Pension Episode (Part 1)

Together, John and I hope to bring clarity to the world of personal finance, specifically relating to firefighters. Firefighting is a difficult job making sound. Financial decisions shouldn't be. In today's episode of the fiscal Firehouse, John and Louis will go over the defined Benefit Pension Plan administered through the Fire and Police Pension Association, also known as FPPA.

John and Louis will discuss how the pension plan is funded, what the contribution rates are, and then also what your expected, defined benefit. Is going to be John and Louis will also briefly discuss different retirement options regarding the pension plan. This is part one of a two-part series regarding the defined benefit pension plan Without further ado, let's kick it over to local 1309 studios and the recording of the fiscal firehouse. Welcome back to another episode of the Fiscal Firehouse.

I'm your co-host John Beatty. With me as always, I have my friend and partner, LB Louis Barella. What's going on today, Louie?

He's always happy and positive, and he has an enthusiasm unknown to mankind. he's just an amazing mentor too. And so, yeah, we had a, we had a really nice last set with him. Had a dinner on night two, steak dinner. His family, his son came and, it just was really cool. He got some cool retirement gifts from past and, current crew members. And, it was just, it was a really cool night. And talk about a guy that has done it right.

He made his mark on this organization and on the guys that he worked with. And, he was the sole of our crew for a long time. I mean, he's been the soul of three A for. Eight, eight years. And so, uh, it was just really special. he, like I said, he did it right. Like I said, he did it right. I and, Ron, I just want to give you a special shout out, but I know you're retired now and you're probably like, I don't need these guys. I don't need this Financial Independence podcast.

I'm all done with that. But, if you are listening, I just want you to know that, I love you and I'll miss you. I'll miss Apple 30. I'll miss the late nights laughing around the firehouse table and, all the bullshit we gave each other while on shift. So have a great retirement and thank you for being a great friend.

and while we're on the, points of personal privilege, it's almost, February 28th, which is my wife, Katie's birthday. technically. Technically speaking, it's February 29th. She's a Leap Day kiddo,

Yep. This is what allows us to hopefully get outta here at a reasonable age and have a nice, lifestyle as we leave. but before we get into the pension, some of the feedback that we've had from the listeners is, they're like, man, I love what you guys are doing. This is awesome. I'm learning a ton, but so much of what you guys are talking about. Is forecasting into the future. And that's so far off.

I just got hired and you guys are talking about the 4 57 plan and all these other things, but dude, I'm not gonna touch that for 30 years. Is there anything, any advice, is there any quick wins that I can have that I can start saving a little ching right now? So we're gonna start trying to incorporate some quick little hits and potentially some, lost money out there if you will, in which you can, find a little bit of extra ching in your pocket.

So, uh, there is something in the great state of Colorado called the Great Colorado Payback. So this is actually administered through the, The Department of Revenue, and this has actually been going on for many years, at least the last five or six years, and they'll advertise it every once in a while on tv. But a shout out to Kyle Lupe, we were at the training center eating some lunch the other day and he was talking about it again. I was like, oh man, I haven't done that for a while.

I haven't looked up that stuff. So just Google it. You can get on the website. It's super easy to fill out, I promise you. It's not a phishing scam. There's no Nigerian prints offering you millions of dollars. But there is something, where all the companies, if you've registered with, whether it's bank accounts, phone companies, cable, all sorts of things, if you have money returned to you and they can't verify your address or something else like this, it goes to the Department of Revenue.

And they basically keep it until someone claims it. So according to their website. Over $765 million has been claimed since they've gone live with this thing, a tremendous amount of money. So just in Colorado. So when this thing first kicked off, I did my little search. And I'm not gonna shit you, I got like 1200 bones back in my pocket. If those of you that don't know me, I was a little bit of a vagabond for a while. Traveled a lot of places, lived in a lot of different apartment complexes.

So most of it was, like I said, some type of deposit that was owed to me or something else like this. And it's super easy to claim it. So go on there. You basically just type in your demographic information and then depending on what it is, they might make you upload. Like I had to upload my driver's license photo and that was it. And I just did it again today just for grins to see if I had any lost money out there.

But for the majority of us, it's just uploading a driver's license, maybe a social security card, something like that. But, yeah, let's see if there's any lost money. And I'd be curious, let us know if you guys, uh, maybe we should have a contest Who found the most lost money out there? Maybe we will, throw in a little gift card or maybe some merch. I was

So if you lived in a different state and you might have money, outstanding from one of those other states, you can search on their website as well. So yeah, look, if you're, even if you're outside of Colorado, that's

and we don't wanna make this a three hour conversation, so we're gonna give you some of the highlights today. and then we will get into some of the finer details for part two of the episode. But Louie just want to kick it off and just talk about what the pension plan is in generalities. And I will highlight this. The plan that we are gonna talk about is, Colorado specific, firefighter and police specific. So FPPA.

So if you have something on any of your documents that says you're part of the FPPA plan, this episode is for you.

There are other plan plans that we may discuss at a, at another date, but this specific episode is for the FPPA defined benefit plan that covers many professional firefighters in the state of Colorado. So there is a ton of info, of information related to your pension. and because it's so vitally important for all of our retirements, we, like you mentioned, we'll split it up into two episodes.

this first episode, we're just gonna give you a general, a general high level view of what the pension is and how it works. And then, in the next episode we'll go ahead and talk about deferral options, about, the drop. A lot of people talk about that, especially as they're getting closer to retirement. So we'll just give you an overview of the pension as it is today, the regular pension plan. but at the end of the day, having a pension is awesome, right? It is.

It's guaranteed income in retirement. So this is something that the 4 57 or a 401k or IRA plans do not offer. Those are plans where you invest money and the return that you get in the market based off of your investments is what you have, whereas the returns of the pension are formulaic, they're based off of a formula that we'll go into later. but this will give you a predictable income stream every month while in retirement,

They're gonna take on that liability and it shared just like an insurance product, it really does take a lot of that worry outta the way. So it's very similar to working right, where you get a monthly check that comes into your mailbox every year. Pretty much guaranteed, and you just don't have to worry about market fluctuations and stuff like that. Now, that's not to say that they're foolproof, and it's not like it's any better from like a risk standpoint.

if the market goes down by 75%, everyone's invested in the market, our pension is invested in the market, we're all gonna feel something, but they just spread that risk out a little bit more because they still have people paying into the plan. They haven't paid out all the things. So it's just like from a peace of mind, I have found that a lot of people, it just makes planning and retirement. A lot easier for our members where they don't have to worry about that.

They know what the calculation is gonna be. It's based off of, years of service. And we'll talk about that here in a minute. But it's a way more predictable plan for them to start taking, income in retirement. And like I said, just from a psychological perspective, from a spending perspective, that's the other part is people are scared to spend money in retirement. They really are. They're just worried about I don't know. Am I gonna live 30 years? Am I gonna live 40 years?

What's the market gonna do? So they end up always spending, for the most part, way less money than they could have. Yeah. 'cause it's just that fear of running outta money and longevity and the pension helps protect against that

There's a lot of people that would freak out and they sell low, so they start selling off the investments in their 401k 'cause they're worried about it going down by another 20 or 30 or 40%. So they sell a bunch of stocks at a low and that really hurts 'em in the long run. Whereas the pension, it, like you said, it takes that risk away and it lets you have a set income, even when the market goes down temporarily, which all dips in the market are temporary, they eventually come back.

And having the fortitude to wait through that is, made a lot easier If you have a guaranteed source of income, which is what the pension is

just wandering and being more conservative as I get older. we are blessed to have the defined benefit. it's something that for a lot of, the private sector employees, they used to have, I look back at some research, and this was based from the Bureau of Labor Statistics, but like back in the early eighties, man, they had 60% of private employers had some form of a pension plan. So you think of the big ones like GE, Ford, all of these ones had really. Big, robust and dressed real pension plans.

But as the risks, as the liability started to build up, they started to get rid of those. And then there was the creation of the 4 0 1 plan, right? The 4 0 1 A and K plan that really took it off of the employers and it put the ones on the employee, to, fund their retirement. So a huge change in legislation and what that was and how that's been effective.

But, right now, if you were to ask the majority of people, especially people that stay in a company for a long time, the pension plan is, it's favored. People do like that predictable source of income. And if you work in government, you're lucky. 'cause there's a lot of defined benefit plan and plans in there. So if you're a listener, not related to FPPA, maybe, your spouse is a state employee or a teacher or some other type of defined benefit, they're gonna be very similar.

So I, a lot of, you'll see a lot of similarities between what Louis and I are. Gonna discuss, but always go back to your plan provider and the documents to make sure that your plan, reads out a certain way. We don't wanna give any misinformation, so the stuff we're talking about is specifically FPPA related,

So how long are you actually paying into the plan, the longer that you're into the plan, the more that plan is gonna be calculated. So the way that, FPPA is set up, there's different accrual amounts based on years of service. So for the first 10 years of service, you get a 2% per year accrual on your base benefit. And then after that 10th year, it then goes up to 2.5% for the remainder of the time that you're gonna be employed.

And it's all based off, like I said, years of service, but they all also take a calculation of the three highest. Salary years that you have in the plan, and that's what they're gonna average out for whatever your benefit is. So it's a calculation. We'll put it on the Instagram, page as far as what that calculation chart looks like. so you can exactly see based on how many years of service you have, what your base benefit.

Is gonna be, that's generally speaking how the plan is at least calculated. Now, there's different options you can take as far as what's considered early retirement versus normal retirement versus what Louis was talking about at the beginning, deferred retirement. So there's different options, strategies that you can take, and those are all gonna have a different amount that you're gonna be eligible for. if you have early retirement, you're obviously gonna take a hit.

It's very similar to Social Security. When we were talking about social security last month, where, if you take Social Security at 62, you're getting penalized because you're taking it earlier than what the government says, or what Social Security says is normal retirement at 67. So if you think about it from that framework, it's very similar in that aspect. So years of service, how many years you having on the plan, and then also what your three highest average salary years are.

That's gonna be your base

So you have a firefighter that is, let's see, we'll say they're 25 years old. They get hired, right? Actually, let's make them 20. we got a lot of young folks that we're

It used to be 55 was considered normal retirement age, so they would've been penalized for retiring at the age of 50, even though they put in 30 years of service. So that's an enhancement that's been really nice. And we actually have some members that are starting to go down that road and they're retiring before 55 and they have 30 years of service. So I think that's a huge shout out to the plan and the sponsorship of that. And I really encourage our folks to strive.

You might not get there, but if you strive for it and start saving aggressively and doing the right things and trying to, put yourself in a better financial position, you might have the opportunity to be one of those members that we're talking

a lot of it had to do with how the contributions were set up, and we'll talk about our contributions here in a minute. But basically it had been underfunded for a tremendous amount of time. The benefits were too juiced up or promised too good. And then as they hired people, they had to tear out those people. And their benefits were different than someone that was hired like five or 10 or 15 years ago. And it's terrible. It's terrible for

One of those being that you cannot carry over unfunded liabilities year to year, like you couldn't para. So that is a way of basically. Causing the pension board or forcing the pension board to say, Hey, we have a shortfall.

We need to shore it up now by either increasing contribution rates or decreasing benefits or doing something in order to make it whole for the next year, that's a, that, that might sound like, oh, it's just a reason for them to maybe not give us, cost of living adjustments are something, but the truth is, what it does is it guarantees that pension will be healthy and funded for future generations and for future firefighters and police officers, it's a good thing.

So they have those safeguards which make it a healthy pension overall. Would you agree with that

So all that means is basically every person that's in the plan, every new person that they hire, all the actuarial studies show. That the plan is healthy enough to pay 100% of your benefit moving forward. So that's really why that's of concern. And a lot of, pension plans, are somewhere around like 75 to 80% funded, status. and that just goes to show you those members that are in the plan that are younger, are more at risk for having some funding challenges in the future.

That's really, that it, the people that are drawing out on it already will probably be fine, similar to how social security is. but future benefits may have to be reduced if they don't shore those things up. So I'm very proud of our plan. I'm very proud of, the folks that sit on the boards and the people that can consult the CPFF. I really do think they're trying to do best by the membership and not put the plan at risk by, in incre increasing.

Crazy Colas and some of these other things that we'll talk about here in a minute. So I think they've done a really good job. And, if you are a member of F-F-P-P-A and the defined benefit, you should feel secure that the money that you're promised is gonna be there. They're working diligent.

And like John said, that is a huge blessing for us. And that kind of leads us to our next point is, okay, let's talk about how it's funded. how is this

We adopted it, but there was a little bit of a premium that we had to pay in order to reenter into FPPA. So if you were hired before 2008 and you elected to go the defined benefit route, you do pay another 2% additional premium. So like me, I'm 2007, I actually pay in 14% of, of my paycheck goes into the plan. So that's just part of the setup. I still think it's a fair deal.

I've gotten no qualms or complaints about it, but if you're like, man, I'm looking at my paycheck, and Louis said it's 12%, I can do basic math. So just be mindful of that. And there's no special code that you'll see on your payroll that says like a reentry fee or something else. It's just gonna say, FPPA and then what we paid into that. The

You're making up for it now, but you'll get the same benefit. Yeah.

And this is, as John and I were mention, as John and I were talking about earlier, this is a way that FPPA ensures that the pension is healthy, that it's fully funded, and that we have enough going forward for all the new. Police officers and firefighters that are hired within Colorado, correct?

let's talk a little bit now about how we actually gonna collect our benefit. What does that

We try to put

So once again, if you are younger than the age of 55, but you do have your, if your total years of service and your age add up to 80, that will also be considered normal retirement, which is a huge benefit. It really is. We talked about how that's calculated once again, 2% per year for your first 10 years, and then your accrual rate goes up by another half percent after the 10th year. So 2.5% basically until you retire. So it's a pretty simple calculation.

You don't even need the chart to figure it out. You can figure out what. How many years you've got on and then just do the quick math on that. But there is a chart available, which we'll have, on our feed for that. And it's all based off of your three highest year salaries when they average all that stuff out, which for most of us is probably gonna be our last three years unless we take a demotion, which I'm not in favor for anyone. So it probably should be based on your last three years.

Yeah, so that is normal retirement. Now we are eligible, just like with social security, you can take what's considered early retirement. So for early retirement you have to have a minimum of five years of service credit, and that's payable at the age of 50.

So an example for that, and we have, we have some folks here and it happens all over the place, but they work here for five or six or seven years and then they move on to greener pastures or they just find that the fire service isn't for them or they do something different, right? So they don't get their, they don't get all of that time. So what does that look like for them? They would then be eligible, to start collecting what's considered early retirement at the age of 50.

But at a minimum they had to have at least five years of service credit. And once again, that is calculated at a rate of 2% per year, moving forward. But you are gonna take a significant. Reduction in that because you're drawing early on it at the age of 50 and you just didn't have that much, service time. So I'm a huge fan of the defined benefit.

I think it works amazing for the majority of our members, but if you are one of those people that are not able to put in a significant amount of time, I would qualify that as probably 20 years or more. You take a pretty big hit, and it's not portable, it's just you're your money's tied up and locked up. So

It might be the best option for you. Just know that you'll pay in terms of money outta your pocket for taking that early

But it's, I just, it's unfortunate because I wish there was an alternative, but the other alternative is what we have with what we had before, and that's where people put in money and then the organization puts in money, the 4 0 1 a, and then they have to manage it. And that creates some problems too. So there's not a perfect solution. There's always pros and cons, gives and takes, peaks and valleys, if you will. But overall, I'm very happy with our defined benefit and our members should be too.

So that's what, early retirement's all about.

Still not as much as if you hit the rule of 80 and you're taking a normal retirement, but much, much more than if you took an early retirement.

But there is one particular, chart in that brochure that is really helpful and that's what we're referring to. It's called the benefit calculator, and it's this green, blue and yellow one sheet of information that basically lists in one on the XA axis, it lists the age of retirement, and I don't know Y axis. It lists the years of service. So for your specific situation, you can say, I have.

X years of service and I'm this age at retirement, or I'm going to be this age at retirement, what would my benefit be? And then there's this, the color code is very significant because if it's falls within one of the yellow categories that shows that you're getting a normal retirement, if it falls into one of the blue categories, you're getting a vested retirement. And if you're, in one of the green categories, you're getting an early retirement. So it'll show you those percentages.

It's a super easy way to just cross 'em up and look, I know it might sound more complicated when I explain it with all the color codes and the axes

You keep referring back to base benefits or, the more base pay and FPPA uses the definition of a pensionable earnings is how they define it. so how is that calculated? And specifically is overtime calculated in, in that calculation, so to speak. So if you work a bunch of overtime or you work on a special team, or you do a bunch of wildland deployments, all this additional money, does that beef up my base benefit? And the answer is.

'cause they're trying to juice up what their base benefit is gonna get in. The pension plan is smart, it's run by actuarials, and also there's a level of fairness. I would say to some degree, and it's just not sustainable. If we're depending on you to have a salary of a hundred thousand and then all of a sudden it's 200,000 and everyone is doing that, the pension plan just cannot support that system. It will break.

So as, as hard as it is and, dealing with fairness and everything else like this, it is not over time. Additional overtime is not calculated into your pensionable earnings. What is based on our Fair Labor and Standards Act, FSLA, there is a certain amount of prebuilt overtime into everyone's paycheck, which you don't even see. It just go, comes as part of your paycheck that is added in there. So there is that additional benefit.

It's just anything in addition to what your normal assignment would be is not gonna be considered pensionable earnings. So if you wanna know more about that, you can look on FPAs website. They talk about different things that actually can enhance your pensionable earnings. so I'm gonna refer back to, and this is specific to the West Metro folks and our contract, what is considered pensionable earnings? 'cause this is important.

So all of our longevity pay is actually in addition to, that's considered pensionable. 2% every five years in addition all the way through your career, which actually towards the end of your career adds up

That would also be con considered, pensionable earnings as far as. Is what you get towards your pension. that's, all the other, ancillary tech, technician fees that we get. So all the specialty folks, the hazmat folks, all that other stuff, you get your additional stipend. It's just at the end of the day, you're not gonna see that reflected on your pensionable earnings. So if you ever go on to, I would encourage everyone to go on to the FPPA website, and log onto their account.

If you haven't set one up, it will tell you every year basically what FPPA has on your records for what is considered pensionable or not. And that should pretty much align, with what your paycheck is, minus over time and then minus any other, technician pays or any other type of non differential pays is how I'd classify that. So we get that question asked a lot, but if you, but there's always a but, but the thing is, we talked about fairness and, and equity.

All they care about is the three highest years. So if you are a firefighter and then you promote at the very end of your career and you work your way up the ladder for, to an officer and then to a chief level, and you're only a chief level for three years, you will get whatever the chief levels three highest years are. and you only paid into that for three years, so there is that as well. just in how that is calculated and how that's factored in, are

And this has been a huge issue. we founded a, pension committee last year to specifically address this. I don't wanna say that there's been a lot of misinformation. I think a lot of people, a lot of our members are still under the pretense that there is some type of cost of living adjustment, whether guar guaranteed. And it's just not, it's just not true and it's not accurate. And we want to try to dispel that myth.

so there's certain things that the board will look at to decipher whether or not, basically what is the COLA gonna be and how much can they afford and what the compounding cola is. But they did make, what I would say is a pretty fair concession. back in 2023, they passed some legislation. FPPA got it through the legislator to change. This is through the state. So everything that changes with the documents has to be, has to go through the legislature. but they were able to find a happy medium.

And at first Man I thought man, these guys are super creative. I would've never thought of that. Upon further investigation, this is actually pretty common that a lot of other pension plans have done. But basically what the plan is now allowed to do is give. One time non compounding colas. All right, so there's certain parameters that they have to hit, and I'll talk about those parameters here. But they also, they will also reference this as what they call a 13th check.

And the way that gets distributed is in October, obviously they'll take the last year's, they'll take the investment performance, all these other things, they'll take inflation into account and then they'll figure out what potentially could be the non compounding cola. So specifically if the board is to approve a non compounding ko, they can only do it under these specific circumstances. So first and foremost, the compounding cola.

That is given, it has to be less than 1%, which I'll talk about that in a minute. For the last decade or so, it has definitely been less than 1%. FPPA also has to determine and make sure that the long-term investment pool has averaged a return of at least 6.5% over the last five years. So mainly that is a lot of the stocks that they have invested in, that's long-term horizon, what they're thinking about paying long-term in the future.

they just have to make sure that reaches that minimum threshold of 6.5% over the last five years, which for the last few years has had no problem. In fact, I think last year the annual performance was almost 10%, so they've been able to hit that mark. Pretty quickly. And then they factor in, inflation. All right?

So then they're gonna take in, the CPIW, which is just an inflation metrics, and then they're gonna, and then they're gonna subtract whatever additional compounding COLA was, and then they're gonna multiply that from the base benefit. So that sounds like a mouthful. So let's give an example. I think this, I'm always about, context and giving me examples 'cause I just sound like a bunch of numbers right there.

So let's say that we had a firefighter who's 55 years old who had retired, and their annual base benefit was $70,000. 70 K is what they're. Annual base benefit was gonna get. So if you go off of last year's version, all right, the board approved a 3.66% onetime annual benefit, which would be added to that $70,000. All right? That will be paid out in October. And basically how they got to that is they took the, compounding cola and subtracted it from the previous inflation.

So that was 3.8 was last year's previous inflation. And then they subtracted what the compounding Cola was, which was 0.14. And that's where you get the 3.66. So for this particular person that was, had an annual benefit of $70,000. It was a check of $2,562 added to the, their October monthly distribution that they got, which is no chump change.

Like it's, it's a way why, why the math works and why, uh, pensions like this, it doesn't add the additional liability of that in the future, which is what a compounding hole it does. And when they start talking about when FPPA was giving their presentations and saying we get it. All the retirees, people that are getting ready to retire, like they, you know, inflation in 2022 was 9%. They're like, we need way more than what you guys are giving us. Why can't we do this?

We got a hundred percent funding. You know, they start kicking out a 3% cost of living adjustment just in year one. And then in year two, you know, within like three years that thing's funding status is down to 85%. Like it's just precipitous and almost exponential I guess is the word I was looking for. And how fast you can drain that without it being

It's if members want changes and they want to go to FPPA, basically we gotta come up with another 20% in contributions. And I'll be honest, I don't know of any of our members that are beating down the door to put in another 10%. Our employers are already paying another half percent. So it's just doesn't seem like it's gonna be in the cards and realistic.

So it's a short term solution, the one-time check to try to get people by, but the message has to be that you cannot rely on the pension to have a cost of living adjustments. Yeah. If they have room in the pension, they will, but it's just not dependable, so please don't do it. I think

But the very next year, even though the cost of goods has increased permanently, that firefighter will go back down to a $70,000 pension. And then maybe, or maybe not in that next year, will they get, an additional one-time payment? Who knows? It all depends on the funding status. the important thing to remember there is it's not base building.

And if your pension when you retire is set it, let's just go to the $70,000 and let's say you get a 70,000 pension, which is a great pension, you have to assume that it's gonna stay around that level and it's not gonna, it's not gonna keep up with inflation. I think that's the biggest takeaway that we can tell you is it is not guaranteed to keep up with inflation. And in fact, it probably won't.

During some of the years when inflation was high over the last, three, four years ago, there was inflation that was seven, 8% a year, and those guys were getting. 0% or 0.5%. So they basically, that was reducing the power of their pension by 7%, six and a half percent. That is big over time.

It's just not meaningful enough to keep up with, even at the two point half or 3%. And every year you fall a little bit further behind. So I know in the past, if you guys, a quick way to think about it is, the rule of 72. We've talked about this when we talked about why it's important to invest in the doubling of your money.

In the very basic principle that basically if you take the number 72 and then divide that by whatever your rate of return is gonna be, that will give you how much time it will take for that money to double. So very basic math is. If you had a 10% annual return, you know it's gonna be 72 divided by 10, so it'd take you seven years to double that money, assuming you get that return for that amount of time.

Inflation works the exact same way, so you can take 72 and then divide it by whatever the current inflation rate is. And in the circumstance, if it's a, if it's around three, it's gonna be 24 years that money is gonna be halved, your purchasing power is gonna be hald. And it's just really tough.

If we got people leaving at 50 and 55 and they're living to 90, which I hope for everyone, when you hit 75, you are definitely gonna feel that because the pension has not even come close to keeping up with that. That's where we talk about having the supplemental retirement vehicles having additional monies to help support that. because it's just, it's easy for that money to get eroded and our brain just does not work like that. It just

That means that in about 25 years, your purchasing power is cut in half. So if you had a, if today you retire with a $70,000 pension, 25 years from now, that pension will be able to buy you about $35,000 worth of goods and services that it can buy today. So you can have. These one-time payments, which help, but at the end of the day, your base will be about half of what it is when you retire in 25 years. That those are just rough.

And it all depends on the actual inflation rates and how well the pension is doing. But in general, it's safe. I like to tell our members that it's safe to say that your pension is not really inflation adjusted. It is not. So we encourage John and I like to encourage people to give yourself a cola. What's the best way, John, to give ourselves a cola in retirement?

And the secret is, a lot of people don't think about it, but the things that actually go up, as you get older, that are higher than the average, normal CPI inflation, healthcare costs, food costs, all these other things, they are way higher than 3%. most people would pray for a

should, and I love to have that dialogue. That means that you're engaged and you're making action. That's the other part is doing action. It's a lot to

You got this big old 4 57 pull of money that you can just be like, I'm gonna pull $5,000 out from it this year and give myself a cola and make sure that my, my standard of living stays the same. It's one of the smartest things you can do, and it's the one two punch of retirement for us, right? that's how you do it. you got the pension, you got your 4 57. Those things together will get you to financial independence.

we don't currently have the option, but this is somewhat of a hypothetical, but this is also to, I would say just assure the, the folks that have a 4 0 1 a plan, that have a money purchase plan, a defined contribution plan. Your benefit is more than likely, unless you went really crazy on some investments, is probably gonna be very similar to what the base benefit of someone on the do divine benefit plan's gonna be.

Now there's always, there's always exceptions, but generally speaking, so the way that you could do that, if you were at all curious, once again, this is an example, right? Another example. So we have a 55-year-old firefighter who's retiring after 30 years of service, and they, They topped out their three highest years were a hundred, was a hundred thousand dollars. Alright? Based on our little cool little benefit chart, we look on that.

We say, okay, 55 years old, 30 years of service, that's a base benefit of 70% of their highest three years, which was a hundred K. So they're gonna get 70 K per year, all right? If you do that into a monthly basis, that would be $5,800. And then obviously we gotta pay the tax man on that. It'd be less than that. So what basically is the present day value? If you had to go and buy that same kind of benefit, what would that look like? And it's called an annuity. Alright.

That's basically what we are all have. When you have a pension, you have an annuity, we have a contract with FPPA with the pension provider, and they are going to more or less guarantee us this benefit moving in the future. So the easiest way on an apples to apples comparison, how you'd want to do that is you want to compare it to what's called a SPI A or a single premium immediate annuity. Big nerd talk here, big nerd talk.

But basically that's saying I'm gonna hand over all this money right now, and the next day you're gonna start paying me out at this. So in order to get that calculation, in order to get that $5,800 a month, and every insurance company's gonna be a little bit different. So this is just take it for a grain of salt, a rule of thumb. It would be about one point, a little over, $1.1 million is what you would have to have in your 4 0 1 a account in order to purchase basically that same benefit.

Now, there's additional factors that we'll talk about in episode two, and that talks about, when you think about survivor benefits and other options, that add some complexity to it. But just on a general speaking, so if you really feel like you're getting shafted, right? I don't want to say, I don't know if this is a healthy exercise or not, but if you invested your money in just the stock market, it didn't get super crazy, didn't sell when it was really low. I can almost, especially with.

The way that the market has been over the last 25 or 30 years, I'm pretty confident that it would be very close to what that benefit's gonna do. 'cause honestly, that's. What FPPA is using, their barometer for what their average Expected returns is about 7% and that's pretty much more or less what the stock market has offered. Even a little bit higher than that, but that's a pretty conservative amount.

So I don't want to feel like people are, are somehow, at risk if they don't have a defined benefit. That's the other part. Like you guys have been putting a lot of money away. The department has been kicking a lot of money away, into that. but that's just a way that from a mathematical standpoint, how you can value what is your pension benefit. And where a lot of advisors will work on people is when they have the option to either take a lump sum or should they annuitize this.

So basically take a monthly payment in the future and they can all run those calculations if you worked at another job or you have a spouse that has that option. there's another way to figure out what makes the most sense. But that's a pretty, pretty simple rule of thumb is what's my pension worth if I retire today and I have this benefit, like in, in real time dollars. Yeah.

There's a lot of guys out there, a lot of firefighters, John, that I've talked to who are like, this is it. I gotta keep working way past my expiration date here. But I have to because I. I don't have enough in the pension, and that's all I have. I don't have a 4 57. I haven't been contributing to that. I don't have a Roth IRA. And so this is all I got and I gotta keep beefing that up. We don't want people to be that way.

We, we almost named this show 55 and out because we were like, we want people to be able to get outta here when they want to get outta here and have a long, fruitful retirement. And give yourself that option. Don't put all your eggs in one basket and spread that risk around, or spread that. Diversify. Yeah, diversify. and you can do that easily with a, with your pension, with your 4 57.

and if you want to go crazy with a Roth, IRA too, you can, spread things out like that and then give yourself the flexibility and the options to get outta here when you want to get outta here and have the kind of retirement that you want to have.

There's also something called deferred retirement, so you're not taking your retire retirement, you're holding off on that. and then we'll talk about, survivor options or spousal options and what that looks like. 'cause there's kind of some things here. And try to get into some more of the nuances with some of these other things that make our pension a little bit more unique than just, a traditional pension.

So there'd definitely be a lot more to come 'cause we know we've gotten a lot of feedback specifically. differentiating between should I enter the drop plan or is the deferred retirement a better option? And we're gonna give some case studies on what LA looks like and potentially who should be thinking about what, in those particular circumstances. So definitely more to come. So I hope this was beneficial.

I hope this is just I would say this is kinda level one and just getting an understanding of how the pension works, how it's funded, how much we pay into it, what's it look like when I retire, all of those other things. and it gives us the foundation that now we can talk about some of these more, complex topics regarding the pension and what options, you should consider or just what's

And we haven't made any kind of show notes on that or talked about that. But we'll just tell you that your pensionable amount is gonna be all screwed up and messed up and blown up potentially by a divorce.

it's a blessing honestly, to have that optionality, to be able to hopefully retire at, a somewhat early

This podcast is for informational and educational purposes only, and should not be construed as professional financial advice. Should you need professional advice, consult a licensed financial advisor or tax advisor. The opinions of John Beatty, Louis Barilla and their castmates are solely their own, and don't reflect that of West Metro Fire Rescue.