Thinking about Retirement early on in your career is something few of us spend any considerable amount of time doing. It seems so far off… Everything will take care of it self. In this day and age, you need to start the process early on. It’s these decisions in the beginning that will shape what your retirement looks like.
There are many moving parts to the NYPD Retirement plan puzzle. Tier 2 buyouts, night differentials, and deferred compensations just to name a few. For our purposes today, we have broken down a few basic concepts into two areas:
- Things to think about while you are on the job (these are the Saving or Accumulation years)
- Things to consider as you approach the end (Retirement or Distribution years).
Let's start at the beginning with what you should be trying to do along the way.
Start Your Financial Planning Process Early
At RMR Wealth Builders Inc, we suggest starting the retirement planning process early. Gone are the days when NYPD officers could rely on police pension funds alone. The proper steps must be taken as early as possible, to maximize the benefits.
An early start, complete with savings and a Financial Plan, helps ensure you have the largest possible nest egg to build on and allows us to offer more help in creating the retirement lifestyle you desire most. With people living longer into retirement, coupled with an expected retirement on average at age 50, an early start helps ensure you have enough money to see you through your golden years.
While Still on the Job
The first step is figuring out what benefits you have available to you. The NYPD has a Tier system. Each Tier provides slightly different benefits and will come with a slightly different strategy of saving. Tier 2 has several more choices to make. Officers have the ability to contribute more funds towards the Pension side of things through the ITHP and 50% Indicator Riders. ITHP or the “Increased Take Home Pay” rider allows you to over fund your pension with an extra 5% of your salary on a pretax basis. The “50% Indicator” also allows members to over fund their pensions with 50% of their assigned contribution rate but this time on an after tax basis. This means they have to make choices as to where to defer and how much between the Pension side and Deferred Comp. Tier 3 (the newest Tier), does not have the riders to put extra money into the Pension side so they have to lean a lot more on the Deferred Comp side.
Most Officers decide how much money to contribute to retirement plans based on affordability. The nice part about an NYPD career is you have very clean visibility as to how much money you will make each year. There are very few years (barring injury) in which you will make less money than the previous year. This makes saving for Retirement or anything else very predictable. So out of the academy, you need to figure out how much of each paycheck you can afford to contribute. A general rule of thumb here is to do a little more from the start then you think you can. This not only promotes budgeting but also sets you on a good trajectory to reach your goals.
Once you determine the proper amount, the big question is where do you start? Which options provide the most “bang for your buck?”' There is no right answer that fits the bill for every single person, but let's make some broad stroke statements that will at least get you thinking the correct way. Just know that RMR Wealth Builders, Inc. does provide Educational Financial Seminars (talk to your delegate) as well as personal consultations.
As a general rule, when deciding where the first retirement contributions should go, we have numbered the best choices in order of efficiency:
- ITHP Rider (Pension, 5% pre-tax salary)
- 457 (Deferred Comp, up to $19K pre-tax, $25K age 50 and up)
- 401(k) (Deferred Comp, up to $19K pre-tax, $25K age 50 and up)
- 50% Indicator (Pension, 3-4.5% of salary after tax contribution, based on individuals contribution rate)
- 457 (Deferred Comp, up to $19K pre-tax, $25K age 50 and up)
- 401(k) (Deferred Comp, up to $25K pre-tax, $25K age 50 and up)
Tier 2 has a few more choices, but both Tiers have a substantial ability to defer money nonetheless. Whenever you are trying to figure out how much to defer based on affordability, you want to stick with pre-tax options. This will enable you to defer more with less of a pinch on your take home pay. So Tier 2 starts with ITHP. It allows you to defer an extra 5% of your salary pre-tax into the Pension System. All this money grows at a guaranteed rate of 8.25%. That is a great return without taking any investment risk at all. From there, Tier 2 should try and max (or as close as you can) the 457. Again, a pre--tax contribution, no guaranteed return on any Deferred Comp Accounts but a diversified equity portfolio should be competitive if not slightly higher over the long term. As your career progresses and you start to earn more, you may find you have more income to defer. When this happens, you can choose either the 50% Indicator on the Pension side or continue on the Deferred Comp side with the 401K. Choices 3 and 4 from above are really more like choices 3 and 3a. The predominant difference between these two choices are tax-deferred versus post-tax. So it really depends on who you are and what you are trying to accomplish. Aquick phone consultation with our team can help you decide which one fits for you.
For Tier 3 it's a little less complicated. With fewer choices you have to start with the 457. Once you max that option out you go immediately to the 401(k). If you max out the 457 and then get about 10% of your pay in the 401(k), you are deferring roughly the same amount of money as a Tier 2er that does ITHP, 50% Indicator and the 457. What you don’t have is that security blanket of the “guaranteed 8.25%” that the Pension side offers. The good news as mentioned above, is that a diverse blend of equity in Deferred Comp should get you about the same.
There are some questions regarding ROTH versus Traditional within the deferred Comp, we will save the full explanation for another article but as a general rule, if you are trying to figure out “what you can afford to defer,” you are usually better off with a pre-tax option or Traditional.
Getting Close to the End
So you have put in the hard work and time and now it is time to walk away, enjoy life and family and put aside the stresses of everyday cop life. This shouldn’t be a time to panic. Start speaking with someone who knows your retirement system and all the moving parts and options EARLY. You do have a lot to consider and you do have to figured out before your final day.
A few things to consider:
You have several “pots of money” (listed below). The major questions that arise are “Do I rollover the Lump Sum from Pension or leave it in?”, “What do I do with my Deferred Comp?”, “Do I take a survivor option on my Pension?”, “Do I need Insurance?”
Pots of Money
- Excess from Pension (Rollover or Leave)
- Final Pension Loan (Rollover or Leave)
- Banked Variable (Rollover to where)
- Union Annuity (Rollover or leave with city)
- Deferred Comp 457/401k (Rollover or Leave)
Every case is different!! This cannot be emphasized enough. What is right for Sally might not be good at all for Joe. Don’t blindly follow someone else’s path. Your Retirement is one big math equation. We determine what you should or shouldn’t take or rollover based on your needs now, 10 years down the road and then much further beyond that. The first box you want to check for a successful retirement is getting a pay raise from your Pension alone. Once we figure out what pension option gets you that raise we work backwards from there. So everyone’s equation will be slightly different. As planners, our main goal is to make sure you NEVER run out of money. If the right amounts of money are put in the correct places now, we can ensure your long term success. It takes careful planning and someone with experience in the inner workings of the NYPD.
Get the Right Help
You have gone through extensive training to become one of New York’s finest. Why should retirement be any different? Yet, that’s what many people do when it comes to retirement. They wing it or in many instances take the advice of the officer in the locker next to them! The result is varying and sometimes not so great advice. Here at RMR we have committed to correcting that trend. We offer objective advice along with accurate answers to all of your questions.
The right wealth management firm can help protect your retirement, so you can relax after years of protecting your city. At RMR, our financial planning professionals have years of experience and training to not only help you put it all together when you retire but also help you get there by providing Education and Guidance along the path of your career. Every situation is unique, and your retirement plan should be, too.
Establish a Timeline for Your Retirement Planning
There are several considerations to keep in mind when establishing this timeline, including things like:
- Where should I defer money? (Deferred Comp or Pension)
- How much should I defer?
- How should I allocate my investments?
- How many years of service is enough?
- How much Retirement Savings do I need?
- How do I get there?
It’s also important to consider your retirement dreams, plans, and goals and prioritize your savings accordingly.
When you create a timeline, you can use the information above to determine how much you need to have in savings at different points in your career to create the retirement lifestyle you want to lead.
The earlier you begin your retirement planning, the more money you have to work with as you approach your retirement.
Account for Special Needs in Your Financial Planning
Every NYPD officer is unique. You have unique family situations and special considerations to keep in mind from a Financial Planning point of view. If you are taking care of elderly parents, have special needs children, or have other specific financial requirements, RMR can help you create a pathway to a comfortable retirement that accommodates these needs.
Takeaways to Consider
Keep these things in mind as you consider your NYPD retirement options:
- Work with a team that knows the in’s and out’s of the NYPD Retirement
- Figure out all the moving parts (Overage, Final Pension Loans, Banked Variable, Union Annuity)
- Create an Income Timeline
- Take the Pension Money or Leave it in?
- Factor in any Special financial needs in your customized plan
Focusing on these key takeaways can help you better prepare for the financial future you really want.
Are you ready to get help creating a Financial Plan that helps you achieve your NYPD retirement goals? Call Matt Levens, Director of Wealth Management at RMR Wealth Builders Inc. today at 212.946.3921 to learn more about opportunities and options available to you.