, and insurance.
Next, you have your entertainment expenses. Again, with a $4,000 paycheck, that would be $1,200. This should cover your trips to the cinema, evenings out with friends, restaurants, and hobbies.
Finally, you have your savings: $800 a month, which should ideally be put into an investment account to take advantage of long-term compound gains (more on that later).
Keep in mind that the 50/30/20 rule isn’t set in stone. Depending on your situation, you may want to adjust it either temporarily or permanently, depending on how far off track you are to reach your financial goals. For example, you may want to drop entertainment to only 20% and savings to 30%.
Get Out of High-Interest Debt
If you haven’t been adhering to a strict budget and overspending as a result, there’s a chance you’re in credit card debt. With average interest rates of 21.47% in 2024, you’ll be hard-pressed to find any investments that consistently outpace it. Rather than putting that 20% of your paycheck into long-term savings, pay down that debt as fast as possible.
If you have multiple credit cards or other forms of high-interest debt, consider making the minimum payment on the debt with a lower interest rate and double down on the one with the highest interest rate.
Here are some caveats to consider: if you don’t have an emergency fund to cover at least a few months of expenses, you may want to focus on building up that fund while paying down your debt. So, perhaps 10% to your debt, 10% to your emergency fund, or an appropriate variation depending on your situation.
About your mortgage – that’s usually a trickier situation. Generally, mortgage rates are considerably lower than long-term investment returns. However, a conversation with a financial professional is highly recommended to help you determine the best path for your funds.
Begin Saving for Retirement Beyond Your Pension
Your pension may not provide you with the lifestyle you desire in retirement. If that’s one of your fears, you should consider investing to grow your savings further.
For one, you can open an IRA, a tax-advantaged retirement account. Within that IRA, you can purchase stocks, bonds, ETFs, and mutual funds.
Your contributions can be either ‘Traditional’ or ‘Roth.’ Traditional IRAs allow you to deduct the amount of your contribution from your taxable income for the year and then pay taxes on those contributions and the earnings they’ve generated once you begin making withdrawals in retirement.
Roth’s contributions work the other way around. You don’t get a deduction for the year. Instead, you make post-tax contributions, and then those contributions can grow tax-free for the remainder of your life. By tax-free, we truly mean that. You won’t owe any taxes on your withdrawals as long as you adhere to the rules.
In 2024, you can contribute $7,000 to an IRA; if you’re 50 or older, you can contribute $8,000. If you’re making Traditional contributions, your deduction may even drop you down a tax bracket.
However, one issue with IRAs and other investment accounts is that they depend on the performance of the stock and bond markets. Fortunately, alternative ways exist to create income streams beyond your pension and investments, such as cash-value life insurance and annuities.
Annuities are contracts where an insurance company promises to pay the buyer a specified income in the future. The payment amount and schedule depend on the type of annuity and the agreed-upon time frame.
Cash-value life insurance is a type of policy that not only provides a death benefit but also accumulates a cash value over time.
As a firefighter, you can borrow against your death benefit from that cash value component to cover medical expenses, supplement income in case of injury, or simply provide financial support during retirement.
We’ve barely scratched the surface of annuities and cash-value life insurance as they are very complex products that warrant more attention in separate articles. However, if you’d like a consultation to see if they fit your financial situation, don’t hesitate to reach out.
Plan for Medical Expenses
Unfortunately, one of the most significant expenses in retirement is health care. As a firefighter with a higher chance of experiencing a range of illnesses, it’s vital to figure out how to pay for medical expenses early on while you have room to maneuver. Complicating matters is the reality that many firefighters retire before they qualify for Medicare, requiring a solution to cover the gap in medical coverage.
You’ll likely qualify for your employer’s coverage for 18 months upon retirement due to the COBRA law – beyond that, however, you’ll want another insurance solution lined up. Don’t forget about long-term care insurance, either – Medicare typically doesn’t cover it.
Another option, if you qualify, is to open the triple tax-advantaged Health Savings Account.
- Deductible contributions
- Tax-free growth
- Tax-free withdrawals (if used for qualifying expenses)
Like an IRA, you can purchase investments that align with your risk profile to generate long-term compound growth. You can then use your withdrawals to help with your coverage gap between retirement and Medicare, or let your assets grow and use them later down the line for expenses Medicare doesn’t cover, such as long-term care.
Final Thoughts
Firefighters often can’t give their finances the attention they need. And we get it – once you get home, you don’t want to open the budget planner, shop around for insurance solutions, and craft a tax plan. You want to spend time with your family, watch the game, and take it easy, especially if you’re coming off a long shift. That’s why we’re here – we do the research for you and help ensure you get the financially sound retirement you deserve.
If you’d like to see how we can help you prepare for a financially secure retirement, click the button below!
