by Mark Burnam
Editor’s Note: At the Ready exists to give a voice to 1st responders everywhere. We believe that the information shared through At the Ready, by responders to other responders, benefits the entire responder community. We know too that information shared by others can be just as useful. In the case of this article series, the information shared will help the responder community be more prepared for the day when you turn in your badge and gun, or take-off and hang-up the turn-out gear for the last time. We asked Mark Burnam, Financial Advisor/Director of Marketing and Client Services for “The Second Half Team” at C/F/R Financial LLC State of Florida, to write about strategies you can take to ensure more peace-of-mind when that day comes.
In Part 4a we are going to dive into what you actually can to do with your moneys upon terminating DROP and retiring, review some of your choices, and the pros and cons of each choice.
When you terminate DROP and “retire” you have a handful of options with your “rollover moneys”:
1. Have your plan send you a check for all your moneys, pay a ton of taxes, and “go to town”
2. Roll all your DROP moneys to your 457/Deferred Comp provider
3. Leave your money in the pension plan (FRS or your Municipal Pension Plan)
4. Roll your moneys to IRA Rollover account(s) at a financial institution of your choosing
5. Do one or a combination of these choices, but let’s address all five.
Show Me The Money! Cash me in and send me a check
It is rare that we hear of anyone doing this with sizeable moneys, but amazingly it does happen. Most of you should know that a) this creates a taxable event and possible penalties on top of the taxes b) people forget these moneys will be “taxable income” and this distribution may also throw you into a higher tax bracket c) you will now be liable for a hefty tax bill on those moneys. We have not met with anyone whereby this was the rightthing to do. People still do it and you may even know someone who did. As Sheriff Buford T. Justice aka Jackie Gleason said in “Smokey and The Bandit”, “…you can think about, but dooooooooooon’t do it.” Worst case you could do #’s 2, 3, or 4(below) and then take some or all of your moneys out later possibly spreading out the tax liability over different tax years.
Roll your moneys to your 457 deferred comp provider(s)
In some of the 75+ agencies and departments we work with someone, the 457 providers have FIXED rate accounts that may make some sense for SOME of your moneys for the short-term – not all and not always a big percentage of one’s moneys, but SOME. In fact, 95% of the time or more we recommend placing at least a small portion of your rollover moneys in those accounts as part of our final investment recommendation. Why?
In some cases we discover the person doesn’t even have a 457 account so we get them to open one up prior to terminating DROP and retiring. Why? For a couple of reasons: 1) take advantage of the fixed rate 2) depending upon one’s age, for cash flow planning and anticipated withdrawal needs prior to age 59 1/2 as there may be Pre 50, 55, and 59 1/2 rules one needs to aware of and 3) in some cases, you may entitled to a small annual tax-free withdrawal credit if used for healthcare (we’ll discuss those in more detail in an upcoming article) 4) or to roll some of one’s unused sick/vacation payout into the 457 plan so they can shelter some of that payout from current taxation (various factors will affect how much etc. which we discuss in person) 5) for your peace-of-mind as this is all new.
Bottom line here is conservative bonds and bond funds aren’t paying that much so if your 457 provide has an attractive fixed rate bucket, then they may be worth a look for SOME of your moneys for the short-run. It mainly comes down to your need for significant cash flow withdrawals prior to age 55 or 59 1/2;. If so, then some proper planning is called for as we may recommend you keep and allocate enough money with your 457 provider to cover those withdrawals as part of that planning.
Lastly, you could leave your moneys with the 457 provider in a fee-based mutual fund investment program. The fees aren’t that cheap plus what the funds charge (that you don’t see). That aside, you may end up with “1-800 who am I talking to today?” Mary? Steve? Dick? Jane? Do you want to pay for some stranger on the other end of the line giving you advice? Do they really know you? Your wants? Wishes? Dreams? Fears? Concerns? Even the ones who have a dedicated person for you are so stretched with thousands of other retirees there is no way they can properly and prudently give you the attention you deserve. It is not their fault, but it is what it is. It is your money, however in our opinion you can do much better elsewhere.
Leave your DROP Moneys in the plan IF…
This isn’t common, but some city plans may allow you to leave your moneys in the plan and whatever the plan earns, you earn – whether that is up 30%... or down 30%. Note: The plan is run for the best interests of a collective group of people (retirees and future retirees). Its investment composition and timeframe is theoretically “infinite”. Its long-term needs and risks taken may not mesh with YOUR needs and risk tolerance. While the returns have probably been pretty solid over the past 5-6 years in a huge up market period, could you have handled the investment performance of 2008? The stock market lost 39% that year so most plans were easily down -25%, if not -30%, or -40% or more from 2007 peak to 2009 trough. Could you have stomached losing 30%+ of your moneys before enjoying the run of the past 6 years? This 2008 performance was not uncommon. I have researched various pension plan performance #’s in 2008 and no matter how good the plan, the board members, or money managers – the funds were down considerably. Even FRS was down -26.74% that year!
How soon we forget. Currently many people just remember the last 5-6 great years. Note: 5 year performance records for pension funds and your 457’s mutual funds DO NOT include 2008 hence the 5 returns are “off the chart tremendous”, enticing, and not realistic going forward. And, if you choose to leave your $ in the plan, who do you call for advice? The Administrator? Board member? They generally aren’t financial professionals and certainly don’t know the ins and outs of your financial condition. For all those reasons above, we just don’t find this to be one’s most attractive rollover options for your moneys with one exception…..
IF you are in a plan that allows you to leave your money in the plan after you terminate AND they guarantee you a very attractive fixed rate of return i.e. 6%, 7%, 8% or more then leave your money there and enjoy it while you can. These plans are not common, but there are a handful of these plans around Florida. Sometimes these rates are tied to the “actuarial assumed rate of return” of the plan and are re-set from time to time. If you are in one of those plans just leave your money there and take it while you can get it. Note: obviously if the plan eliminates the guaranteed rate, lowers it substantially, forces you to take your money elsewhere, or the safety of your plan comes into question then it may be time to move elsewhere. Until then, enjoy.
Lastly and like the 457s, you may be able to leave your moneys in the plan, but with a default “advisor”/provider and usually in some mutual fund investment program for a fee. The stated fees appear cheap, but when you dig deeper, they do not include what the mutual funds charge (that you don’t easily see) and sometimes more. All of that aside, you again end up with “1-800 who am I talking to today?” Juan? Ron? John? Don? Do you want to pay for some stranger on the other end of the line giving you advice? Do they really know you? Your wants? Wishes? Dreams? Fears? Concerns? Even the ones who have a dedicated person for you are so stretched with thousands of other retirees there is no way they can properly and prudently give you the attention you deserve. It is not their fault, but it is what it is. Again, in our opinion, you can do better.
Roll all your moneys to an investment and financial advisory firm
Note: “Rolling your moneys” implies a “rollover” which means you are doing a tax-free transfer from one qualified tax-deferred account to another i.e. from DROP to an IRA Rollover account and so forth.
As I said before, the “world is now your oyster” and you have A-Z of choices other than your 457 provider, your plan (if they allow you to keep it there), or some default provider. We know there are many choices and decisions so it can be challenging to decipher what and who is best for you, how much to roll, do it all with one provider? Split it up? Who do I trust? Paralysis by analysis! Help!
Take a breath. Relax. Interview a few people. Talk to retirees from your department. Ask for an introduction. Plug alert -- Talk to us. Granted, this is our niche and our expertise, but we find most “advisers” have very little knowledge of DROP, 457’s, 403b’s, pre 50, 55 and 59 1/2 rules, COLA’s, sick/vacation payout options, healthcare credits, 175/185 moneys, 1% plans, VEBA’s, and all the ins and outs specific to 1st responders, municipal employees, and more. We do -- this is what we do. You, your pension plans, specific rules, nuances, your situation, and YOU and YOURS are our focus.
? Pitfalls to look out for à we strive to be the best we can be and do what is right for our clients. Obviously, when it comes to money, not all do. There are many “wolves in sheep’s clothing” out there so to say. They may even be a former 1st responder or even a co-worker who is now a “financial expert”. Just because I have a gun or a garden hose, doesn’t make me an expert in law enforcement or fighting fires. The reverse is also true.
When it comes to money, competition is always fierce. While we do have a few honorable competitors, we do hear lots of horror stories. As a FINRA arbitrator I have seen tons more. While I could write an entire article on this subject, and maybe I will, I fall back to the old “nothing is free“, there is no “free lunch” and “if it seems too good to be true then it probably is…”. True financial professionals have a right be paid and to earn a living just as you do. We are who we are and believe in full disclosure. So what are the most common and egregious missteps we see and hear? Mainly we see “errors of omission” i.e. not telling the whole story à Half truths, undisclosed fees and charges, back-end charges, false/misleading “guarantees”, liquidity restrictions(moneys tied up) , and so forth.
Some of these mistruths are due to the “adviser” being “green” i.e. inexperienced. Some are simply ignorant while others are simply being disingenuous. Plug alert -- We are not perfect, however, we know the nuances of your field, our business depends on it. If we don’t know the answer, we’ll say so – and then find out. We strive to maintain an impeccable reputation, and we are very thankful for all the introductions as they are the greatest compliment we can receive. We work our tails off to out-service the competition. We strive to be your partner -- one you can trust, feel confident in, and comfortable having a long-lasting relationship with for your “second half of life”. The busier we get, the more we are raising the bar and limiting the number of new clients we will take on as we can’t work with everyone and we can’t be all things to all people – neither can you. Anyone that claims to be, I would avoid.
Lastly, ask what they are licensed for? Are they just licensed to sell life insurance products, annuities? or some managed mutual fund program? This is quite common. If so, how can they objectively make available to you and recommend the A-Z of financial and investment solutions which may be appropriate for you and yours? They can’t! What if you went to Publix and were “steered” to only look at aisles 1 & 2? “No, don’t look at aisles 3 -14, you want something on 1 or 2.” It’s akin to them trying to cram their “square peg” into your ”round hole”. Sounds painful -- look elsewhere.
All or nothing? No, you can always do a combination
We have mentioned before there are a few reasons why we recommend one keep SOME of their moneys with their 457 provider, the state, or the plan etc. We generally recommend a combination of sorts. How much we recommend is simply an offshoot of the financial plan we create and run detailing your cash flow needs in retirement. We then plan for those withdrawal needs in the most tax-efficient manner possible. There are smart ways to do it and not so smart ways. Which should do you choose? Anyone recommending you roll all your money to them without any true thought or analysis on your anticipated cash withdrawal needs…RUN!
Cash flow needs aside, if we feel that the 457’s FIXED Rate bucket’s current rates are worthy of some of your money vs. a bank/bond alternative then we recommend so. If not, we don’t. In a few cases, we even recommended they put most all their money there as they had tons of withdrawal needs in their 50’s. Either way, we recommend what is right as it is simply the right thing to do.
Remember, there is no law saying you have to roll ALL of your moneys to one place. Honesty, integrity, knowledge, proactive guidance, top notch service, meeting eye to eye, handshakes, and doing what is right never go out of style. Trust and being comfortable are paramount. In person meetings, updates, and direct phone access – not some “half your age 1-800-NO-HELP who am I talking to today person”.
We cover Central Florida to South Florida down both coasts and are in those areas at minimum once per month. When you are ready to meet reach out to us and we’ll make it happen. Note: If you’re not in our area we sincerely hope you find someone in your area who exemplifies those traits above. We wish you all the best in your “second half of life” – life after terminating DROP and retiring. Failing to plan is planning to fail. Have a plan so you can retire and work because you want to work – not because you have to then you can truly say “so long tension, hello pension!”
Sincerely,
Mark Burnam and all of us at The Second Half Team
“So long tension hello pension!”
Contact Information
MBurnam@cfrcpa.com or check out our website
Editor’s Note: At the Ready exists to give a voice to 1st responders everywhere. We believe that the information shared through At the Ready, by responders to other responders, benefits the entire responder community. We know too that information shared by others can be just as useful. In the case of this article series, the information shared will help the responder community be more prepared for the day when you turn in your badge and gun, or take-off and hang-up the turn-out gear for the last time. We asked Mark Burnam, Financial Advisor/Director of Marketing and Client Services for “The Second Half Team” at C/F/R Financial LLC State of Florida, to write about strategies you can take to ensure more peace-of-mind when that day comes.
In Part 4a we are going to dive into what you actually can to do with your moneys upon terminating DROP and retiring, review some of your choices, and the pros and cons of each choice.
When you terminate DROP and “retire” you have a handful of options with your “rollover moneys”:
1. Have your plan send you a check for all your moneys, pay a ton of taxes, and “go to town”
2. Roll all your DROP moneys to your 457/Deferred Comp provider
3. Leave your money in the pension plan (FRS or your Municipal Pension Plan)
4. Roll your moneys to IRA Rollover account(s) at a financial institution of your choosing
5. Do one or a combination of these choices, but let’s address all five.
Show Me The Money! Cash me in and send me a check
It is rare that we hear of anyone doing this with sizeable moneys, but amazingly it does happen. Most of you should know that a) this creates a taxable event and possible penalties on top of the taxes b) people forget these moneys will be “taxable income” and this distribution may also throw you into a higher tax bracket c) you will now be liable for a hefty tax bill on those moneys. We have not met with anyone whereby this was the rightthing to do. People still do it and you may even know someone who did. As Sheriff Buford T. Justice aka Jackie Gleason said in “Smokey and The Bandit”, “…you can think about, but dooooooooooon’t do it.” Worst case you could do #’s 2, 3, or 4(below) and then take some or all of your moneys out later possibly spreading out the tax liability over different tax years.
Roll your moneys to your 457 deferred comp provider(s)
In some of the 75+ agencies and departments we work with someone, the 457 providers have FIXED rate accounts that may make some sense for SOME of your moneys for the short-term – not all and not always a big percentage of one’s moneys, but SOME. In fact, 95% of the time or more we recommend placing at least a small portion of your rollover moneys in those accounts as part of our final investment recommendation. Why?
In some cases we discover the person doesn’t even have a 457 account so we get them to open one up prior to terminating DROP and retiring. Why? For a couple of reasons: 1) take advantage of the fixed rate 2) depending upon one’s age, for cash flow planning and anticipated withdrawal needs prior to age 59 1/2 as there may be Pre 50, 55, and 59 1/2 rules one needs to aware of and 3) in some cases, you may entitled to a small annual tax-free withdrawal credit if used for healthcare (we’ll discuss those in more detail in an upcoming article) 4) or to roll some of one’s unused sick/vacation payout into the 457 plan so they can shelter some of that payout from current taxation (various factors will affect how much etc. which we discuss in person) 5) for your peace-of-mind as this is all new.
Bottom line here is conservative bonds and bond funds aren’t paying that much so if your 457 provide has an attractive fixed rate bucket, then they may be worth a look for SOME of your moneys for the short-run. It mainly comes down to your need for significant cash flow withdrawals prior to age 55 or 59 1/2;. If so, then some proper planning is called for as we may recommend you keep and allocate enough money with your 457 provider to cover those withdrawals as part of that planning.
Lastly, you could leave your moneys with the 457 provider in a fee-based mutual fund investment program. The fees aren’t that cheap plus what the funds charge (that you don’t see). That aside, you may end up with “1-800 who am I talking to today?” Mary? Steve? Dick? Jane? Do you want to pay for some stranger on the other end of the line giving you advice? Do they really know you? Your wants? Wishes? Dreams? Fears? Concerns? Even the ones who have a dedicated person for you are so stretched with thousands of other retirees there is no way they can properly and prudently give you the attention you deserve. It is not their fault, but it is what it is. It is your money, however in our opinion you can do much better elsewhere.
Leave your DROP Moneys in the plan IF…
This isn’t common, but some city plans may allow you to leave your moneys in the plan and whatever the plan earns, you earn – whether that is up 30%... or down 30%. Note: The plan is run for the best interests of a collective group of people (retirees and future retirees). Its investment composition and timeframe is theoretically “infinite”. Its long-term needs and risks taken may not mesh with YOUR needs and risk tolerance. While the returns have probably been pretty solid over the past 5-6 years in a huge up market period, could you have handled the investment performance of 2008? The stock market lost 39% that year so most plans were easily down -25%, if not -30%, or -40% or more from 2007 peak to 2009 trough. Could you have stomached losing 30%+ of your moneys before enjoying the run of the past 6 years? This 2008 performance was not uncommon. I have researched various pension plan performance #’s in 2008 and no matter how good the plan, the board members, or money managers – the funds were down considerably. Even FRS was down -26.74% that year!
How soon we forget. Currently many people just remember the last 5-6 great years. Note: 5 year performance records for pension funds and your 457’s mutual funds DO NOT include 2008 hence the 5 returns are “off the chart tremendous”, enticing, and not realistic going forward. And, if you choose to leave your $ in the plan, who do you call for advice? The Administrator? Board member? They generally aren’t financial professionals and certainly don’t know the ins and outs of your financial condition. For all those reasons above, we just don’t find this to be one’s most attractive rollover options for your moneys with one exception…..
IF you are in a plan that allows you to leave your money in the plan after you terminate AND they guarantee you a very attractive fixed rate of return i.e. 6%, 7%, 8% or more then leave your money there and enjoy it while you can. These plans are not common, but there are a handful of these plans around Florida. Sometimes these rates are tied to the “actuarial assumed rate of return” of the plan and are re-set from time to time. If you are in one of those plans just leave your money there and take it while you can get it. Note: obviously if the plan eliminates the guaranteed rate, lowers it substantially, forces you to take your money elsewhere, or the safety of your plan comes into question then it may be time to move elsewhere. Until then, enjoy.
Lastly and like the 457s, you may be able to leave your moneys in the plan, but with a default “advisor”/provider and usually in some mutual fund investment program for a fee. The stated fees appear cheap, but when you dig deeper, they do not include what the mutual funds charge (that you don’t easily see) and sometimes more. All of that aside, you again end up with “1-800 who am I talking to today?” Juan? Ron? John? Don? Do you want to pay for some stranger on the other end of the line giving you advice? Do they really know you? Your wants? Wishes? Dreams? Fears? Concerns? Even the ones who have a dedicated person for you are so stretched with thousands of other retirees there is no way they can properly and prudently give you the attention you deserve. It is not their fault, but it is what it is. Again, in our opinion, you can do better.
Roll all your moneys to an investment and financial advisory firm
Note: “Rolling your moneys” implies a “rollover” which means you are doing a tax-free transfer from one qualified tax-deferred account to another i.e. from DROP to an IRA Rollover account and so forth.
As I said before, the “world is now your oyster” and you have A-Z of choices other than your 457 provider, your plan (if they allow you to keep it there), or some default provider. We know there are many choices and decisions so it can be challenging to decipher what and who is best for you, how much to roll, do it all with one provider? Split it up? Who do I trust? Paralysis by analysis! Help!
Take a breath. Relax. Interview a few people. Talk to retirees from your department. Ask for an introduction. Plug alert -- Talk to us. Granted, this is our niche and our expertise, but we find most “advisers” have very little knowledge of DROP, 457’s, 403b’s, pre 50, 55 and 59 1/2 rules, COLA’s, sick/vacation payout options, healthcare credits, 175/185 moneys, 1% plans, VEBA’s, and all the ins and outs specific to 1st responders, municipal employees, and more. We do -- this is what we do. You, your pension plans, specific rules, nuances, your situation, and YOU and YOURS are our focus.
? Pitfalls to look out for à we strive to be the best we can be and do what is right for our clients. Obviously, when it comes to money, not all do. There are many “wolves in sheep’s clothing” out there so to say. They may even be a former 1st responder or even a co-worker who is now a “financial expert”. Just because I have a gun or a garden hose, doesn’t make me an expert in law enforcement or fighting fires. The reverse is also true.
When it comes to money, competition is always fierce. While we do have a few honorable competitors, we do hear lots of horror stories. As a FINRA arbitrator I have seen tons more. While I could write an entire article on this subject, and maybe I will, I fall back to the old “nothing is free“, there is no “free lunch” and “if it seems too good to be true then it probably is…”. True financial professionals have a right be paid and to earn a living just as you do. We are who we are and believe in full disclosure. So what are the most common and egregious missteps we see and hear? Mainly we see “errors of omission” i.e. not telling the whole story à Half truths, undisclosed fees and charges, back-end charges, false/misleading “guarantees”, liquidity restrictions(moneys tied up) , and so forth.
Some of these mistruths are due to the “adviser” being “green” i.e. inexperienced. Some are simply ignorant while others are simply being disingenuous. Plug alert -- We are not perfect, however, we know the nuances of your field, our business depends on it. If we don’t know the answer, we’ll say so – and then find out. We strive to maintain an impeccable reputation, and we are very thankful for all the introductions as they are the greatest compliment we can receive. We work our tails off to out-service the competition. We strive to be your partner -- one you can trust, feel confident in, and comfortable having a long-lasting relationship with for your “second half of life”. The busier we get, the more we are raising the bar and limiting the number of new clients we will take on as we can’t work with everyone and we can’t be all things to all people – neither can you. Anyone that claims to be, I would avoid.
Lastly, ask what they are licensed for? Are they just licensed to sell life insurance products, annuities? or some managed mutual fund program? This is quite common. If so, how can they objectively make available to you and recommend the A-Z of financial and investment solutions which may be appropriate for you and yours? They can’t! What if you went to Publix and were “steered” to only look at aisles 1 & 2? “No, don’t look at aisles 3 -14, you want something on 1 or 2.” It’s akin to them trying to cram their “square peg” into your ”round hole”. Sounds painful -- look elsewhere.
All or nothing? No, you can always do a combination
We have mentioned before there are a few reasons why we recommend one keep SOME of their moneys with their 457 provider, the state, or the plan etc. We generally recommend a combination of sorts. How much we recommend is simply an offshoot of the financial plan we create and run detailing your cash flow needs in retirement. We then plan for those withdrawal needs in the most tax-efficient manner possible. There are smart ways to do it and not so smart ways. Which should do you choose? Anyone recommending you roll all your money to them without any true thought or analysis on your anticipated cash withdrawal needs…RUN!
Cash flow needs aside, if we feel that the 457’s FIXED Rate bucket’s current rates are worthy of some of your money vs. a bank/bond alternative then we recommend so. If not, we don’t. In a few cases, we even recommended they put most all their money there as they had tons of withdrawal needs in their 50’s. Either way, we recommend what is right as it is simply the right thing to do.
Remember, there is no law saying you have to roll ALL of your moneys to one place. Honesty, integrity, knowledge, proactive guidance, top notch service, meeting eye to eye, handshakes, and doing what is right never go out of style. Trust and being comfortable are paramount. In person meetings, updates, and direct phone access – not some “half your age 1-800-NO-HELP who am I talking to today person”.
We cover Central Florida to South Florida down both coasts and are in those areas at minimum once per month. When you are ready to meet reach out to us and we’ll make it happen. Note: If you’re not in our area we sincerely hope you find someone in your area who exemplifies those traits above. We wish you all the best in your “second half of life” – life after terminating DROP and retiring. Failing to plan is planning to fail. Have a plan so you can retire and work because you want to work – not because you have to then you can truly say “so long tension, hello pension!”
Sincerely,
“So long tension hello pension!”
Contact Information
MBurnam@cfrcpa.com or check out our website
