HR 2146: Cops, Firefighters, and EMS – Don’t Fear Failing Pensions

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HR 2146 has the capacity to be a game changer for many of the nation’s public safety employees. In 2015, President Obama signed into law HR 2146, and suddenly hundreds of thousands of cops, firefighters, and EMS providers can retire at 50 and access their 401k without a 10% penalty. The public safety employees have to separate after age 50, so leaving at 49 will not help them. Additionally, they have to leave their 401k and their 457b plans with the employer. This is not an issue, as it is normally the case that extremely low fee companies cater to public safety employees. The entire act is a huge benefit when you consider the news dealing with the pensions of public safety employees.

Across the nation, the pensions of police and firefighters are under fire. One such example is the Dallas Police and Fire Pension which seems to have been poorly managed. There is a real chance the fund could fail, especially given the fact the mayor refuses to support a rescue bill. Many retired officers, firefighters, and their families are staring into a financial abyss. That is, unless they planned ahead for this possibility. Socking money away into their 401k and 457b plans can help these public safety employees to ensure their financial future is not dependent upon how well any single fund is managed. Diversity is important, unless you can buy the whole market in a single fund like VTSAX.

As stated earlier, I am a cop. With that comes long hours, dangerous situations, and an untenable long-term sleep schedule. But I love my job, helping people, and serving my community. I am also passionate about personal finance and helping people optimize their financial decisions, especially early on in their employment where they have the opportunity to take advantage of the time in the market their youth affords them. I also am blessed to get to work for an excellent city that affords me the following benefits that help me with getting towards financial independence that other cities may not:

  1. 401k with a 50% match up to 3% (defer 6% to get 3%).
  2. 457b plan.
  3. Health Savings Account
  4. 2 to 1 match (7% to get 14%) towards my retirement at the Texas Municipal Retirement System.
  5. 20 year retirement to obtain a pension via TMRS.
  6. 6% shift differential.

Any one of these is an incredible benefit, but let’s look at a case study for a brand new 25 year old police officer who joins the police force, but does not learn about investing and the path to financial independence for five years. At that time, he works extremely hard in order to reduce expenses, live frugally, and max out his employer only retirement accounts. We will define those accounts as 1-3 above, and we’ll use the number specific to my employer, even though your mileage may vary across the country when it comes to public safety employment. For ease of calculation, we’ll assume our police officer will not get a raise for the first five years of his employment before receiving one at five years.

Brand New Cop Case Study with FI Wake Up at Five Years

As a brand new cop, our protagonist will be earning $59,264 a year. After five years of investing 6% to get 3% from the city, he will have around $30,600 in his 401k if we assume a 7% return each year. Now the officer comes across any one of a dozen fantastic financial blogs such as, Mr. Money Mustache, or Our hero has seen the light. The recent news stories about neighboring cities having pension problems serve as a catalyst for how he can work to secure the financial future of his family. He knows that no one saw these pension problems coming decades ago. He is fifteen years away from any possible pension benefit. The possibility exists that his pension could experience problems between now and retirement. He is unwilling to bet the financial future of his family to something he has so little control over.

The best time to plant a tree was 20 years ago. The second best time is now. – Chinese Proverb

At year five our hero gets a raise to $75,626 (again, there are incremental raises in most police jobs called step raises, but we’re simplifying the math a bit). From he learns about how awesome 457b plans are. He decides to work extra part-time jobs and he continues to live in an apartment for reduced rent. Then he puts every dime he doesn’t need to live off of into his retirement accounts, maxing them all out and even adding a Roth IRA as well. This comes out to $44,900 saved a year in contributions (401k/457b – $18,000 pre-tax each, HSA $3,400 pre-tax, and $5,500 for the Roth IRA which is post-tax). This is also ignoring any raises, cost of living adjustments, or adjustments to these limits by the IRS.

Financial Independence

Along the way, he reaches financial independence in his early 40s when he can access his 20 year pension. He decides to keep working because he loves and believes in his work. Additionally, in five years he’ll be 50, still young, and able to access 100% of his tax-deferred retirement money without any sort of penalty. He’ll also be able to access his Roth contributions. Given the starting amount from above of $30,600, the officer will get to $1,959,109.95 when he is 50. This does not include the pension he was promised at 45 or the 50% match (6% to get 3%) from his employer. Those things will of course help, but it is simply icing on the cake at this point. He is guaranteed a nearly $80,000 a year income for the rest of his life using the 4% rule ($78,364.39 to be precise).

The match and pension would be nice if they continued in the long run, but now the officer is set for life. He can retire confidently or keep working to serve his community as he chooses. HR 2146 helps to give him this confidence and simplify accessing his money. Consider this benefit with the great assistance a 457b can do for retirement. Public safety employees should not be at the mercy of lawmakers as they consider how to address pension issues. Part of financial independence is independence. After doing so much by saving the lives and homes of others, public safety employees should save their own family from completely preventable pension worries.

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