Friday, November 1, 2013

MORRIS: Public sector employees have much to think about

Well, the Tigers are finished until spring training, the Lions have a bye week, and Uncle Sam is staying open for a few more weeks. So now is a good time to review your finances.
I particularly want to address a group of people that are often overlooked by the financial industry. I’m talking about people who are employed by municipalities and school districts.
Impacted by years of a soft Michigan economy and changes in state and city hall budgets, many of these professionals need to make the same decision many in the business world have had to make. Should you retire early or remain on the job?
There are a lot more moving parts to analyze for public sector employees versus the private sector. For example, most automotive workers had a 401(k) plan and a pension. For most, the choice was simply whether to maintain a monthly pension check or select a lump sum distribution.
Certainly those were huge, life changing decisions that had to be made, along with some critical investment decisions. But with public employees there are even more moving parts. It’s going to require a sharp pencil to make some tough decisions.
For example, many educators, firefighters and police officers can increase their pension amount by purchasing additional years of service. The cost depends on such factors as years of service and income, and the financial return can be substantial.
Social Security can also be a bit more complicated for police officers and firefighters. Many had the option of not participating in the Social Security program during their careers and participating in an alternative program instead. Or they could choose to retire early then re-enter the workforce, making it possible to become Social Security eligible.
Many of these professional also have what is called a 457 Deferred Compensation Plan. They’re somewhat similar to corporate America’s 401(k) program, but with some significant differences, including the ability to receive income prior to age 59 1/2 without a ten percent tax penalty. The 457 funds can also be rolled into an IRA, but the 10 percent penalty gets back into the equation.
Another option unique to police officers and firefighters is the Deferred Retirement Option Program, aka DROP. Simply stated, DROP allows participants to elect their pension and continue to work.
While they work, what would have been pension contributions go into the DROP fund. The fund can accumulate significant dollars, which are taxed at retirement when the retiree is likely to be in a lower tax bracket. Or they can be rolled over in an IRA.
The public sector employs a large segment of the population. For educators it’s somewhat simple in that they can purchase additional years of service. For firefighters and police officers there’s even more to the equation.
Some decisions can be made simply by mathematics, while others are a question of lifestyle. By that I mean the choice to re-enter the workforce or just retire and forgoing the opportunity for additional income. Physical and mental health are obviously a part of that equation.
I encourage police officers, firefighters and educators to seek professional advice, especially with all of these moving retirement pieces and formulas. You risked your life every day. There’s no need to put undue risk on your retirement nest egg.

Fax your questions to Ken Morris at 248-952-1848 or email to Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is vice president of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. INVEST and Society for Lifetime Planning are independent companies.

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