Welcome to Pension Attention, the best show for first responders who want to take control of their finances.
After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]
Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are at whatever stage in your career you are in to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve. Before we get started and to find out more about me or my team here at ONE Fire and Police, you can go to our website at www.pensionattention.com, or you can give us a call (805) 409-8150. Again, that's (805) 409-8150. You can actually schedule your free 15 minute retirement tracking meeting with myself, with Toby, with one of our advisors, to be able to take a look at where you currently are and make sure you're on track for that retirement goal whether you got five years on 10 years on, or you're even entering drop. It's a great time to take a look at where you're at. So give us a call. (805) 409-8150 Oregon. You can go to our website at PensionAttention.com. [01:32.7]
We've all heard the term ripple effect before. It's the continuing or the spreading of the results of an event or action that we have done. And sometimes those events or actions at the time seem minuscule or small, or basically insignificant. And if you're anything like me, I like to see the results, at least maybe not right away, but I'd like to see where I, at least I'm going. And some of the things that we talk about and one of the main topics today that we're going to be discussing regarding how much you should contribute to, to deferred competition plan or what contributions should look like? For that it's hard because sometimes we don't actually see what that'll end up being. The beauty of numbers is math doesn't lie, right. So we can actually forecast out a hundred dollars, you're doing a paycheck today what that will look like 25 years from now. There may be an assumption or two that we can make, and we can be conservative with those numbers. But the reality is it's least it's a good benchmark to look out of what it could be 25 years from now. [02:30.9]
But we can't be misled here in that even a small insignificant increasing your contributions from let's say $50 to $75 will make an impact. In Detroit, Michigan, there was a humble Sunday school teacher named Edward Kimball who had a passion for investing in his students. Have you ever heard of a guy named Edward Kimball? I mean, I hadn't. One of these students was a young boy who happened to work in his uncle's shoe shop. Now Edward noticed that this boy wasn't very interested in Sunday school. So he took it upon himself to go meet him at his job at the shoe store. That encounter changed everything. You see that boy became a Christian and his name was Dwight L Moody. And he went on to become one of the great Christian evangelists and crusaders of his time. And during one of these conferences, he went to Liverpool, England. And while he was preaching there, a Baptist pastor named FB Meyer was transformed by Moody's message. Moody invited Meyer to tour America with him. At a conference Meyer asked the crowd, if you're not going to give up everything for God, would you be made willing? [03:30.0]
This challenge John Wilbur Chapman, who was a man in the crowd there who then also became an evangelist. Billy Sunday, a professional baseball player at the time attended one of Chapman's meetings. He became a Christian and was transformed. He quit baseball and began preaching. Sunday, went on to be one of the great Christian speakers and thinkers of the 20th century and probably the most famous evangelists of his time. In 1934, a group of believers who introduced to God through Sunday, asked evangelist Mordecai Ham to organize a gathering in Charlotte, North Carolina. At one of those gatherings, Amanda attended and became a Christian. That man was Billy Graham. Now Billy Graham is a household name. He has reached an estimated 2 billion people. He's evangelized and shared the message with more than any other person. But if you remember at the beginning of this story, the humble Sunday school teacher in Detroit named Edward Kimball, that none of us had ever heard of before. He's who started this timeline by taking an interest in a boy in his Sunday school class, by seeking him out and going to his uncle shoe shop, where he worked investing in him and talking with him, challenging him. [04:36.2]
Remember that boy was Dwight L Moody and the ripple effect that ensued because of the decisions of Edward Kimball had made plenty, more rings and ripples out in this vast ocean that he could ever imagine. And he died never, truly understanding the great impact of what he perceived most likely to be a very simple act of kindness and care. Friends, each and every interaction and decision that we have can move mountains. They're not insignificant and our choices have consequences, both good and bad far beyond ourselves. And I shared this story about amazing ripple effect because today, as we talk about what may seem as a mundane or often talked about topic around your deferred compensation plan or how much we should invest or save to our differed compensation plan. I can promise you this, although it may seem small and or insignificant right now, I promise you it's not. Now math can show that, but the reality is we all know and have seen the ripple effects of our lives and the things that we do today will have impacts for us later. [05:31.5]
And our job as advisors, especially in my group here at ONE Fire and Police, is to make sure that we illustrate and portray your numbers, your goals, and financial objectives, to be able to build this structure for you and the ripple effects that can happen from the decisions we make today, even on listening on this podcast, this Pension Attention, this podcast, right now, as you're listening to this, the decision to give us a call or, or, or even call your advisor if you're working someone to be able to say, Hey, you know, I was listening to something and I want to really focus on this and talk about it. That decision right there can make changes. So for this topic today, I'm excited to bring on Toby Rodriguez, the executive director here at ONE Fire and Police to help us shed some light on what we talk about at stations and with our clients in our meetings here at the office, around a couple of questions, really how much we should contribute to our deferred compensation plan? What's the right number for us and will that reach our financial objective? And if we haven't defined that objective, we need to set out with that course first, which we will do here at ONE Fire and Police. And so we discussed that with our client. And so Toby, welcome on. [06:33.4]
Toby: Hey buddy, how are you?
Brad: I'm good. I'm good. I'm good. So, as you know, we're talking today largely around the deferred compensation plan and a lot of the conversations that you and I get involved with, with our clients and both in the station and in our meetings with clients, I, I wanted to pick your brain and have the guys here. You know, what are some of the comments and concerns that you see in particular, you know, around deferred compensation planning and, and really how much, the main question right. Of how much is the right number for each of our clients to be deferring into their deferred compensation plan? [07:02.3]
Toby: That's a great question. Probably the biggest, the two biggest questions I would get, I would say are that question you just mentioned, which is how much should I contribute? And the second one, the second big question, wouldn't be do I do Roth versus pre-tax.
Brad: Hmm.
Toby: So those are probably the two biggest questions I get.
Brad: Yeah. And on the, on the first question, as we talked about, right, when it comes to how much, you know, I've, I've, I've mentioned a lot on our, on our, on our podcast here. And as our clients know who are listening to this, right, we go through a pretty extensive cash flow analysis and, and wealth forecasting. But how does that play into helping us answer the question with them? Not necessarily for them, because they're a part of this conversation too, right. But with them, with regards to the number, the how much. [07:42.5]
Toby: Well, I think that's everything. I think our cash flow analysis really does answer that question for them. I think that everybody has the question, how much do I contribute? And I think for everyone, it's a different number. I only there's a certain number for everybody. I don't think it's a blanket number. I think there's just a specific number for everyone. And it's not about how much someone can contribute necessarily. I think it really starts with how much can I contribute because as you've seen during the so many years, mostly guys, when they start young, it's based on our, how much number, but then later on in their years, it's more of a catch up thing now and what do I need to contribute? So I think that cash flow analysis is critical so we can determine what is their shortfall, and then what number do we need to have in that account, by the time they retire. So we can determine exactly on a monthly basis or bite and say biweekly basis, we need to contribute. So, I mean, as a base number, just to make things simple, the minimums are 19,500 every year. With that, so if you take that divided by 26, we get me in 26 times a year, that's $750 per paycheck. So if everybody could max out, that would be great, but I don't think that's the case for everyone. [08:50.0]
Brad: Right.
Toby: So I think the cash flow, the cash flow analysis is critical so that we can determine the amount that need to contribute.
Brad: Yeah. Great point. In fact, you know, on that, I want to, I want to double down on that question for a second too, because as you know, and, and you know, I've done countless, you know, station meetings with these, with these guys forever. Right. And it's one of those things where, you know, we've gone in and you probably heard me ask the question. I know you've asked it where now how many of you have contributed based on what you can afford and you know, most of the hands go up. [09:14.1]
Toby: Hmm.
Brad: Right. And then, you know, and then that's very normal. And then who's listening to this right now. Understand that that's a, that's an okay thing, right. With Toby just mentioned what I want him to talk, talk a little more about is, you know, when you put it into context, let's say you're contributing $50 a paycheck right now. So a hundred dollars a month, right? If you haven't looked at what that means 10 years from now, or 15 years from now, or shoot 25 or 30 years from now, depending on how early on the job you are, that's what a wealth forecast can do is showing, okay, this $50 I'm contributing right now, what's that going to be if I do nothing, if I change nothing, right. What will that look like in 20 years? And then when we come in there and discuss the, around some financial advising perspectives around the why, so to speak, you can see what an extra $25 a paycheck and extra a hundred dollars a paycheck can mean towards that. Right Toby? [09:58.9]
Toby: Right.
Brad: Yeah. And so as we get into these kinds of things, too, you know, for example, one of the things we're bringing up right now is this MOU update that our, that our guys have seen. Right? So, and, you know, as you're getting increased in paychecks, you know, that's a great thing for us to be able to have that conversation say when those things come through in January and in July, roughly, I mean, it's a weird pay schedule, how they got, how that went all down, but then you can use that to seamlessly contribute right to your retirement plan. [10:22.5]
Toby: That's why, in my opinion, Brad, the best way to do it is based on a percentage number. That way when you get pay raises so that like this last one where you write your contributions automatically go up. So I think from the time that an employee starts the job, I think that they should be on a percentage base automatically that way, every single time they get a pay, raise their contributions, go up. That way if they have a big check, it goes up. Or if for some reason they're off duty or something happens where they're not working as much, it also goes down. So that will help out also. But I think the percentage basis, the best way to go, because of that. [10:56.8]
Brad: Yeah, that's a, that's a great call. And on the, on the Roth side of things, I mean, that's always been something, you know, for past 25 years or so since that got initiated, it's, it's a big question that we have. And, and the one thing I've said, and I don't know if you agree with this is just like the number or the amount to contribute there is not a right scenario for Roth.
Toby: There can't be. There really isn't. I love Roth, Brad. I do. I think it's a great thing, especially when you're in a position like our, our clients.
Brad: Hmm…hmm.
Toby: That every single part of their retirement is taxable. I mean, think about it. Their pension is taxable, right? Drop is taxable. And most of their deferred comp is taxable because most of them aren't doing wrong. So at the end of the day, I think it's about affordability if you ask me. [11:41.5]
Brad: That's a good point, I mean, in taxes, right.
Toby: Yeah.
Brad: And we can afford, you know, contributing to the 10,000 or 15,000, you can per year, but still paying the taxes. Cause in a Roth contributory, you're still paying taxes along the way while you're still working.
Toby: Correct.
Brad: Yeah.
Toby: I guess. So I don't get the tax break. That’s so, think about that for a second. You were saying, what's the right number? So let's take 19,500, right.
Brad: Hmm…hmm. [12:01.4]
Toby: So most of our clients are in 33% tax bracket. That's 24% Fed, 9% state.
Brad: Hmm…hmm.
Toby: So if I'm on a 33% tax bracket and I contribute 19.5, I get a thirty, roughly a 33% tax break on that money. So it's like, I contributed 13 grand, like I paid 15 grand, but my balance is making five at the end of year, essentially that's what it's like.
Brad: Yeah.
Toby: It's like six grand. It just went there. I don't want to pay that six grand to the IRS, or I'm going to put that six grand in my account.
Brad: Right.
Toby: Does that make sense? So when I do Roth, I don't get that benefit. So most of our clients, as you know, they make pretty significant incomes. And with those incomes, they need to reduce their taxes as much as possible. So most of them can't afford to do Roth from my experience. And what I've seen is most of them can't afford to do Roths simply because they don't get the tax breaks. So what they'll do is instead of doing 19.5, 750 per check, what do they end up doing? They say, you know what, I want to do Roth, cause I don't want to pay taxes later, but then they ended up doing half the contribution. So yeah, you're getting a tax break later, but at the same time, you're not contributing as much. So you're going to have half the amount of money down the road. [13:04.4]
Brad: Right. Right
Toby: And that would be my concern.
Brad: No. And that's, and that's a great concern. That's why we wanted to kind of discuss today when it comes to at that number. And, and, and, you know, from, from what we talked about the beginning of this podcast in particular, in this episode, right, with regards to, you know, what can seem like somewhat small or innocuous changes to your deferred comp plan, we just kinda mentioned a few things on, you know, $50 per paycheck or going up to 20, you know, gone to 75, things like that. But the reality is no matter what stage in the career you are in, if you would, if you would agree here and regardless of the deferred comp plan, the traditional side or the Roth regardless is any change or any incremental change you have going and that matters. It makes a big impact over time. I mean, this is a good segue into some of the conversations you and I have all the time with clients with regards to dollar cost averaging, right? I'm smoothing out the volatility in markets. I mean, you and I both know we've had how many conversations last year with our clients rightfully so with regards to what happened in the market last year. [13:54.9]
Toby: Yeah, it was a volatile year.
Brad: It was a volatile year. And so when you look at it for a comp plan, one of the main reasons why tax deferred accounts like 401ks and deferred comp plans, like with our first responders, right, is they grow tax deferred and they're in that shell that you just mentioned, right. So the ability to, you know, also have contributory dollars every two weeks that go into it makes a big difference. And again, back to you may think that $25 increase isn't much, I promise you that it is. And I think you would agree, right? And I always try to tell our clients like this and anyone who's listening to this right now, you know, it's really important for us to be able to see and map out those changes. [14:29.8]
Toby: Yeah. I, I love dollar cost averaging. It's something that I've talked about for gosh, the last 15 years, since I've done this at 17 years.
Brad: Hmm…hmm.
Toby: I think dollar cost averaging is really good for anybody. I think I don't care if you have a 401k plan, 437 plan. I don't care if you're doing IRA rather than even an IRA, right. If I take my max contribution and I just go stick that few thousand dollars in, at the end of the year, it's way better to do it on a monthly basis or biweekly basis for that matter. So 26 times a year is a great way to do it. Cause I'm buying the same event, essentially, I'm buying the same investment over and over and over again, 26 times a year. And my average class is going to be the absolute least possible.
Brad: Hmm…hmm.
Toby: I’d do that.
Brad: So you just described, dollar-cost averaging perfectly that's, you know, for those of you listening that, you know what you're hearing us throw around these terms of dollar cost averaging, what Toby just describe as there's a hundred percent accurate, right? You're basically investing 26 times at different increments along the way instead of buying it lump sum. So you get the benefit of averaging out your costs throughout the year, which over time has been proven and shown to have some really great impacts both on your volat volatility of your portfolio, but also on the returns.
Toby: Absolutely. I agree a hundred percent. [15:34.3]
Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the drop program? go to www.pensionattention.com to find out how we can help. [15:49.9]
Brad: So as we get through the competition of dollar cost averaging and what the investment management approaches to defer compensation plan now, how would you say the deferred compensation plan as a whole, the decisions to how much you contribute and what type or that's Roth or traditional, how does that fit into the overall plan that we put together for our first responders?
Toby: Well it’s critical. First of all, it's only one piece plan, right.
Brad: Right.
Toby: That's their defined contribution plan. So they have multiple things going on. It’s like part of what, they're all, I don't know if a lot of these first responders realize, but a big part in, in my opinion, when we run cash flow analysis and network summaries, one of the things that I, I think I've heard you talk about it, but one of these I always talk about is probably one of the biggest vehicles they have contributed to that they haven't had a choice over the years. One of the biggest things in successes for them that they've done all of their lives since they start the job is depending where they're at, when they were hired on, is they're contributing anywhere from 9 to 11% out of every single paycheck goes into another bucket altogether, it's called a defined benefit plan. [16:49.0]
Brad: Hmm…hmm.
Toby: That’s your pension, right?
Brad: Right.
Toby: So this is only one piece of the puzzle. And in my opinion, the engine that drives the ship, like we always talk about, but that being said, there's a lot of other things going on too, that we need to talk about with these guys, right. And how they all fit together. We've got their defined benefit plan or as they know as their pension in that their defined contribution plan, better known as 457 or deferred compensation plan and then drop, which is not holding together and that's a whole another conversation we need to have. [17:14.3]
Brad: Right. And you know, and that's a great point as we're talking about this and you know, for those of you listening that are clients of ours, and you've probably heard Toby and I talk about this at length and the reality when you put together a plan and what Toby and I do, and we specialize in is making sure that that plan is, is understood now, but also in context of what it means for when we eventually get to retirement. Now we've have clients on this call who probably are listening that we've actually walked into retirement with that we've went from active duty into retirement. And for those of you that are, that are not listening or sorry, those of you that are let's back up, for those of you that are not clients of ours currently here at ONE Fire and Police, I would urge you, you know, we're big proponents and advocates for finding that advisor, someone you can build trust in because the reality is you want that guided approach to help answer these questions along the way, and specifically tailor them to you. [18:00.5]
So if you’re listening to this right now, you can actually give us a call at (805) 409-8150. You can also go to our website at PensionAttention.com. You can set a time to talk with Toby and I to set a free 15 minute, no retirement tracking meeting we're calling it. Just take a look at where you're at. Take a look, what your deferred compensation plan is doing. Ask some of these questions and if you don't know, the questions will help guide you along in our discovery meeting. I mean it's really important that we, we want to make sure we offer that and make sure you have out there because to what Toby said is huge. The understanding that your deferred comp plan, your pension plan and drop that works in together with each other, we can't stress enough how important that is. [18:32.3]
Toby: You mentioned something Brad about finding somebody you trust.
Brad: Hmm…hmm.
Toby: That is, I mean, you couldn't hit the nail on the head, but I think it's important to find somebody that you trust, but also has experience with this particular group of clients.
Brad: Right.
Toby: And this group of clients has rules in place that are very important to pay attention to, and if not paid attention then can have severe consequences. For example, a deferred compensation plan. The rule is as soon as you separate service, what you can take funds and there's no penalty. You're going to pay the taxes, we all know that. But there's no penalty for doing so. Where an IRA, for example, what does it have? It has a 15, or it has a penalty of 10% if you take the money out before 59 and a half.
Brad: Right. [19:14.0]
Toby: So a lot of advisors don't know that. And what they'll do is, you know, our, our clients, when they retire early, right, they retire at 55, 56. So they're not 59 out and a half. What if they need that money? And they rolled it into an IRA. They all of a sudden they created a 10% penalty for themselves simply because they rolled it over into the wrong type of vehicle.
Brad: Yeah. Sadly, I've had to correct that for a lot of clients before in the past, from advisors have done that. And you're totally correct. I mean, there was a first responder veil that was, believe it or not put in by an under the Obama administration and move the age from 55 down to 50. So anyone post retirement, right. Or sorry, post active duty in retirement that retires after the age of 50, you know, has that veil, I've always called it. It’s a veil of first responders that allows them to withdrawal from their deferred comp plan, right without a penalty, to your point. That's a, that's a great point. And, and by the way, as you're listening to this too, you know, these are obviously things we're talking about, generically, we go specific on an individualized basis for each of our clients. And you know, if you're listening to right now, you make sure you want to, you know, according to whether your tax professionals and we do that with you as well. [20:09.3]
These topics are really important to know, especially if you're listening to this and you are the person right now, who's got 20, 25 years on maybe looking at entering drop, for example, by the way, it's not that it's not important for those of you listening to that a couple of years on five or 10 years. The more, you know, the better that's the reason why we set up Pension Attention, right. But to Toby's point finding someone that not only is an experienced, but also is experienced and knowledgeable in a niche practice like this and something that we've dedicated our careers to, but we're both in first respondent’s families, right. We have families involved in this and Toby has one that’s active, right. So it's really important that we build that trust. And we have that with a lot of our guys, as you well know, but at the same time, Toby has a great point making sure that, you know, there are other advisors out there, but the reality is knowing this plan, like the back of your hand is a big value add for clients. [20:55.2]
Toby: I agree a hundred percent and we can get into it later, but that goes into drop as well, right. Because there's a rule there. You’re right if you, all these rules that I would say probably half of the clients don’t even know.
Brad: No, it's a good point. In fact, we're going to have a whole episode on drop.
Toby: Yeah.
Brad: We're gonna have an episode on pension and the beauty of having a great podcast like this, it's a great forum for us to, to reach you on a weekly basis, to hear our voices for our clients, listening we love you and we miss you. We can't wait to see you again, you know, as we we get back this post COVID era, you know, when we get back into stations and back in the office, but we've enjoyed seeing you on zoom. Toby, that's been kind of a fun environment for us. You know, a lot of our clients have been really responsive and, and love the zoom. [21:30.2]
Toby: For sure. I mean, I can't wait to get back into a fire station and give my guys a hug again. But yeah, I agree with you, buddy.
Brad: Yeah.
Toby: And thanks for having me on today. It's been a joy. I really appreciate it.
Brad: Always, man, we're doing this together and it's a great thing. So, you know, as you're listening to this today, make sure to go to PensionAttention.com. You can also give us a call at (805) 409-8150. And we look forward to hearing from you. Toby, I'll talk to you soon, my friend.
Toby: All right buddy.
Brad: Bye bye. Next week on Pension Attention, we're gonna go through how drop works for you. I'm really looking forward to that. And until then stay safe. [22:00.4]
The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [22:24.1]
