Retirement Planning for Firefighters & First Responders
Firefighters and other first responders can enter retirement with a financial picture that looks very different from that of a typical private-sector retiree. Pensions, DROP proceeds, governmental 457(b) accounts, IRAs, taxable investments, Social Security and insurance products may all need to work together. The challenge is not simply accumulating money. It is deciding what each portion of retirement assets should do.
Why firefighter retirement planning can be different
Many career firefighters and public-safety employees may have access to retirement benefits that differ significantly from those available to private-sector workers.
Pension Income
A pension may provide a substantial lifetime-income foundation. That income should be considered before deciding how much additional retirement income needs to be generated from investments.
DROP
Deferred Retirement Option Programs can result in a significant accumulated balance when the employee leaves service.
The eventual distribution can create an important rollover, investment and liquidity decision.
Governmental 457(b)
A governmental 457(b) plan can provide important tax-advantaged retirement savings and may have distribution characteristics that differ from IRAs and many other retirement plans.
Earlier Retirement
Public-safety careers may allow retirement at ages when many other workers are still accumulating assets.
That can create a longer retirement horizon and a greater need to consider inflation and long-term growth.
Start with the pension
Before deciding what to do with DROP, 457(b) or IRA assets, it is useful to understand what the pension already accomplishes.
A pension may provide a predictable monthly income stream for life, depending on the option selected and the terms of the retirement system.
That pension can function as part of the retiree's income floor.
A useful question
How much of the retiree's essential monthly spending is already covered by dependable income such as a pension and Social Security?
The answer can materially affect how aggressively or conservatively other retirement assets need to be positioned.
Learn more about pension retirement options .
DROP can create a major decision point
DROP proceeds may represent years of accumulated retirement benefits.
- Keeping eligible assets within an employer or retirement-plan structure
- Rolling eligible assets to an IRA
- Using managed investments
- Using an annuity for selected objectives
- Maintaining part of the assets in highly liquid reserves
- Using more than one strategy
The governmental 457(b) deserves special attention
Governmental 457(b) plans can be an important retirement-planning tool for firefighters, police officers and other public employees.
Distribution and rollover rules can differ from those that apply to IRAs and other retirement accounts.
Before rolling a governmental 457(b) balance elsewhere, a retiree should understand what plan-specific advantages, investment choices, fees and withdrawal provisions could change after the rollover.
Read the dedicated Governmental 457(b) Guide .
Liquidity should be decided before investing
One of the biggest mistakes at retirement is committing too much money to long-term products before determining how much cash may be needed.
Retirees should consider possible expenses such as:
- Home repairs
- Medical expenses
- Vehicle replacement
- Travel
- Family assistance
- Taxes
- Large purchases
- Unexpected emergencies
Assets that may be needed in the near term generally should not be placed into a strategy without first understanding withdrawal restrictions, surrender charges or market risk.
Where annuities may fit
An annuity is an insurance contract and should generally be evaluated for a specific purpose rather than purchased simply because someone is retiring.
Depending on the type of contract, an annuity may be considered for objectives such as:
- Tax-deferred accumulation
- Predictable interest crediting
- Protection from certain market losses
- Defined downside protection
- Lifetime-income features
- Death-benefit or other insurance features
Annuities differ substantially. A fixed annuity does not work like a variable annuity, and a RILA does not work like a fixed indexed annuity.
Four major annuity structures
Fixed Annuities
Fixed annuities generally provide contractually determined interest crediting and principal guarantees, subject to contract terms and the claims-paying ability of the insurer.
Fixed Indexed Annuities
Fixed indexed annuities generally link interest-crediting potential to an index formula while protecting contract value from direct index-market losses, subject to contract provisions.
Variable Annuities
Variable annuities generally offer investment options whose values fluctuate with market performance and can experience investment losses.
Registered Index-Linked Annuities
RILAs generally provide index-linked return potential together with defined downside protection such as a buffer or floor. Losses can still occur.
A pension changes the annuity conversation
Someone retiring without a pension may have a significant need to create dependable income from personal retirement assets.
A career firefighter with a substantial pension may already have an important source of lifetime income.
That does not automatically make an annuity unnecessary.
But it does mean that the reason for using an annuity should be clearly identified.
For example
If pension income already covers essential expenses, some retirement assets might reasonably be focused more heavily on liquidity and long-term growth.
Another retiree may place greater value on downside protection or an additional contractual income stream.
Neither approach is automatically appropriate for everyone.
Managed investments may also play an important role
Managed investment accounts can provide features that annuities may not, including greater liquidity, direct ownership of securities, broad portfolio customization and potential capital-gains treatment in taxable accounts.
They also generally expose the investor directly to market gains and losses.
The appropriate question is not necessarily:
“Annuity or managed account?”
The more useful question may be:
“What job should each portion of the retirement portfolio perform?”
Read: Annuities vs. Managed Accounts .
A possible hybrid retirement structure
Retirement portfolios do not necessarily need to use only one financial structure.
| Retirement Need | Possible Resource |
|---|---|
| Essential lifetime income | Pension, Social Security and potentially selected insurance-income strategies |
| Emergency liquidity | Cash, savings, money-market or other liquid assets |
| Long-term growth | Diversified investment portfolio |
| Selected downside protection | Certain annuity structures or other risk-managed investment strategies |
| Tax diversification | Taxable, tax-deferred and Roth assets where appropriate |
| Legacy objectives | Investments, insurance, beneficiary planning and estate strategies |
This table illustrates concepts only. It is not an asset-allocation recommendation.
Fees matter — but so does what you receive for them
Retirement products and accounts can have very different compensation and expense structures.
Some traditional fixed and fixed indexed annuities may have no explicit annual base-contract fee.
Other annuities may have significant explicit expenses.
Managed investment accounts frequently use ongoing advisory fees, and underlying investment expenses may also apply.
A proper comparison should consider:
- Explicit annual charges
- Advisory fees
- Underlying investment expenses
- Surrender charges
- Optional rider charges
- Liquidity restrictions
- Crediting limitations
- Services received
Taxes can affect the decision
Retirement money can be held in several different tax structures.
These might include:
- Governmental retirement plans
- Traditional IRAs
- Roth accounts
- Nonqualified annuities
- Taxable investment accounts
- Cash and bank accounts
Moving money from one structure to another can change future taxation, withdrawal flexibility and other benefits.
Tax consequences should therefore be considered before completing rollovers, large withdrawals or annuity purchases.
Read: How Are Annuities Taxed? .
Florida firefighters and FRS
Florida firefighters participating in the Florida Retirement System may have additional decisions involving pension benefits, DROP, Special Risk membership and retirement-plan distributions.
Those decisions can interact with 457(b) balances, IRAs, annuities, brokerage accounts and other personal assets.
Questions firefighters should ask before moving retirement money
- How much guaranteed monthly pension income will I receive?
- What expenses does my pension already cover?
- How much money do I need to keep liquid?
- What benefits might I give up by moving my 457(b)?
- What taxes could result from the transaction?
- What surrender period applies?
- What happens if I need substantial cash unexpectedly?
- How much market loss can I realistically tolerate?
- How much long-term growth do I still need?
- Do I need additional guaranteed income?
- What fees and expenses apply?
- How is the financial professional compensated?
- What reasonable alternatives were considered?
- How does the strategy affect my spouse or beneficiaries?
Frequently asked questions
Does a firefighter with a pension still need investments?
A pension provides income, but retirees may still need liquidity, inflation protection, growth and assets for unexpected expenses or legacy goals.
Should DROP money automatically go into an annuity?
No. An annuity may be appropriate for some objectives, but DROP proceeds should be evaluated alongside available investment, retirement-plan and liquidity alternatives.
Can I keep part of my money liquid and put another portion into an annuity?
Yes. Depending on individual circumstances, retirement assets can be divided among different strategies designed for different purposes.
Are annuities appropriate for every firefighter?
No. Suitability depends on factors such as existing pension income, liquidity needs, risk tolerance, taxes, time horizon, fees and the specific contract being considered.
This material is provided for general educational and informational purposes only. It is not intended as individualized investment, insurance, tax, legal or retirement-plan advice.
Public retirement systems, governmental 457(b) plans, DROP programs, annuity contracts and tax rules can differ substantially and may change over time.
Investors should review applicable plan documents, contracts and current retirement-system rules before making financial decisions.
Insurance guarantees are subject to the claims-paying ability of the issuing insurance company.
Investing in securities involves risk, including possible loss of principal.