Firefighter Retirement Plan, is Your Pension Enough?

The retirement benefits most of us will experience in the future will not be similar to our parents’. A generation ago, a decent job meant having the potential for a reliable retirement income until death. Back then, employers actively engaged with funding and providing for their employees’ future retirements, meaning the employees were passive players in their retirement planning. Nowadays, much of this has changed. Most modern employers are happy to help their employees plan out the retirement process, but employees have much more active roles in today’s retirement preparations. Also, today’s retirement options can vary vastly depending on an individual’s profession and industry. 

Since different jobs offer different levels of income, and the number of years that a person worked in a specific industry must be accounted for, various retirement options exist. Some employers offer 401ks, and others offer pensions. Firefighting is one job among a handful of occupations nowadays that still receives a pension after retirement. Still, although firefighters often risk their lives daily to save other civilians, there are other difficulties that firefighters must anticipate before retirement. 

Pensions for Firefighters

Firefighters are listed among a few other job opportunities, like government workers and teachers, that qualify for pension plans after retiring. When a person’s job comes with a pension plan, that means the employer is adding money and investing those resources to access that monetary compensation later, usually after retiring at a certain age. For occupations that offer pension plans, two categories of pensions exist, defined-benefit plans and defined-contribution plans. 

Defined-Benefit Plans

First, the defined-benefit plan is the traditional option that allows the employers more control over the accumulated money, with employees having far less control over the plan. Under the defined-benefit plan, when a person wants to earn more benefits, that individual needs to work for several years more, achieve a higher pay level or live a long life. Still, the employer retains total control over a defined-benefit plan, the contributions invested into the retirement account, and the investments made. Although the employer has total control over this type of plan, the employer makes all of the employee’s retirement account contributions to bolster funding. So, the investments are used to help provide funds for the employee’s retirement. 

Defined-benefit plans have a set schedule of benefits that will be distributed to the employee upon retirement. The payments that these retired workers will receive are formulated from calculating several things, including how long the employee worked for the company and the amount of money that accumulated into the retirement account before the worker retired. Also, an employee is guaranteed to receive these benefits irrespective of how the employer investments performed. The retiree’s firm must still cover all of the retirement payments owed to the retired worker, even when the investments made cannot cover the retirement account’s payment costs. Under a defined-benefit plan, workers can plan to receive payments for the rest of their life and even transfer those benefits to a spouse after death. 

Defined Contribution Plans

A defined contribution plan means that an employee’s organization puts money into the employee’s retirement account, matching the employee’s contribution level. The matching process can vary depending on an individual’s place of employment. Another factor that affects an individual’s retirement if that person is on a defined contribution plan is the company’s investment performance within the organization’s pool. When a company offers a defined contribution plan, it has no liability to ensure payments upon retirement. Instead, the employer is expected to match the individual’s contributions. 

Pensions for Firefighters

Nowadays, defined-contribution plans are the more popular retirement option for many firms because they cost far less for organizations to maintain. For instance, 401K plans, a type of defined-contribution plan, are now so widely available that most people refer to their defined-contribution plan as a 401k plan. 401k plans are so numerous that they have become a synonymous term for a defined-contribution plan. Still, most public sector workers, including firefighters, are given a defined-benefit plan that features a pension. While the defined-contribution plan means the employer is liable to cover the employee’s payments until death, and sometimes even after that, many firefighters still wonder if their defined-contribution plan will offer them enough money to live through retirement comfortably. 

The Defined-Benefit Plan: Looking Closer

Depending upon the state that you worked in and plan on retiring in, most firefighters must meet several requirements in their state to qualify for a defined-benefit plan upon retirement. Different states apply varying determinants to assess an individual’s benefit plan and when a firefighter can start receiving retirement benefits. 

The majority of states require firefighters to reach fifty-five with at least twenty-five years of active service to receive their defined benefits once they retire. The standard retirement benefit that a firefighter will receive monthly is about half of what the firefighter’s base pay was while actively working. Still, that benefit depends on the state the firefighter resides in when retiring. Certain states provide extra stipulations within these benefits to increase retirees’ monthly amount if more than two and a half decades of service were completed. 

Adding Up the Numbers

So, how much will the typical firefighter receive monthly after retirement? Applying an example with a calculation can help you comprehend what you can expect. Keep in mind that your state will have specific factors that can affect your pension plan. Still, most states offer firefighter retirement benefits that are half of the firefighter’s base salary.  So, it works to start with that figure. 

The average annual income for firefighters in the United States in 2021 is $44,322. Half of that total would be about $22,171 per year before we factor in taxes. Remember, your employer’s contributions are put into your pension before being taxed. So, once you receive the benefits, that money is taxed at a rate that falls within your annual income bracket. Taxes on pension money typically are applied at a rate of 12%, meaning a firefighter’s yearly retirement income after taxes may be as small as $19,510. 

While a yearly income of close to $20,000 may suffice for some once they retire, this may not be enough for others. If you feel that your retirement income isn’t enough, you can consider a part-time job while receiving your benefits. Also, some states have stipulations for those that work longer than the required twenty-five years as firefighters. These incentives can provide extra benefits, adding as much as two to two and a half percent yearly, depending on your state. So, if you plan on retiring soon, you might want to consider if you should work additional years in your current job or at a new place of employment or if you should look into other retirement savings plans to prepare. 

Disadvantages of Relying on Pension Plans

The popularity of relying on one’s pension alone is now on the decline because of the low amount of retirement payments a person typically receives. Nowadays, the average lifespan is increasing because of better technology and increased access to health care, so relying on benefit payments alone may not be enough for everybody. The longer a person lives, the higher the chances of incurring a payment gap issue when relying on a state-funded retirement program. Since people now live longer on average, the potential for this unreliability as a negative ramification only increases when a person is relying on a pension.

The issue with changes in state pensions is one issue of concern. Still, other factors could affect how much you’ll receive each month from your retirement. For example, health concerns as you become older can also limit your finances. As people age, medical costs typically increase. Also, as people age, their families grow, and you may have other issues to consider, like grandchildren and the costs of a larger family line. 

If taking a part-time job after you retire isn’t your style, remember that you still have other options to consider before retirement besides continuing to work. For example, you can consider a non-employee-sponsored retirement account, which will bolster your savings and increase your income later in life. If you can bolster your pension with some other form of retirement income, you’ll likely feel much safer once you finally retire. 

Consider an IRA

While having a pension to rely on when you retire is certainly an advantage, firefighters can augment the retirement benefits they receive by opening independent retirement accounts. An Individual Retirement Account (IRA) is one such option that can help a retiring firefighter bolster income. There are two types of IRA accounts you can consider, Roth IRAs and traditional IRAs. The primary difference between these two options involves the time when the income is taxed. 

First, a Roth IRA account means the money is taxed immediately. Thus, the money you see in your account and any finances that can grow are available for withdrawal without paying taxes on anything. The other option, a traditional IRA account, means the money is taxed based on your annual income bracket when you retire and take out the money. So, for people that fall in a high tax bracket while retiring, a Roth IRA account would work better. Still, for those who fall into a lower tax bracket when retiring, a traditional IRA account offers more advantages. 

The number of your maximum contributions for either type of IRA account would remain the same. With this considered, keep in mind that a traditional IRA account requires a person to make a certain amount of required minimum distributions, or RMDs, once a person is seventy-two years old. On the other hand, Roth IRA accounts do not factor in the RMD. Instead, Roth accounts require that the employee keep them open for at least five years before taking out any of the finances. Also, irrespective of which type of IRA you have, you’ll get access to the money in your IRA once you reach fifty-nine years and six months of age. However, sometimes the required age is higher when dealing with a Roth IRA opened for less than the required five years. 

Both types of IRAs work like savings accounts. So, a predetermined amount of money is taken from every paycheck you receive as a firefighter and then invested into a fund that earns interest. That fund continues to increase until you reach the age of retirement. 

Other Retirement Options

You also have other retirement options to pick from other than IRA accounts. For example, you can invest in a savings account, mutual funds, or CDs. All of these options can help bolster your retirement savings. If you invest in additional retirement savings accounts, you’ll also get the benefit of tax diversification. 

Keep in mind that your pension benefits have to be taxed as soon as you withdraw money from the account. That means you should think about bolstering your retirement plan with another guaranteed account, like a Roth IRA. Roth IRAs are easy to invest into and are not restricted by minimum distributions if you don’t need to take out the money immediately. With this type of IRA, the longer you leave money in the account, the larger the money will grow, meaning you can supplement your retirement with this income or pass it on to future generations. You also have the option of withdrawing on these accounts when they require distributions and continue to bolster your retirement savings. 

Planning for your retirement requires a lot of consideration and means you’ll need to consider your plans when making any investments. Nowadays, pensions are becoming increasingly rare, and their reliability is also in question. So, it’s vital for people that will receive a pension upon retirement, like firefighters, to diversify their investments and supplement their retirement income. 

Speak with your financial advisor to help formulate a strategy the applies your current retirement savings and pension while also considering additional options to supplement your financial resources once you retire. You can create a plan today by speaking with your advisor and making a solid investment in your future. 

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