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, 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 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. To find out more about me or our team of advisors 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. And for those of you listening each week on the Pension Attention podcast, thank you. And for those of you who are new to the show, welcome. If you haven't already done so you can go to our website again, it's PensionAttention.com. You can click on the media tab and there you can click, download and subscribe. You can also download and subscribe on any of the platforms where you would download a podcast, whether that's the apple podcast app on your phone, Google podcasts, Spotify, SoundCloud, and I would love for you guys to leave a comment, share a, like, let us know how we're doing. It's always good to get feedback. And if you like the show, tell someone you like, if you don't like the show, I guess tell somebody you don't like, but I guess share it cause today we're gonna be talking about something we talked about on the Pension Attention podcast on episode 9, that was actually titled how DROP works for you. We're going to go a little bit further into what the DROP program is and provide some more resources and some of the ideas and discussions that we have with our clients here at ONE Fire and Police and we have at stations when we're at stations in normal times, discussing the topic of retirement planning and how deferred compensation fits into the DROP program. [02:15.4]
Now, first and foremost, I think it's important to mention the resources that each of you have when it comes to understanding your pension, your service pension, your DROP program, and some of those resources are actually still accessible to you to this day and are really, really important. Frankly, what I found on almost 15 years of working with first responders is lion share actually don't know that they exist or they've never actually utilized it. So, the first one is the LAFPP website, the Los Angeles fire police pensions website, LAFPP.com is a great resource to find out about your pension program, the DROP program, and any of the questions and frequently asked questions that come around that that's number one. They also have handbooks and program provisions and entry forms on there and exit forms. You can at least get a sense of what they are. And again, for those of the clients listening to us right now, we've gone through those time and time again, we've walked countless members from active duty to retirement. So, from a advisory perspective, we know the route you're going to take. And that's why I want to talk about it here on the show today, for those of you who are listening, who aren't a client, maybe of myself or of Tobie Rodriguez or any of the advisors here at one foreign police, because it's important to know that when you're reading something on a resource like LAFPP, or some other seminar being held, that a lot of it is off the shelf, if you will. It's not necessarily customizable. It's more information overload, quite honestly. And for those of you who sat at a DROP seminar webinar or anything like that before which I've done, right, it is a lot of information pun intended here. It is literally like drinking water from a fire hose. Okay. [03:52.3]
So today I want to condense that into some of the more important aspects of specifically the DROP. Now we all know it is DROP, but what does it actually mean? Deferred retirement option plan again, otherwise known as DROP, got a lot of acronyms right now. It's a voluntary program. This is not mandatory, it's voluntary. And it allows you to have your monthly pension benefit essentially deposited into an interest-bearing account while you continue to work, whether you're working at your current apartment, where it's airport, depending on what tier you're on, which we'll talk about a little bit today, but essentially when you DROP enter, you're retiring on paper and you get to see receive your salary and benefits as an active employee. So, DROP was implemented shoot 19 years ago. Now I think it was like May of 2002 when it was introduced. [04:43.6]
And when I talk about DROP programs, I actually relate the department to a executive type of company. Okay. So, for example, this is what I mean by that. If you took the department now let's just focus on LAFD for a quick second, all right. There's around 3,600 to 4,000 active-duty members, somewhere in that range, it changes, but we'll use that number for right now. Let's just call it 4,000. There's about 4,000 active members on LAFD. If you were to take that and it wasn't a fire department, so to speak, and we moved that into, like, let's say a manufacturing company or choose an industry doesn't really matter, right. It's a pretty sizable company. Wouldn't you agree? So, if you think about that, those of you listening right now, who have worked at this said company for 25 years, which by the way DROP, and we'll talk about this later as well, but DROP program is twofold, right. You have to be age 50 and 25 years of service. Now specifically, before I go further on my company analogy, we should probably talk about DROP eligibility. [05:43.8]
So, if you're an active member of certain tiers and we'll talk about that. So, tier two and tier four, you have to have at least 25 years of service. If you're a tier three, tier five or tier six, you have to have at least 25 years of service and be at least age 50, all right. So, tier two, tier four twenty-five years of service, tier three, tier five and tier six, you have to have 25 years of service and be at least age 50 years old. All right, so let's go back to my analogy here about a company. If you took that 4,000 or so active-duty members currently on Los Angeles, city fire department, and you made that into, let's say a manufacturing company, those who've worked for 25 years of your tier five, for example, and are age 50, you amassed most likely a six-figure salary. Now for you guys, it's obviously between active duty and overtime, which is readily there. We're going to talk about that as we've all been around brown outs and those kinds of things, but the reality is we're going to be in a six-figure environment. Wouldn't you say you're a highly paid executive? [06:44.6]
Now in those firms, by the way, I know this because as a advisor, I work with companies instituting their retirement plans and working with what they call their C level suite executives. Helping them manage their own retirement, because from the company's perspective, they want that set executive to be focusing on the job at hand, not their personal finances. So, they bring in guys like me to help manage their assets and help them plan for their retirement and their investment objectives so they can focus on what they are to do. That's the same kind of methodology I wanted to bring to the fire department. And I did that 15 plus years ago, and I'm still doing it today. And I like talking about it on this forum because we get to talk about, why the DROP program matters? [07:30.1]
Now I would actually call the DROP program, the golden handcuffs plan. And you probably haven't heard that term before, but it's actually a term used in the executive world. It's largely why you see guys walking off on TV or in newspapers when you read this CEO was fired of this bank or whatever, and he walks away with some seven-figure check. How's that possible? Well, it's programs or incentive programs like DROP, it's the same thing you have. So, I definitely advocate utilizing that to your advantage. Now that doesn't work for everybody because we get on at different times, we are doing different roles within the department. If you're over at the beach and you're not getting many calls after midnight, you can probably cruise into your early sixties. No problem. But if you're getting hammered 10 or total times after midnight work in south central, and you've been on the job 25 years, your body's probably telling you, Hey, you know, we probably should to DROP right? As we want to make sure that the financial reason why you would go into DROP also marries with the goal oriented or the life reasons why you'd want to DROP. I want to say that again, the financial reasons you want to DROP and the goal oriented or the family, or the life reasons you would DROP should be aligned. We don't want to make decisions out of money. And I said this before in this program, I said, it definitely over many, many years of being an advisor. Money is a great employee, but it's terrible boss. So, we want to make sure we get into controls so that, we are in control of our destiny and our future, not the other way around. [09:01.9]
And for any of you listening here right now, we know that we've been in an environment in our life where money's definitely dictated what we are to do for right or wrong reasons, because we need money to live and we need money to be able to support the lifestyle we want to have. So proper planning helps with that. So, understanding how DROP works for you and why this program of, you look at from an executive’s perspective back to my company analogy they're putting in programs no different than the city did in 2002 with incentivizing you to stay. And here's why, in my opinion, they're incentivizing you to say, because you are a senior talented, experienced person on the job who they want to keep around and they want to do so by saying, okay, you can't accrue more pension benefits, but we'll let those pension benefits that you stopped at DROP entrance, going to an account and we're going to give you 5% for the next five years. Now, when I say it's voluntary, by the way, it's a five-year stint and there's some other stipulations to it. And we'll talk about that more on a one-on-one basis when you want to get into that. But it's a five-year stint. You can't go longer than the five years necessarily, but you can definitely go shorter. [10:11.2]
So, if you want to go a year or two or three, now it's the right scenario for you, but we can talk about that. I've have had some people do that for different reasons, usually life reasons, right. But that is a possibility. But when you stop that pension, check that accrual, so to speak on the DROP entrance that just going into DROP, they're giving you 5%. Now, guess what everyone talks about, Hey Brad, do you think the DROP program is going to change? I actually don't. That may sound shocking to some people, especially in the state of affairs that we're in. And I shouldn't say that actually. I would say that it will, won't go away because it's too lucrative for both you as the employee of the city and the city itself. Because if they're saying, okay, we're going to give you 5%. Well, if they do even a halfway good job of hiring guys like me to manage that portfolio, anything, they earn north of 5% they technically keep. Technically, right it goes round to the city and however, they run that whole program. But they're only saying we're only going to give you 5%. So, whatever's left, the city has, so it's incentivized on both sides to be able to keep key talented employees, by the way, it's the same thing for a company trying to keep an executive. And when that said, person leaves, they at least walk with some amount of money that both parties agreed to. [11:25.2]
Again, no different than an executive walking out of a bank that presumably being fired, but walking away with some seven-figure check, it's the same thing for you guys. Now might not be seven figures, but again, it's all relative. Okay. We're talking about a good half, a million-dollar check roll over that is addition to your deferred comp plan and VC or SK time or other savings. So, understanding your balance in your portfolio, heading into DROP both entrance and exit is hugely important to your overall retirement plan. [11:56.1]
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. [12:12.4]
Now I want to switch gears for a second. I wanna talk about some of the steps to enroll in DROP. We talked largely about what DROP is on episode 9. So, you can go back to the Pension Attention podcast and look on episode 9, about more in depth about DROP. And I touched base on it a little bit here in the first few minutes, and I want to describe my analogy I've used in stations and with clients about why the DROP program has been enacted and why it's really been so successful in my opinion, depending how you look at it. But I want to talk about the steps to actually enroll in DROPs. So, step number one, and by the way, this is coming directly from the LAFPP.com Los Angeles Fire and Police Pensions website. So, step one purchases of service credit. So real quickly, you must complete all purchases of service credit prior to entering DROPs. So, a purchase is considered completed, what they're saying when LAFPP has received payment in full. [13:06.3]
So, for questions on that, please contact the LAFPP, the active member services, they can go through that with you. And when you get your number, that's when you talk to your advisor about the financial gain on whether that's right for you. And service credit, remember should be purchased no less than six months prior to your anticipated retirement or DROP entry. I want to repeat that because it's in bold letters here, service credit should be purchased no less than six months prior to your anticipated retirement or DROP enter date. So that's step number #1. Step number #2, we need to obtain a letter of intent. This is somewhat newer in the past couple of years, a letter of intent to enroll in DROP your LOI letter of intent will be prepared by one of their benefits specialists. [13:51.3]
So real quickly for those listening on the police side, Harbor Port police members, you have to obtain your LOI by contacting the Harbor Department, Human Resources, and for Airport Police, you have to obtain your LOI by contacting the Airport Department, Human Resources. So, step number #1, purchase of service credit. Step number #2, obtaining your LOI, your letter of intent. Step number #3 is scheduling the DROP entry appointment. So, to do this, and this has changed recently with COVID, but I think they're getting back more to the normal side of things on the in-person, but I'll keep you updated as I know as well. We need to call LAFPP, the DROP service pension section to schedule an appointment no more than 60 days and no less than three days prior to your intended DROP entry, effective date. So real quickly for those listening, that phone number is (213) 279-3100. Again, (213) 279-3100. You can also email them at dropsp@lafpp.com. [14:56.9]
Now I get this question a lot, but appointment that they are required and they have to be scheduled with the benefits specialist, which is assigned to process your entry. So, just remember that. And at the appointment, and once it's been scheduled, your DROP entry packet will be emailed to you. So, prior to your scheduled appointment, you'll complete the entry packet, we don't need to sign those. Now right here is where most of my clients will reach out to me when they get that packet, I'll help you fill that out. I filled out many, many before we work with your benefits specialists. So, they're with the city and they're really good to walk through the paperwork, but it's really important, or some decisions you'll be making on these DROP entry forms that really, I would suggest and, in my opinion, you should seek counsel. You should seek advice for it. Financial advice, even CPA. We can help you with that. So, if you have any questions on those items, you can give us a call at (805) 409-8150. We can help you with those some of the decisions you have to make on that DROP entry packet before you go to your meeting and when you get this packet, once you schedule the appointment. And you must submit your application to enroll in DROP by appointment only, it's not a walk-in situation here. Okay. So that's step number #3, schedule, a DROP entry appointment [16:10.0]
Step number #4, bring the following. And this is their list of bringing to your DROP entry appointment. Number one, your driver's license or department picture ID card, social security numbers, or birth certificates, marriage certificate, or state registered domestic partnership documents, if you’re not already filed with LAFPP, any dissolution of marriage documents need to be reported. And again, a quickly for Harbor and Airport police members, you must also bring the LOI prepared by your department, they have a special requirement for that. So again, ID, social security or birth certificate, any marriage certificate or otherwise dissolution of marriage documents. Those are all important to bring to your DROP entry appointment. And again, for Harbor port, and Airport police it's to bring the LOI that's prepared by your department. Now on these forms, I'm going to add something to step four that we do here at ONE Fire and Police is making sure that when you go there, remember you're not signing these papers, you'll do that with them there, but there are some decisions to meet. One is the rollover form for your taxable portion of your DROP program. [17:13.1]
Now I mentioned specifically the taxable portion because there's two forms on here now. There's a taxable portion and a non-taxable portion. The non-taxable portion is the portion of your DROP, which comes from the pension side for the mid-nineties, when they were essentially taxing your pension. The relief association in the union, I believe they were able to win an agreement that basically says 50% of that value should be paid out lump sum at the time of retirement. That is essentially the non-taxable portion. So, there are two different forms. One's the bigger piece, which is the taxable form, so, you have three options there. You can cash it out, which I don't typically advise. But again, this is an advisory situation setting, cause I don't know your personal situation, but that is an option to cash it out. Secondarily, you can roll it over to your deferred comp plan or thirdly, you can roll it over to an IRA. [18:06.1]
Now real quickly, either one works on the second and third option, rolling it into for comp on a roll into your IRA. If you're under the age of 59 and a half, I typically recommend to roll it to your deferred comp plan because if we need assets from there, and this also depends on the deferred comp plan balance as well. But if we need assets to supplement your pension, and you've heard me say this many, many times on this program, and those of you heard me speak at stations around your distribution rate in retirement. If we needed to pull last, we want to make sure it's in the veil, so to speak of deferred comp plan. Now specifically the 457 plan, which is your deferred comp plan allows for distributions prior to age 59 and a half, if you're a first responder and retire after the age of 52, avoid early withdrawal penalty. Now, anything more on that is really important to reach out and we can discuss more about that. But if you are 56, 57, somewhere around there, it's probably wise to roll at a deferred comp plan, that's not necessarily strict advice there, but it's always customizable. If you have questions on that, we are happy to answer that for you for your own specific situation. But if you're 59 60 and DROP exiting, you really can roll it to an IRA because you're in the same environment from a taxable perspective in an IRA, as you are with the deferred comp plan, and really you don't need the administration of the deferred comp plan anymore now that you're retired. [19:28.5]
And again, we can more go more in depth on that, should you like to. You can give us a call at (805) 409-8150 to figure out how that works specifically for you, but there are two different forms inside there. So, on that step four, when it says, bring the following to your DROP entry appointment, I do want to add that before there's you want to have a conversation with your advisor. If you don't have one, again, reach out to us at (805) 409-8150. We can help you go through this because one of things I'm going to add that step four is your information on your role over choice. And it's important to have that when you go to that meeting. And lastly, I want to go through some things to consider before entering DROP. Number one, in my opinion, I say this constantly is make sure you have your planning in order. Yes, DROP is a great program. Yes, a lot of the guys do it around certain ages around the same age I should say, but that doesn't mean it's right for you. So really sit with someone. If it's not us find someone that you can build trust into understand your current situation, how that relates to a job that you've put in 25 or 30 years of your life into to make sure that it works for you. [20:34.5]
Now, a couple of the things is you have until one day prior to your DROP entry, effective date, to change your mind and revoke your DROP application because I get this question a lot. It is technically irrevocable. So afterward your decision to participate in DROP becomes your . I think that's important. Okay. Now, per the Los Angeles administration code, your DROP entry date may not be backdated. So that's another thing I want to add on there. Now you must also be, this is kind of a unique one and guys talk about this a lot, but I want to say it here. You must be on active-duty status on your DROP entry date. In the event, you are sick or you're on vacation or any other non-working status on that day, your DROP entry date, they will automatically be advanced the next qualifying date. So just remember that as you go through those. [21:23.0]
So, step number #1 to recap real quickly purchase the service credit. If you have any questions on that, make sure to give active member services, a call, and once you get your numbers, seek an advisor to make sure to walk through if that makes sense for you. Okay. Step number #2, obtaining letter of intent to enroll in the DROP. Step number #3, schedule a DROP entry appointment, and then step #4, the following we mentioned about bringing to your DROP entry appointment. And I'll go through this with you and the only thing I added to that list, if I recall is to sit with an advisor, to go through your decisions on how you want your DROP to be rolled over and where you want it to go. [21:57.0]
Thank you for listening to Pension Attention. Hope you enjoy today's episode before acting on anything discussed today. Remember speak with a financial advisor near you about your specific situation, or if you'd like our help, you can visit us at PensionAttention.com or give us a call (805) 409-8150. [22:16.6]
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. [22:40.2]
