Financial Planning for First Responders: A Guide to Help Build and Protect Wealth

A life of service is rewarding in its own right, but it can come with financial rewards as well. However, first responders have unique needs and benefits that can make traditional financial planning less than helpful. Let’s take a look at some of the twists you may encounter when planning for your financial future.

WHY FIRST RESPONDERS NEED A UNIQUE FINANCIAL STRATEGY

HIGH-RISK CAREERS

Whether you regularly run into burning buildings, confront suspected criminals or respond to mass casualty events, first responders have some of the most dangerous everyday lives. This increased risk means you need to take estate planning even more seriously than the average person. It also may have you dealing with added stress that reduces the time and energy you have to focus on money.

EARLY RETIREMENT

Between the intense physical and mental demands on first responders, as well as the increased possibility of career-ending injury or other trauma, it’s not surprising if you wind up retiring earlier than the average person. A lengthier retirement can mean an increased need for savings, which can require additional planning.

Early retirement may not even be a choice, but rather a requirement. For example, federal law enforcement officers generally have a mandatory retirement age of 57.

Like many first responders, you might plan to have a second career after this early retirement, another unique twist that requires special first responder retirement planning.

UNIQUE COMPENSATION AND BENEFIT STRUCTURES

Under the Fair Labor Standards Act, first responders are automatically covered by minimum wage and overtime requirements, meaning you must be paid at least time and a half for overtime work. This applies to:

• Police officers
• Detectives
• Deputy sheriffs
• State troopers
• Highway patrol officers
• Investigators
• Inspectors
• Correctional officers
• Parole or probation officers
• Park rangers
• Fire fighters
• Emergency medical technicians
• Paramedics
• Ambulance personnel
• Rescue workers
• Hazardous materials workers

Importantly, while overtime usually means “more than 40 hours a week,” there are special rules for firefighters and law enforcement. The opportunity for overtime pay can be a real boost financially but it also means paychecks that are inconsistent from week to week. Managing overtime income becomes an important part of your long-term plan.

In addition, your retirement benefits may be quite different than your neighbors’. For example, many workers in the public sector receive a pension in retirement, which is rare for retirees in most private industries today. Retirement planning with a pension can look very different than it would for someone relying on their own savings.

PENSION PLANNING AND RETIREMENT BENEFITS

Pensions are also known as “defined benefit” plans, and they’re different from the “defined contribution” plans many Americans now rely on in retirement – mostly 401(k)s.

Unlike a 401(k) or similar plan, a pension will pay you a predictable amount in retirement; your benefit is defined. That’s unlike a 401(k) plan, where you know the amount you’ve decided to contribute but don’t know what that will equate to years later.

CalPERS – the California Public Employees Retirement System – has the biggest public pension in the US, covering teachers, government workers, public works employees and first responders. The Federal Employees Retirement System is another plan that includes a pension benefit and covers federal firefighters, police and others.

If you have a pension but aren’t sure what to expect from it, learn more about how pensions work.

CALCULATING YOUR PENSION

The amount you can expect to receive from your pension depends on your particular plan and is usually based on a formula that may take into account how long you worked, your salary when working and other factors.

When you retire, you might get the option of receiving a lump sum benefit vs. lifetime payments. Your pension administrator or HR department should be able to give you information about how much your pension may be and options for receiving it.

If you have a choice regarding how you want to receive your pension, a financial advisor can be a valuable resource for exploring pension strategies for first responders and the broader implications of different options.

PREPARING FOR EARLY RETIREMENT

The rules of thumb you’ll likely encounter online about retirement, like the “4% rule,” might not be as helpful if you retire early. Early retirement for police, firefighters and other first responders can be a double-edged sword of fewer years to save and more years of spending to cover.

Early retirement plans can also be more complex for first responders given the unique nature of your retirement and other benefits as well as the possibility you’ll start a second career. Again, an advisor can give you more tailored guidance than most financial websites.

TAX TIPS FOR FIRST RESPONDERS

Anytime your pay increases, your income taxes will increase. And if your income increases enough, it could push you into a higher federal tax bracket. The potential for overtime and a higher corresponding pay rate makes this even more likely for first responders.

It’s rarely wise to forego a higher income in order to keep your taxes low. Just be aware that in years with a lot of overtime, you may have a higher tax bill. That said, there are some things you can do to shelter some money from taxes now and help set yourself up for a secure retirement.

First, you may have access to a 457(b) plan. Contributions aren’t subject to income taxes in most cases. Any earnings in your 457(b) account are tax-deferred, and you can withdraw funds without penalties in retirement.

You may also be able to contribute to an IRA. As with a 457(b) plan, contributions to a traditional IRA can be tax-deductible and growth is tax-deferred until you withdraw it in retirement. A Roth IRA, on the other hand, won’t give you an immediate tax break, but any growth is tax-free as long as you meet the requirements.

If you have a high-deductible health plan, you may also be able to contribute to a health savings account. HSAs are unique in that they are tax-deductible, they grow tax-free and withdrawals are also tax-free when used for qualifying expenses.

While HSA money can be used to immediately pay or reimburse yourself for health care expenses, you can also leave it in your HSA’s investment portfolios to allow for the opportunity for it to  grow —though growth is not guaranteed—and then submit for reimbursements years or even decades later.

MANAGING RISK: INSURANCE AND EMERGENCY FUNDS

If you’re injured or worse at work – a possibility you need to take seriously as a first responder – what will happen to the people who rely on you? Risk management is critical in high-risk jobs. Look at your insurance coverage and plans now to make sure your family is protected.

IF YOU’RE INJURED AS A FIRST RESPONDER

You can protect yourself and your family by having:

• Disability insurance. You will often receive this through your employer, and you should have both short-term disability (for an injury you recover from) and long-term disability (for an injury that ends your career). Some policies might offer a residual or partial disability rider, which will cover your lost wages if you’re partially disabled and can only work part-time.
• Emergency funds. Disability insurance typically covers only part of your paychecks, and obviously you won’t have the opportunity to earn overtime while you’re disabled. In addition, you may have to pay for services at home that you can no longer handle yourself, whether that’s child care, housework, yardwork or transportation. As a first responder with a higher likelihood of serious injury, you should make sure your emergency fund is big enough to make up the gap.
• A health care proxy and power of attorney. These designations allow someone (like your spouse) to make medical and financial decisions on your behalf if you’re unable.

IF YOU PASS AWAY AS A FIRST RESPONDER

In a worst-case scenario, your family may be left behind to support themselves without you. These are critical for you to have in place, just in case:

• Life insurance. You may receive life insurance through your employer as well, but if not – or if the policy doesn’t give you enough coverage – you can also buy life insurance on your own. Remember that the policy should cover your family’s needs for the rest of the time you would have been working. We believe in having term life insurance as opposed to whole life.
• An estate plan. This might include a will or trust to handle how your assets are handled after death, as well as guardianship and beneficiary designations.

WHY WORK WITH A FINANCIAL ADVISOR

GUIDANCE FOR FIREFIGHTERS, EMTS, POLICE OFFICERS AND OTHERS

As you can see from our first responder financial guide, it’s important to choose a financial advisor who understands public sector benefits and your unique challenges. Reach out today so a financial advisor can help get you started with financial planning with your needs in mind.