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Planning the retirement you want starts with understanding how your pension plan fits into the ‘big picture.’ And without those overtime hours and biweekly paychecks, how will you protect the money you worked so hard for? Or know you have enough to support and feed your family?

In this episode, I discuss what happens when you move from active duty to retirement, and how a pension plan supports the transition with the most cash flow and the least amount of risk.

Show Highlights Include:

  • The “Project 523” path to protecting your years of dedicated service and preserving your pension now. (3:00)
  • How to live a comfortable retirement without penny-pinching or counting vacation hours (no matter what changes in the economymarketplace). (9:00)
  • How a pension plan protects your family for the ‘worst-case scenario,’ and why insurance plays a role in safeguardsding your assets for generations to come. (17:40)
  • What the Catch-22 author reveals about the ‘traps’ of your pension planning today. (22:00)

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 805-409-8150.

Read Full Transcript

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 order to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team here at ONE Fire and Police of fiduciary advisors are dedicated to ensuring you take control of your finances and build the life you deserve. Before we get started on today's episode and to find out more about me or my team here at ONE Fire and Police, you can go to our website at PensionAttention.com, or you can give us a call. You can call us at (805) 409-8150. On today's episode of Pension Attention. We're going to be talking about none other than pensions, your pension in particular, what this show is in essence named after. [01:16.4]

And I want to bring up two concepts before we get started luck and hard work. In 1997, Warren buffet, the famous investor, and multi-billionaire we all know, he proposed a thought experiment and he said, imagine that it is 24 hours before you're going to be born. He said, and a genie comes to you. The genie says, you can determine the rules of society you're about to enter and you can design anything you want. You get to design the social rules, the economic rules, the governmental rules, and those rules are going to prevail for your lifetime, your children's lifetime and your grandchildren's lifetime, but there's a catch he said. The catch is you don't know whether you're going to be born rich or poor, male or female, infirm able bodied, in the United States or in Afghanistan. All you know is that you get to take one ball out of a barrel with 50 billion balls in it and that's you. [02:10.0]

In other words, Buffet continues, you're going to participate in what he calls the birth lottery. And that is the most important thing that's ever going to happen to you in your life. It's going to determine way more than what school you go to, how hard you work, all kinds of things. Now, Buffet has long been a proponent of the role of luck in success. In his 2014 annual letter, he wrote and I quote “Through dumb luck, my business partner, Charlie and I were born in the United States. And we are forever grateful for the staggering advantages this accident of birth has given us.: So, when explained in this way, it seems hard to deny sometimes the importance of luck randomness, and we'll call it good fortune in life. And indeed, these factors, I think we all can agree, do play a critical role, but I want to consider a second part here, hard work. [02:57.9]

And that brings me to a story, it's called the story of Project 523. Some of you may have heard of this before, but it's a good story when it comes to hard work and how these two go together. So, in 1969, during the 14th year of the Vietnam war, at that point, a Chinese scientist named Tu Youyou was appointed the head of a secret research group in Beijing. The unit was known only by its code name, Project 523. Now China was an ally with Vietnam and Project 523 had been created to develop anti-malarial medications that could be ministered to the soldiers. The disease had become a huge problem as we all know now. Just as many Vietnamese soldiers were dying from malaria in the jungles as were dying in battle. Tu began her work by looking for clues anywhere she could find them. She read manuals about old folk remedies. She searched through ancient texts that were hundreds or thousands of years old. She traveled to remote regions in search of plants that might contain a cure. [03:56.1]

And after months of her work, her team had collected over 600 plants and created a list of almost 2000 possible remedies, slowly and methodically to narrow the list of potential medications down to about 380 and tested them one by one on lab mice. She quoted, “This was the most challenging stage of the project.” She said it was a very laborious and tedious job in particular, when you faced one failure after another. Now hundreds of tests were run, most of them yielding nothing, but one test an extract from a sweet wormwood plant known as Qinghao seemed promising. Tu was excited by the possibility, but despite her best efforts, the plant would only occasionally produce a powerful anti-malarial medication. It wouldn't always work basically. So, her team and her had already been at work for two years, but she decided they needed to start again from the beginning. So, Tu reviewed every test and re-read each book searching for a clue about something she missed, then magically, she stumbled on a single sentence in the handbook of prescriptions for emergencies, an ancient Chinese text, which was written over 1500 years ago. [05:05.0]

The issue was heat. If the temperature was too high during the extraction process, the active ingredient in the sweet wormwood plant would be destroyed. Tu redesigned the experiment using solvents with a lower boiling point. And finally, she had an anti-malarial medication that worked 100% of the time. It was a huge breakthrough, but the real work was just beginning. So, the power of hard work in this case with, for her in proven medication in hand, it was now time for the human trial. So, the hard work was about setting in. Unfortunately, there were no centers in China at this time, performing trials for new drugs and due to the secrecy of the project, going to a facility outside of the country was out of the question. So, they'd reach a dead end. That's when Tu volunteered, to be the first human subject to try the medication. In one of the boldest moves in the history of medical science, she and two other members of Project 523, infected themselves with malaria and received the first doses of their new drug. [06:02.7]

And guess what it worked. However, despite discovery of a breakthrough medication and her willingness to put her own life on the line, Tu is prevented from sharing her findings with the outside world. The Chinese he's government go figure, had strict rules that blocked the publishing of any scientific information. She was undeterred. She continued her research eventually learning the chemical structure of the drug and a compound at that point officially known as artemisinin and going on to develop a second antimalarial medication as well. It was not so 1978, almost a decade after she began in three years after the Vietnam war ended, that Tu’s work was finally released to the outside world. She would have to wait until the year 2000 before the world health organization would recommend it treatment as a defense against malaria. Today, the artemisinin treatment has been administered over 1 billion times to malaria patients. It is believed, has saved millions of lives. So, Tu Youyou is the first female Chinese citizen to receive a Nobel prize and the first Chinese person to receive the Lasker award for major contributions to medical science. [07:10.7]

Why am I bringing that story up right after I bring up a story about luck that our wonderful investor Warren Buffet quotes. Tu Youyou, was not fabulously lucky is why I'm bring it up. My favorite fact about her is that the, she had no postgraduate degree, no research experience abroad, and really no membership in any of the Chinese national academics. A feat that actually has earned her the nickname, the professor of the three no's, you can look that up. But man, was she a hard worker, persistent, diligent, driven. Does that ring a bell for anyone? I hope it does. Because if you're listening to this right now, and you're an active member currently, or actually a retired member, in fact, from the Los Angeles fire police pensions, you are both lucky and a darn hard worker. And I don't want to go into an episode as important as this one, why I named the show? That's why I spent over 15 years dedicating my work to serving our active and retired members for our fire and police because not only are we lucky enough to have the opportunity to be able to be working for a department such as ours, but you had to work your tail off to earn all that you've earned. [08:23.2]

No one gave that to you. You had to go take your fire science classes. You had to work those hand crews. You had to do all the things that sadly sometimes our media likes to report on, Oh, they get this pension or they get this drop them out, but they don't look at the inner workings like someone like we do here at ONE Fire and Police as civilians as to what you've dedicated in both taking the God, given talent of having the luck to be able to serve in our fire and police department, but also working again your tail off to earn those benefits. So, as we go into today, talking about your pension and some ideas to think about, and really the basics of what it is, and that's where you'd reach out to us to help you understand how your pension works for you best cause you're going to have tableside conversations at that kitchen table. I know you do. [09:06.4]

I've been to hundreds of them as a civilian, as a kid growing up in the house with my dad, I've seen it all, and it's great. It's such comradery. It's a team approach. It's amazing. But when you get into situations, as you heard me say on this show before around bigger items outside of the walls of the fire station, right, let's say, you know, deferred compensation investments, family, pension, insurances, right? Those are big concepts that I really am a big proponent of making sure that you have an advocate, a team member, a partner working with you. And the pension is one of the things that comes up probably the most, especially when you get closer to drop. So, if you're listening right now and you don't have that advisor you're working with, or you're not getting enough information from the city, which is normal, by the way, I mean, you get a big city, they have a really great plans, but they don't necessarily always do the best job of articulating those plans. Give us a call (805) 409-8150. You can also go to our website at PensionAttention.com and you can set some time with myself or a team member to sit and make sure that the pension you're looking at, the amount that you're looking at, discussing if you want to stay on for that extra six months or a year, which inevitably happens and us to put it in context of what that means for your retirement, which by the way, may be different than your firemen may be different than your captain or your paramedic or your AO, your engineer. Okay. And you can talk about those at the station, but when you step out of those walls and really sit down, understand how it works for you and your wife and your family, because that's at the end of the day, what matters to go from active duty to retirement. [10:36.6]

So, what is pension? We all know what it is essentially, but I want to break it down for a second. First and foremost, I'm going to talk today largely about tier 5. You can go to LAFPP Los Angeles Fire and Police pensions.com. You can find out a lot information. I say that at stations, a lot and a lot of guys don't even know that site exists, but it's a great resource for you to find out about your drop, your pensions. And if you're on other tiers, they have a whole section on different tiers. Because the provisions of the tier 5 are different from those and other tiers and plans provided to other city sworn employees. The tier 5 is one of several pension plans, right that's provided to sworn members of fire, police, airport, and harbor departments, all of them in the city of Los Angeles. [11:17.6]

And most people won't break it down this way. But in essence, a pension is what we call a defined benefit. So, in our world, the financial advisory, and we do this here at One Capital Management, right. We put in retirement plans for corporations, and we do them both on a defined contribution, which is more of a 401k side of things in the private sector or for you, your deferred comp plan, which we talked about a few weeks ago and we'll talk heavily on this program. And when we talk in our advisory practice as well. And a defined benefit plan is a pension plan. That's where they, the employer are defining your benefit based on how long you work, how much you put into it, et cetera. And a defined benefit plan is essentially an annuity. Now, now, to be fair, I'm not talking about the product annuity. If you look up annuity in the dictionary, it stands for periodic payment essentially. Every month, you're getting a set payment that you've earned based on the amount of years you worked in the amount you have in the plan. [12:14.7]

So, if we start there, the first thing I want to say as a big overarching summary of a pension plan is that you go from active duty to retirement, the first thing that happens is you go from two biweeklies, every other Wednesday to one monthly. And that one monthly is at the end of the month. So, it's important I talk about this in our planning practice with our clients around cashflow, because we've all been there where two weeks is two weeks, right. We've, we've gone those last couple of days where we haven't had a paycheck, I've been there, you know, where it's like, man, how you know, look, I got to feed myself somehow, right. So, we want to make sure that we don't get into that pinch. So that's what we add in things like VC and SK time and bank hours. So, a good advisor will sit with you and make sure that you talk with personnel and understand, okay. So, where's our vacation time, our sick time and our bank hours to see if we can put some cash in our bank as we go into retirement. So that we don't, we get into that first 30 and 45 days with some dry powder as I call it, some runway, some lead way with cash. So, we don't get pinched going right from active duty and then waiting 30 more days till we get our next paycheck essentially, sometimes. And that paycheck being pension and not active duty with maybe some overtime. [13:24.2]

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. [13:40.3]

So, yes, as many would probably understand. Pension has a lot to do with cashflow. And the biggest question we get asked here at one foreign police, when we sit with our clients is, Hey Brad, Hey Toby, can we retire? Like, do we have enough money? We're concerned about that. We're concerned from going from 130, 140, or maybe even $200,000 of income, active duty and overtime down to 90,000 or a 100,000 or 110,000 every year, no matter what. Now there are some COLA adjustments, cost of living adjustments that will be talked about. Okay. And we'll go through that when we sit with you and understand where you are and we'll look at the city's plan and how those things come to light, but that's pretty much a fixed payment. So, I understand the philosophy and it can look like what we call a financial cliff and we show it on our cashflow. We'll say, okay, the year before you left active duty and overtime, we were making, let's call it $150,000. Now we're making 90. So as a $60,000 swing from active duty to retirement, Brad, where do I make this up? [14:41.5]

This is where we talked heavily a couple of weeks ago, about a sustainable withdrawal rate, understanding how drop, deferred comp plan, other savings you might have, maybe even VC SK and bank hours like I mentioned all, come into play to form this, what I call pool of overtime for the rest of your life. So, we've all worked right in active duty and had that idea that look, we can go work overtime, but that goes away. The one of the main thing that goes away is overtime when you retire. The next thing that goes away is active duty pay because now you're on maybe 75, 80, 83% of your pension, your last active year working that percentage of that number. So, we have both overtime going away. So how do we make that up? Well, we want to formulate something for you that says, okay, the amount that you saved now, you have something we call in your world, a liquidity event. Now drop, deferred comp plan, vacation times, bank hours, some of that's available, but now it becomes available to you to spend in retirement. [15:39.1]

And I want to be honest with you. A lot of people have issues with spending money that they've saved. And if you're listening right now and that's you, you're not alone because we've worked so hard in the years. If you're active duty right now, and you're listening to this, you're in what I call the accumulation phase. All right, you are in that phase where you are working and saving, working and saving. Eventually and for anyone who's listening here, that's retired you are kind of like, yep been there. But when you go from active duty to retirement, what you're really doing is you're going from accumulation phase of your life, to the distribution phase of your life. So, understanding what that means and becoming comfortable with the amount that you've earned in your pension, and you're going to be getting every month, but also what you've earned in your deferred comp plan and your drop. This is where the rubber meets the road friends. This is where we understand if you have a million dollars using that as an example, a million dollars between let's call it deferred comp plan and drop, and I'll exclude VC and SK time for a second. Okay. And you need to make up $50,000 in your income. Well $50,000 divided by a million is 5%. So right there, we start at what we know we need to distribute because that's the life that you want to live. [16:48.1]

And by the way, our job is to make sure that not only do you grow your assets, we protect your assets, but also sustain those assets. So, partnering with you, walking you through what we call our black book, our wealth forecast analysis puts together the concept that you would understand, Hey, if you want to live that lifestyle and you want to have that come out, which plenty good. Here's what we're gonna need to be pulling. We need to match an investment plan that meets that. So, have to understand and come through our risk tolerances, come through what's going on in the markets and politics, all those conversations, especially nowadays more than ever come into play when you're designing a portfolio. And that's what we do here at ONE Fire and Police to supplement your pension, which is what we're talking about today. [17:27.2]

Now, if you give us a call here at one foreign police, and we'll sit with you, one-on-one to help you put together your overall retirement planning, which will come into play when it comes to pension planning. Couple things we'll go through, one of which is when you actually choose to drop, enter, as we all may know, but I want to reiterate on today's show is that when you drop enter, you are essentially retiring on paper. Your pension plan is fixed. It's done. Whatever that time period is there you go, you've earned those allotments, okay. When you exit five years later, and by the way, with drop, as we mentioned on our drop episode, you don't have to go the full five years, but the full five years currently as mandated is the maximum time period. So, when you leave, you'll have a lump sum rollover for drop, and your pension starts kicking in basically the next month at the end of the month. And one of the things we're going to talk about in a couple of weeks is insurance planning, which you wouldn't think comes to play when you're talking about pension. But one of the areas we talk about is when you actually file for your pension, when you drop enter, not when you drop exit, when you drop enter is around your spousal, or what happens to you if you pass away? What goes to your wife? [18:37.2]

Now I bring this up because being raised in the family, it was an important topic that I learned at a young age is that when something happens to you, God forbid in retirement, while you're on pension, basically 55% of it goes to your spouse. And then if something happens to your spouse, it's done. Nothing goes to the kids. So, you'll get options to what they call buy up. So, for example, if you had, let's call it $10,000 a month in pension, but instead of receiving 55%, you can buy it up. Meaning instead of receiving $10,000 a month and you can receive $9,000 a month. And if something happens to you, God forbid the full 9,000 goes to your spouse or a 100% Now these aren't exact numbers, I'm giving you an example that we'll go through and we'll get your exact numbers. When we go through LAFPP, when you're looking to drop enter. But the point exists is that a lot of times people will choose that buy-up option. And I want to be very open with you completely from an advisory standpoint. Usually, I'd recommend taking the lower amount and go and buying your own insurance to equate for that difference. Take that $1,000 spread goats spend $500 of it. So, you cashflow positive yourself, $500. So now you're receiving 9,500. You're spending again, an example here, $500 for insurance, okay. But guess what? That insurance comes to, not only your wife, but also your kids. And it comes tax-free so something that we would not think go together. This is why is stress so heavily holistic planning, meaning taking everything into consideration. [20:05.8]

When you're talking about pension, it can't be a singular discussion. It has to consider drop. It has to consider cashflow. It should consider things like insurances to what I call. I call it pension insurance. Frankly, you're insuring your pension. And as we round out, today's subject around pension, which we're going to have more episodes on this because it's such a, a big topic and such an important topic. You know this, but if you look in the middle of your paycheck, you're paying about roughly 11% of your paycheck into your pension. That's why they call it a funded pension. It's being funded by those of you that are active. So those of you listening right now that are retired, your pension is an essence being funded in a way by those that are active. And those that are active right, are essentially funding those that are retired and it's a revolving system. Now, the differences there is that that pension program has investments inside that they hire guys like us to help them manage their investment, which is by the way, why the drop program, as you recall me mentioning is such a lucrative program, which is such a great thing for both you, as the members, people serving our community and the city itself, because they're guaranteeing a 5% rate of return, which is a good thing for you guys. [21:11.4]

But also, if they're making higher than 5%, they keep the spread. So, it wins out. So, interest rate arbitrage is a win there. So, investment guys, aren't always the bad guys, okay. We're actually trying to help that's our, that's our job when it comes to the investment management of things. And you can go on LAFPP.com again, it's a great resource with good information from the city. And you can actually look up your credit for years of service. It starts at 20 years at 50%, and it goes all up to 33 years or 90%, which is maximum. So those of you floating around there with understanding your pensions and those years, usually my discussions happen around between 27 years and 33 years. We'll have that conversation between 27 years and 28 years. It's the difference between 71% pension and 74% pension. So, I'm going to bring something up as we end this show today, we're going to talk more about this in later episodes, or if you have more questions about your specific pension discussions and how it relates to everything again, give us a call (805) 409-8150. You can also go on our website at PensionAttention.com and set some time with myself or my team to go through this. [22:11.5]

But what I want to bring up is that 27 to 28 years, as an example, between 71 and 74%, we get the question all the time. You know, if I just stay that extra six months or that extra year, I'll gain the extra 3%. And then the difference between 28 and 29 years is also 3% from 74 to 77. So, it ends up being what I call chasing the carrot. You start thinking about where you're at, and unless you're going to get a job down at the beach and kind of cruising around in your red ink is super low key. You know what I mean? Then that's one thing, but it has to do, as you've heard me say on this show before around quality of life and the quantitative, the numerical data, the numerical numbers, and that's what a plan does. That's what a good advisor should do is to bring it into relevance or context for how it suits you and your family. Because when you're at the station or you're talking in general, I mean, logically and humanly, we're like, well, shoot, 74% is better than 71. So, I better stay that extra year. But it's a trap in a way, because you're going to say that next year, you're going to say the same thing to yourself next year. So, putting a plan in place to understand what works for you is really important. [23:14.8]

And on that, I want to end with a story it's actually kind of interesting. A guy named John Bogle; he was the Vanguard founder. If you've heard of the Vanguard investment company, he passed away in 2019, but he wants told a story about money, I think that always highlighted something that we don't think about enough. So, at a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal Joseph Heller, that their host a hedge fund manager had made more money in a single day than Heller had earned from his wildly popular Catch-22. So, Joseph Heller was an author, he authored Catch-22, we've heard that story. Over its whole history so this hedge fund manager in this story, what he's talking about here made more money in one day than Joseph Heller, the author of catch 22 did in the whole history of the book. Heller responds, Yes, but I have something he will never have enough. Friends, I think that story sums up a lot of what I know I try to do in our advisory practice here at ONE Fire and Police and now my business partner, Toby Rodriguez, the same thing. We want to help our clients, especially those serving our fire and police departments in our great city of Los Angeles to understand how their numbers that they've earned. I want to use that word very appropriately here. You've earned these dollars. You've paid in to your pension for 27, 28, 30 years. How does that relate to your goals, your objectives, your desires, if you will, in retirement? [24:39.8]

And we want to get down to that number of what's enough for you and make sure it's relevant to you. It's between us and our conference room or our phone calls together. Not the station, not elsewhere, our friends or colleagues. That's all great and it's all good to talk about, but the end of the day, you're your own unique person in your own unique situation. And so, understanding if I could boldly be able to say that one day and say, you know what? He has something I don't have that person who made 15% of the deferred comp plan that you think so wildly successful or anything else that you kind of hear all the time, but they don't have what you have, which is enough. Understanding that context is a huge win and set makes you dangerous in my opinion. It sets you apart from many people. And that's what I want to do is serve our clients to be able to get to a point where we design your cashflow, what's coming in, what's going out, do some debt management strategies, to fully encapsulate your transition from active duty to retirement. And for you to be able to sit there confidently, proudly saying that's enough. And by the way, that enough will transpire to not only you and your wife in retirement, but ideally for your kids and your grandkids. And setting that plan in place around pension, which may seem like a singular topic needs to be putting together with your entire picture of retirement planning and that's what we want to do here at ONE Fire and Police. So, if you haven't done that or you haven't found that advisor, give us a call (805) 409-8150 or go to our website at PensionAttention.com. [26:04.5]

Thank you for listening today to pension attention before acting on anything discussed today, remember to speak with a financial advisor near you about your specific situation, or again, if you'd like our help, visit us at PensionAttention.com or give us a call at (805) 409-8150. Next week on Pension Attention as I alluded to today, we're going to be talking about, why insurance is important. I know it's a boring subject matter. In fact, it's a subject matter that most people don't want to discuss because it's morbid, but it's important. I want to express to you why, until then stay safe. [26:37.2]

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. [27:00.6]

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