Words of Wisdom as You Prepare for Life After the Police Force
You’re likely aware that law enforcement officers (LEOs) face a unique set of financial challenges when planning for the future. A forced retirement age, a potentially lengthy retirement and the uncertainties of navigating a pension plan are just a few. Aside from those challenges, I’d like to share four important words of advice every LEO should keep in mind when planning for retirement.
1. Goal setting is key to a successful retirement.
Warren Buffet once said, “Risk comes from not knowing what you’re doing.” As a law enforcement officer, you know this is true. You put yourself at risk when you don’t have a plan or an end goal, both in the field and in retirement.
When setting goals, start by envisioning your ideal retirement. Ask yourself:
- When do I plan on retiring?
- What do I want my retirement to look like?
- What hobbies/interests will I pursue?
- Where will I live?
- How long will I likely live in retirement?
- What legacy do I hope to leave to the people and causes that matter most to me?
Once you have an idea of your retirement goals, your wealth manager can help you answer the biggest question of all – “How much savings will I need in order to retire?” Once you have an idea of how much you will need, you can set SMART (specific, measurable, achievable, realistic and timely) goals to help guide your retirement saving and investing.
2. Market timing has the potential to sink your savings.
Market timing behaviors, such as panic selling in a down market or sitting on the sidelines in cash, can have a detrimental impact on your retirement savings.
It might sound simple to move your money out of the market before it drops and reinvest right before it goes back up. However, it’s extremely difficult to predict market direction. Because volatile markets tend to have large swings, both to the upside and the downside, the best days in the market are often concentrated around the worst days in the market. While recoveries are not guaranteed, taking your money out of the market to avoid a potential drop means that you could miss the full benefit of the recovery.
Rather than trying to time the ups and downs, it’s more advantageous over the long term to establish a target asset allocation that meets your needs and allows you to feel comfortable keeping your money in the market through thick and thin, rather than missing out on the upside as you’re trying to time the market. The longer your time horizon, the more time you’ll have to potentially benefit from up or down markets. As you near retirement, your wealth manager can help you gradually shift your allocation from growth-focused to income-focused.
3. It’s important to have a custom portfolio designed to meet your goals.
A custom portfolio takes into consideration your current financial situation, goals for the future, risk tolerance, time horizon, specific challenges or threats you may face, and more. While investments play a key role in your ability to achieve a successful retirement, they don’t operate in a vacuum. Your portfolio should be designed alongside your overall financial plan so all aspects of your financial life are working together to help you achieve your long-term goals.
4. Taxes have the potential to erode your retirement savings.
Let’s say you’ve done everything right and have successfully transitioned to retirement. Congratulations, you no longer need to worry about your retirement savings, right? Not quite, unfortunately. It’s important to be cognizant of how taxes can impact your retirement.
Withdrawals from various accounts are subject to different tax treatment.
- Taxable accounts – Interest and ordinary dividends are taxed as ordinary income. When you sell an investment to fund a withdrawal, you must pay taxes on the gains, but not the invested principal. Long-term capital gains are currently taxed at more favorable rates than short-term gains and ordinary income.
- Tax-deferred accounts – Withdrawals from traditional IRAs, 401(k)s, 403(b)s, 457 plans and other tax-deferred accounts are fully taxed as ordinary income.
- Tax-exempt accounts – Qualified distributions from Roth accounts and health savings accounts (HSAs) are tax-free.
There are two main withdrawal strategies to consider, based on your specific goals, tax situation and income needs.
Using this approach, you would withdraw from one account at a time. The typical strategy is to withdraw from taxable accounts first, followed by tax-deferred accounts and, finally, tax-exempt accounts. This approach allows the tax-advantaged accounts to continue growing tax deferred for a longer period of time. The challenge here is that you will likely have more taxable income in some years than others.
This withdrawal strategy establishes a target percentage to be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This can help ensure a more stable tax bill from one year to the next and can also help you save on taxes over the course of your retirement.
Keep in mind that even the best-laid plans can go awry. Required minimum distributions (RMDs) after age 72 may force you to withdraw more from your tax-deferred retirement accounts than you had planned, or a change in tax brackets may impact the amount you owe. It’s important to regularly review your retirement withdrawal strategy with your wealth manager to help ensure it continues to meet your goal of providing tax-efficient income.
Are you ready to get serious about planning for your retirement? Law Enforcement Financial Freedom is here to help. We are a specialty practice of Creative Planning that focuses on helping LEOs achieve financial independence. We understand the challenges you face, and we take a team approach to help you solve them. If you’d like help planning for retirement, or for any other financial matter, please schedule a call.