For many of us, when we started our career in the fire service, retirement seemed so far away…so far off, that it wasn’t something that we even considered. Now, maybe halfway through what we originally considered to be the duration of our career; we really start to kick around the idea of when we might be able to retire. The elephant in the room right now is, due to additional stress and staffing related issues, many members are now contemplating how to retire earlier than they had originally planned.
This brings up many questions like, what will my final average salary (FAS) be with what corresponding percentage on my pension, how much can I squirrel away into deferred comp in the next few years, and can I stay long enough to make DROP worth considering? Another big issue to consider is your healthcare subsidy and how to pay for this if you retire early. Most members on today are eligible for their medical subsidy at age 55. If you leave before that, the entire premium will come out of your pocket until you turn 55 years of age. These, among other personal items, are all good questions that should be carefully considered before you think about retiring.
First regarding DROP, many of us were a bit older when we first came on the job. It seems that there is a large group of LAFD members that were approaching 30 years of age when they first got hired. Some were hired earlier while others maybe changed careers which delayed their start in the fire service. Either way, if you were around 30 when hired, you have to put in a minimum of 25 years of service and then assuming you do the full five years in DROP, this puts you at age 60 when you retire. So, if we are doing some advance planning right now, depending on your current age, realistically, five years of DROP may not be for you. BUT, remember you can do any amount of time you want in the DROP, five years is only the maximum number of years.
Deferred Comp is still a mystery to some, but there many are others who have jumped in with both feet. Want to know the difference between a member who has to stay for the whole five years in DROP and a member who says, “maybe I’ll do the full five, or maybe I’ll just see how it goes and leave when I want.” This latter member has been maxed out for many years, is generally a good saver, and who quite possibly has 500k – $1 million in deferred comp (yes, that’s not a typo, many members who diligently max out are nearing or over $1 million in deferred comp).
If you want to start gaining some financial freedom right now, structure your life so you can max out in deferred comp. It will do two things for you: help you build retirement dollars faster so you can retire sooner and two, it will force you to live in a more financially sustainable way by forcing you to reduce your current spending levels. I have never heard anyone say when they retire, “Oh man, I just saved too early and too much, look at all of this money I have!”
The other big issue when you retire is healthcare. As a general rule, we “earn” 4% of our medical subsidy per year of service. After 25 years of service we have earned 100% of our health care subsidy when we retire, but the big wrinkle to remember is we have to be 55 to have the City pay our healthcare subsidy. If we retire at 52, we have a three-year hole that we have to pay out-of-pocket for our healthcare. This, in my opinion, is why you don’t see a lot of folks leaving before 55. But, there are more than a few ways around this. One would be if your spouse works you could use their health insurance until you were 55. Another would be to start the business you’ve always wanted to do and pay for the health care subsidy through earnings you receive while retired from the fire department. Or, worst-case scenario, if you really want to retire and have money saved, just pay for your healthcare out-of-pocket until you reach 55.
In my opinion, the magic minimum scenario is the 55-25 formula. Hit 25 years of service and be at a minimum 55 years old. This gives you an income of 65% of your FAS, your healthcare is paid for, and you can ride off into the sunset and spend some of your investment savings while collecting a pension, subsidized hopefully with a substantial deferred comp account that you’ve built over the years. There are many scenarios that can play out, and individual situations vary, but one thing we all can agree upon is to have a plan and put it into action sooner, rather than later.
By Kurt Stabel