Many of us in public safety signed up with the promise of a pension when we retire. But unfortunately, many of us will be extremely poor in retirement and may not live comfortably in our golden years as we envisioned.
The Common Pension Mentality
When I signed up as a police officer, I didn’t even think about preparing for retirement because I was promised a pension. So I thought I didn’t need to save anything because it was all taken care of for me. I had to work the streets for about half my life, and then I could retire without worrying about money.
I worked for several years in my career with this mentality. Unfortunately, a large number of public safety employees also think this way. Many of them are nearing retirement with very little in their additional investment accounts. Many officers spent their whole careers thinking that the pension was all they needed.
Even though I heard rumors about the need to save extra money, I was never educated on why I needed to. The consensus among the younger officers was that contributing more to retirement was just icing on the cake. We felt there was no real need to contribute more unless we wanted to be wealthy in retirement.
Being wealthy in retirement was never in most of our minds. I signed up to drive fast cars and to have a fun and exciting career. I knew that people didn’t become police officers to be rich, so I admitted defeat to the idea of ever having money.
My Ignorance About Retirement Has Cost Me Tens Of Thousands Of Dollars
- The number of years I worked for the department correlated with the amount of money I would receive in retirement.
- I had no idea how much I would receive, but I knew it increased the longer I worked.
- I knew most police officers didn’t contribute to social security, and I knew I would not receive any social security when I was older.
- I had heard that the department took money out of my check and put it towards my pension, but I had no idea how much.
- I had no idea if medical insurance was covered when I retired.
- I knew I could contribute money into a 457 retirement account, but I didn’t know how much I should or why it was necessary with a pension.
Pensions Are Not “Free Money”
As you can see above, I was very uninformed about retirement, and my employer did not make it a priority to educate me about retirement properly. So all I knew was I figured I didn’t need to worry about it because I would get a pension, and everything would be great.
I’ve Been Paying For My Pension All Along
I thought a pension was “free money.” It was a gift given to you at the end of a long career for a job well done. In reality, I have been contributing 7.65% of my salary towards my pension every year. My pension is not free because I have spent tens of thousands of dollars investing in it.
It’s true that my department also contributes money towards my pension, but I had no idea I was contributing a significant amount towards retirement this entire time.
The Double-Edged Sword Of Forced Saving For Retirement
On the one hand, this forced savings is a good thing. But, on the other hand, most Americans do not save 7.65% of their annual income from day one, so this has at least guaranteed I will always get some money in retirement.
On the other hand, 7.65% is not nearly enough for a comfortable retirement with or without a guaranteed pension.
I now know that to have a comfortable retirement, you need to be investing about 18% of your income for retirement. By relying solely on my retirement pension in my early years, I missed out on tens – if not hundreds of thousands of dollars in retirement assets.
Because I was ignorant about my pension, I was not forced to educate myself on the need to invest above and beyond what the pension provided me. As a result, my pension’s false sense of security put me behind in my retirement saving than if I had started investing 10% or more from day one.
Pensions Are A False Safety Blanket
In 2018, the average salary of a police officer in the United States was $58,320¹. In most jurisdictions, if the average officer reaches retirement age, they are eligible to receive $29,160 (50%) annually for the rest of their life (as long as the pension system stays healthy).
For example, if you work for 32 years in my department, you can receive a full retirement of 80%. This equals $46,656 based on an average police officer’s salary.
While $46,656 may seem generous after a 32-year career, $46,656 will not be worth much if you live another 30 years in retirement. In addition, not all pensions have a guaranteed cost of living increase, which can significantly impact life in retirement.
For example, $46,656 in today’s dollars will be worth around $22,243 in 30 years with a 2.5% inflation rate without a cost of living adjustment. So how would you feel about living off $22,243 in retirement?
Pensions Keep People From Saving
Due to the “guaranteed retirement,” many employees who expect pensions are not saving enough. While I am forced to contribute 7.65% of my income towards my retirement, this is not nearly enough to live the life I want in retirement.
For example, an officer’s 7.65% pension contribution means they will receive $29,160 – $46,656 annually at retirement, depending on their amount of service. With this false sense of security, most pension employees are not saving 18% of their salary as I recommend for retirement.
Saving 18% Is Better Than A Pension
Let’s use the above scenario of an officer who makes $58,320 a year. If the officer did not receive a pension and saved 18% instead, this is how their retirement savings would look after 32 years.
If an officer invested 18% of $58,320 a year, they would invest $10,497 each year for retirement. This would total $335,923 over 32 years.
Using the historical returns of the S&P 500, at a 9% return, $10,497 a year for 32 years would equal $1,876,867!
While there is some debate on a safe withdrawal rate in retirement, most financial advisors believe that if you take 4% a year from your investments, you will not run out of money in retirement.
4% a year from $1,876,867 in your investment account means you could pay yourself an annual salary of $75,075!
So by relying on your investments and saving 18% a year, you could have an extra $28,419 a year in retirement than if you relied solely on your pension.
The Secret Weapon = Investing + Pension
This article is not to diminish the amazing income that a pension provides. Guaranteed income is great, but it can have adverse side effects when relied upon as the sole source of income. However, if you can combine your pension with significant investing on the side, you have a killer combination to have a healthy and wealthy retirement.
Since I started late with my retirement investing, I am doing everything to catch up. I continue to have 7.65% taken out of my check for my pension, and I also invest another 17% on top of that. In addition, I usually bump my retirement contributions up 1% for each raise I receive. By doing this, I have increased my retirement contributions without feeling it in my take-home pay.
Through learning to live below my means and increasing my investments when my income rises, I currently invest 24.65% of my income.
Before you congratulate me for investing so much, understand that I am in catch-up mode. I went through years of investing little to nothing because I did not understand the need to invest outside my pension.
The Truth About Pensions And A Call To Action
Pensions are great for the reasons mentioned above, but they can also be a false sense of security that prevents us from investing correctly. When pensions and additional investing are combined, they can be a powerhouse to create a fantastic retirement.
But unfortunately, many people who are guaranteed a pension fall into the trap of not saving anything additional for retirement.
Here Is My Call To Action For You
If you know someone in a pension program, please forward them this article. We must start educating those younger employees who are just beginning their careers. Playing catch-up is not fun, and I wish I didn’t need to contribute 24% of my income into retirement. 18% would have been much more comfortable had I started at that rate from the beginning.
So please share this across social media or send it to anyone in your email list who could benefit from this information. Encourage them (or you) to find out more about your pension and how you are contributing.
*This article was previously written by Ryan Luke.