Investing for Beginners: A First Responders Guide to Getting Started

As First Responders, we’re trained to make assessments before acting in critical situations, and your financial life should be no different. Investing is a powerful tool to build wealth, but if you jump into it without the right foundation, it can do more harm than good.

So why do we even need to invest if we have a pension?

You’ve got a pension, sure, but will it be enough? The reality is our pension rarely is enough to cover our needs in retirement. With rising costs of living, uncertain changes to retirement systems, and longer life expectancies, relying solely on your pension could leave you coming up short in retirement.  The result of not saving in other retirement accounts?  Working longer, forcing us to work second careers to pay the bills, or reducing our lifestyle in retirement – all things none of us want to be forced into.

Investing can bridge that gap and give you choices in retirement.  Whether that means leaving the job early, traveling, or just having peace of mind.  We need to be able to retire when WE want to and not be forced into chasing a pension.

So where do we start?

The first thing we must do before investing is to get our financial house in order!  What does this look like?

1. Do you have the wiggle room to invest in your budget?  Can those contributions fit into your monthly budget?  Want to learn more about budgets?  Check out our blog on “The Importance of Budgeting”
2. Pay Off High-Interest Debt – Why put your money in the market not knowing what you will earn when you can get a guaranteed 15% – 25% rate of return by paying off high interest debt first!  Learn more about paying down debt by using “The Debt Snowball Method to Pay Down Debt”

Once your emergency fund is in place and your high-interest debts are gone, you’re ready to build wealth through investing.

Use What You Have – Employer Sponsored Plans: The 457(b), 401(k), 403(b) Plans

What Is a 457(b) Plan?

If you work in public safety, you likely have access to a 457(b) deferred compensation plan, a retirement savings plan for government employees.

Advantages:

• No early withdrawal penalty after separating from service
• Pre-tax contributions reduce taxable income today
• Roth option allows for tax-free growth in retirement

What is a 401(k)?

Some first responder agencies offer a 401(k) instead, or in conjunction with a 457 (b) plan. It works similarly to a 457 (b) but usually carries a 10% early withdrawal penalty before age 59½ unless exceptions apply.  There are exceptions for public safety workers who retire after 25 years of consecutive service, and/or after your 50^th birthday.  Check out our blog on “Navigating the Public Safety Workers 10% Penalty Exception” to learn more about this exemption for public safety workers.

So How Much Should You Contribute?

If you’re debt-free with a full emergency fund (3 to 6 months’ worth of household expenses), aim to invest 15% – 20% of your total gross income.  This includes your pension so if you are contributing 7% towards your pension the total amount, we recommend contributing an additional 8% – 13% into a supplemental retirement account. The more you have to contribute to your pension, percentage wise, the closer to that 20% total you should probably be!

FinancialCop tip – try and focus on contributing a percentage of your salary and not a dollar amount (i.e. $50 a check).  Why?  As an example, if you contribute 8% to an investment account and your agency gives you a 3% raise in your salary this year, guess what else got a raise?  That 8% contribution.  If you do dollar amounts, unless you remember to go in and change it then you’re still stuck at $50 a check.  LIFE HAPPENS!!  Trust me when I say this, we all live busy lives and in our experience most first responders forget to go raise that contribution per check.  This can have devastating implications to your future retirement because you end up not having contributed enough to get to that retirement goal!!

What Are You Investing In?

Your employer sponsored plans usually offer all kinds of investment options such as:

• Target date funds – auto-adjust based on retirement date that are usually in 5-year increments (2030, 2035, 2040, 2045 fund, etc.)
• Index funds – funds that track specific indexes like the S&P 500, DOW, Nasdaq 100 etc.
• Bonds funds – Think ISD school bonds, company bonds, US bonds etc.
• Mutual and/or ETF funds – Funds that target investing in specific goals, objectives, or company types.

💡 Not sure what to pick? A target date fund can be a good one-stop shop for beginners. It offers some diversification and adjusts risk as you get closer to retirement.  Have questions, reach out to a FinancialCop by clicking here

So, what are some common mistakes we make when investing?

1. Starting too late – Compound growth favors the early investor.  The longer you wait to start the harder it can be to “catch” up to where you need to be.
2. Ignoring employer matches – If you get a match from your employer for contributions you should take advantage of that match. That’s free money. Don’t leave it.
3. Not increasing contributions over time – Small increases make a big difference. Remember percentages, not dollar amounts, are what we recommend.

Roth vs. Pre-Tax: Which Is Better?

• Pre-tax: Lowers taxes now; pay later
• Roth: Pay taxes now; withdraw tax-free later

If you expect your retirement income (including pension) to be higher than today, Roth may make more sense, but this is dependent on your specific situation!

The Backup Plan for Your Future

For my cops, you have a backup on those critical calls to ensure you have all areas covered on the street.  Firefighters work as a team to attack that fire!  You need that back up officer, and/or team of retirement options to help you plan for your future!

Start by protecting your present: build your emergency fund. Clean up your past: pay off high-interest debt. Then invest in your future.

First Responder work is demanding. Your retirement shouldn’t be.

Need help with your investing decisions, or what to do in your 457(b), 401(k),  or building a plan that works for you?
Reach out to FinancialCop and start building real financial strength—on and off duty by clicking here