When is the best time to start planning for retirement? After the kids are born? Buying a house? Getting married? In our professional opinion, the best time was yesterday. Because the younger you start, the more ready you will be in the event of an accident or early retirement. If you do have a long, fulfilling career, you’ll be better prepared to live the retirement you deserve, one that reflects the decades of sacrifice you put in as a firefighter.
The Benefits of Starting Early
Crafting a Budget
Creating a financial roadmap can get you on your initial path to obtaining financial stability. For example, you get your paycheck – what do you do with it? Spend some, save some, and hope for the best, right? That’s what happens without a budget. And yes, a budget is inherently part of a retirement plan.
Understanding your debts, bills, and disposable income from the get-go will eliminate the guesswork and allow you to create and stick to a budget that will drastically simplify your financial life. One example is the 50/30/20 budget: 50% for living expenses, 30% for entertainment, 20% for savings or debt reduction. Of course, those numbers are adjustable, and you may discover that paying down debt makes more sense before beginning to save.
You can also adjust on the fly as necessary as new financial priorities pop up.
Creating a Goals-Based Plan
How do you know where to go if you don’t know where you’ve been? Now that you have a budget in place, you can determine your financial goals, prioritize them, implement a plan to reach them and adjust your plan as necessary. Unsure of what your goals are or if they’re realistic? A financial professional can look at your finances and help you figure out what your goals are and if they’re realistic, and find the best way to achieve them.
But what does this have to do with retirement? It’s about streamlining your finances and ensuring your money always works for you and not against you. Your finances are probably already tight, and you can’t waste any time or money considering your other factors as a firefighter: higher chances of an early retirement, a potentially insufficient pension, and significant medical expenses.
Investing on the Side
Your pension is more or less guaranteed – but if you want more than that, you have to take action. Investing on the side can potentially provide you with the growth you need to help battle inflation, cover medical costs and leave behind a legacy. And the earlier you start, the more time compounding will have to work its powers.
How much would you have if you simply socked away $500 a month for 25 years? $150,000.
Investing it in a fund that reflects the returns of the S&P 500 with a historical Rate of Return of 10%?
$649,090
That’s $499,090 of extra funds you didn’t exactly have to work for. And every year you continue to contribute the compounding effect may quicken.
After 30 years of contributing $500 a month, you’re now a millionaire. And you’ve spent only about $181,000 to achieve it.
Of course, you could invest more or less, depending on your financial situation, but without a plan, it’s hard to guess how much you can afford to put away.
However, there’s one big caveat – no investment is ever guaranteed. We can assume a historical 10% investment rate, but in reality, your investments could sink right before you need them. Again, creating a plan today can help you determine ways to protect the gains you make to reduce the chances of that happening.
If you’re more risk averse, you can look into other financial products that provide a more or less guaranteed return, such as cash-value life insurance and annuities. Annuities are especially beneficial for end-of-life expenses, when inflation may have reduced the purchasing power of your pension and the funds you saved up on the side are extinguished.
Insurance Needs
Insurance can play an enormous role in retirement planning, especially if you’re forced into early retirement and experience a gap in coverage before Medicare kicks in. Without the proper coverage, you may be forced to go into debt or remove funds from your long-term savings, both of which would negatively impact your retirement readiness. Both medical and disability insurance can help mitigate these risks.
However, even when Medicare does activate, it doesn’t cover everything, such as long-term care. Unfortunately, as a firefighter, you are more likely to need long-term care, and it isn’t cheap. Long-term care insurance should be considered early on to reduce your premium.
As mentioned above, cash-value life insurance may also provide cash infusions as necessary to help pay for medical expenses or other costs.
The bottom line is that integrating your insurance needs early on and fitting them into your financial and retirement plan can improve your long-term retirement readiness.
Understanding Your Pension
Crafting a retirement plan early on will help you determine what your pension payout will look like and what to do with your pension; do you take the monthly payout, take a lump sum, or roll it over into an investment account? Does the DROP program make sense for you?
A retirement plan can help you determine your possibilities and the best route for your savings based on your situation, goals, and risk tolerance.
Creating a Tax Plan
Any tax-deferred retirement plan withdrawal you make or pension payment you receive in retirement is going to get hit by Uncle Sam. A retirement plan can help you strategically place your investments in the proper accounts to diversify the tax status of your retirement income sources, helping you keep taxes low not just in retirement but along the way, too.
For example, a tax-deferred, traditional IRA allows for a tax deduction now, but you’ll owe regular income taxes in retirement when you begin taking distributions. On the other hand, a Roth account doesn’t allow for a deduction, but it does allow for tax-free distributions in retirement. Investments that incur long-term capital gains, such as ETFs, may be ideally situated within a brokerage account, where they’ll receive a lower tax rate than within a Traditional IRA. Asset location and a careful mix of deductions versus tax-free income in retirement can drastically reduce your tax obligation.
Final Thoughts
What is retirement planning? It’s the careful process of streamlining your finances and creating a comprehensive picture of your financial goals, income sources, medical needs, family concerns, taxes, and legacy. Firefighters, as you realize, face unique risks to their retirement on the medical side. That’s why starting as soon as possible can help you shape your finances as necessary to ensure that your retirement remains as secure and stable as possible, no matter the circumstances.
We’ve helped firefighters nationwide secure their retirements with customized solutions. It’s our thank you for your continued sacrifices and part of our tireless mission to serve those who serve. Reach out for a consultation today by clicking the button below.
