Intoduction: Welcome to the fiscal firehouse, a podcast
dedicated to promoting financial literacy to firefighters.
I'm your cohost, John Beatty, executive board member of local 1309,
a lieutenant, and also a certified financial planner with me, I have the
other cohost of the fiscal firehouse, Louie Borrella, executive board member
of local 1309 ambulance driver, and want to be financial expert together.
John and I hope to bring clarity to the world of personal finance,
specifically relating to firefighters.
Firefighting is a difficult job.
Making sound financial decisions shouldn't be.
In today's episode of the Fiscal Firehouse, John and Louie
will discuss their favorite retirement vehicle, the 457 plan.
John and Louie will also discuss strategies to implement that will
better prepare you for retirement.
Without further interruption, let's go to local 1309 Studios and the
recording of the Fiscal Firehouse.
Jon: welcome back to another episode of the Fiscal Firehouse.
I'm one of your co hosts, John Beatty, with me in local 1309 Studios.
I have my other brother from another mother, Louis Barela.
Louie: Howdy, howdy.
Jon: I was going to do another intro for you, Louis.
It was going to be Louis, go blue, Barela.
Go
Louie: hard to go blue right now.
It's so hard to go blue.
Jon: for those of you that don't know Louis outside of the confines of West
Metro, Louie's a diehard Michigander fan.
I mean, he went to Michigan.
He actually just got back from the Oregon game.
Him and brother Norwood were out there.
and Reed brother Norwood is a Oregon duck and, do their crushing
Louie: Oh my gosh.
Number one team in the country.
By
Jon: By far, they are like lights out.
Louie: No weaknesses.
They look good.
We had a great time in Michigan.
It was awesome.
It's my first time back in like seven years.
Reed had a great time.
I had a good time.
Jon: Reid had a great time.
Louie: time, but we got to walk around the campus.
We got to look at my old business school, which is a new business school.
Now it looks fantastic.
Did not did not look like that when I was there.
We went to my old frat house.
and played beer pong with a couple of, I don't know, 20 year
old dudes or 21, probably 21.
Jon: uh huh,
Louie: they just crushed us, of course, but it was as disgusting as it ever was.
I can't believe I'd lived in that house for three years.
I am like the van Wilder.
I could still go back if I had a hairline,
Jon: You know, and I could still go back to school.
I, I love school every bit of it and highly encourage that experience.
there's nothing that will replace that I never asked you how you actually ended up
picking michigan or did michigan pick you?
Louie: So I, you know, I, I was lucky enough to have a full ride scholarship
to school that I wanted to go to.
So I narrowed it down to a few, like I was looking at Texas.
and I was really interested in business at the time.
I didn't know what that meant, but I felt like business.
I want to do business.
It just sounds cool.
Yeah.
Let's make some money.
Jon: some numbers.
Louie: So, when I was in the application process, this was in 2000 and I guess
three, in high school, Michigan was ranked the number one business school in
the country by the wall street journal.
And that had made headlines.
And when I saw that combined with like the.
Football history, you know, everything from the winged helmets
to the big house and all that stuff.
I was like, that would be a cool place to go.
Didn't really think about the cold.
Didn't really think about the winters in Michigan that might've
made me choose another place.
But, I was just like, that'd be really cool.
So.
Decided to go there for the business school primarily,
Jon: did you do a visit before you attended or did you just go
Louie: You know
Jon: in and be like, this is what, this is where I'm meant to be.
Louie: I did do a visit but it was like the only out of state place that I visited
didn't have time or resources to go to like texas or some of those other places
So I was like, I think I like michigan.
This is it.
Let's go had a great time there, but man, the winters are cold.
I I don't I miss the falls.
I do not miss the winters Yeah
Jon: And you know, me being a Midwestern or growing up in
Louie: Oh yeah.
You're used,
Jon: people just don't understand, like, if you've lived in Colorado
your whole life, like you just think the sun is out 300 days a year in
the majority of our country, it's not
Louie: it is not.
Well, and the other thing you don't, the other thing you don't realize is you're
like, Oh, it's going to be 50 degrees.
So for someone who's from Colorado, they hear 50 degrees and they think of 50
and sunny, Oh, it's going to be great.
Like I don't even need a jacket.
Right.
But 50 degrees in the Midwest.
With the humidity, with the wind,
Jon: bone chilling
Louie: bone chilling, like you will be freezing.
You're like, why don't I have more layers on for 50 degree weather?
So 50 degrees is not the same everywhere.
And same thing with obviously at like 32 degrees or 10 degrees.
So, but no, we had a great time.
Jon: that story.
I love that.
I'll have to have a readout.
So I went to, I, I matriculated for a couple of years at, Madison at Wisconsin
Louie: on Wisconsin
Jon: camp Randall.
And, same thing.
We'll maybe have to get the three of us out for another big 10 trip.
Cause those are so much
Louie: it.
And let's, and we're going to go to, Oregon in two years.
Michigan is playing at Oregon.
So, hopefully Michigan can right the ship and we can, go down
there and return their favor.
Awesome.
Jon: I love that.
Well, dude, hats off to you.
That's a huge, a huge accomplishment to really have a full ride to
pretty much your school of choice.
And, you know, we have had been having a lot of fun.
Feedback, from the, from the listeners, so to speak on college
funding and college education.
And, we will do a segue, an episode directly, tied to that.
Cause not every kid is going to have that opportunity.
so we want to make sure that we're planning for our families and our
kiddos and, and, you know, offering the help that, if it's within
our financial house to do that.
So that's something, I've definitely, we've heard some feedback on
and it's, we've got a long list, man, that whiteboard is getting
full with a lot of things, that, the listeners want to hear too.
Louie: And I want to thank the listeners for, you know,
we, we get a lot of in person.
We were just talking about this before we started recording.
We get a lot of in person comments and people telling us what they
really like or what they want to hear.
That's awesome.
We also get a lot of questions submitted to the askfiscalfirehouseatgmail.
com address, just with questions.
You know, feedback, suggestions, episode ideas.
And so we're not ignoring those.
We're not putting those, you know, away and, and not addressing them.
We're kind of just waiting.
We're waiting so that we can either have an episode where we
discuss a listener questions or where we can kind of build them in.
To the agendas that we're kind of talking about through the episodes.
So we're, we're taking those seriously.
We'll go through them.
We just appreciate your guys feedback and all the wonderful
things you've said and all the, all the good critical feedback too.
We want it all.
We, I think we get better every episode when we get those kind of.
That kind of feedback,
Jon: dude, a hundred percent.
And, yeah, it definitely keeps us motivated.
anytime that we feel like you could even have the slightest of impact
on someone in a, in a positive way, it, it, it keeps us moving.
So we are super excited.
And this is really, this is kind of the granddaddy of them all podcast.
I guess, if you will, we're going to talk about the old four 57.
Louie: The only thing cooler than a 3 57 is a 4 57
Jon: That's that's right.
That's that is some nerdy nerdy fight finance jokes but this is the one that
it is just like the Golden ticket if you will to in my opinion financial freedom
in financial options really moving forward And you never want to give just
complete blanket advice to anyone without knowing their personal circumstances
But this is one that I mean, you know Overarchingly if anyone gave me like
you can give one piece of advice to any firefighters out there Like how can you
set yourself up for success in the future?
It would be to fund your 457 hands down if that's the only advice I could ever
get that was my last breath I could give to someone It would be like Use this 457
to all its advantages and in this episode We're going to talk about those advantages
and how it's structured and everything else like this But this is really one
that's applicable to all firefighters.
I don't know Of a fire department that doesn't offer their members a 457.
So
Louie: One and John, you've been around for a while now in all your years of
seeing people retire and seeing, you know, dealing with active retirees.
Have you ever had one retiree come and tell you, man, I really regret
that I contributed to a four 57.
I wish I didn't put money in a forfeit.
Has that ever happened?
Jon: Yeah, man, I just have, so much money in there.
I don't even know what to do with it all.
I, you know, I've never once received that.
It's always the contrary.
It's like, man, I, I just wish I would've known more, or I wish I would.
been able to put more money away and there was a lot of almost more regret,
that they just didn't fund it to the capacity that could have been funded to.
And there was different, different, you know, lifestyle circumstances.
But, yeah, no, overarchingly everyone is like, this is what actually allowed me.
To get out of here when I wanted to get out of here, and without name and
names, you know, just a little case study, it's just at the training center.
And we had a member come through and they're getting ready to retire next year.
this is the first of my knowledge, at least for our membership where someone
is using the rule of 80 and they will basically be, they got hired at 20.
They got 30 years of service.
So they're 50 years old and they're gonna have 30 years of service.
So they're gonna meet that rule of 80 We'll talk about the rule of 80 more
when we get into the pension episode but really they're the first one
that i've seen, be able to reach the rule of 80 At that young of an age.
And, you know, their whole plan is they're going to end up deferring
their retirement for some years.
They're going to live off of their four 57 monies, for the next couple of years.
and they're talking about traveling around the country and even going
international, they homeschool their kids.
And I can't tell you, like, I must, I must've looked like the joker
because of the smile on my face.
And I just want, I just wish that was available for all of our
Louie: everyone.
Yeah.
We want
Jon: have that.
Option and whether or not you take that option.
That's totally on you and your circumstances in your family
circumstances, but to be able to make that move at that age, man, I want to, speak
from the mountaintops and just preach just like how cool of an opportunity that
Louie: well, and that's why we're here.
That's, that's why we're here.
So yeah, you said it like in the, in the one, two punch of retirement, like that,
that jab, I guess would be the pension, which we'll talk to in another episode.
But this is the, this is the cross.
This is the overhand cross is the four 57.
And maybe we'll, you know, eventually we'll talk about the, the uppercut,
which will be the IRA talking about that
Jon: that's, that's a, yeah.
The, the Evander Holy field.
Yeah,
Louie: but, but in the retirement, like the four 57, this is
a huge way of getting you.
where you need to be Retiring when you want to retire and making sure
that you are okay in retirement With that reduced pension amount that
you'll receive when you retire, so
Jon: Let's kick it off.
Let's let's talk about what so and that the other thing is and you know The
thing that's frustrating from like a an educational standpoint is I think,
financial media and people in finance or literature They like to make this
stuff really complicated with all the and the fire service is equally as
guilty The medical community is equally as guilty as acronyms and all these
other things 457s 401a is K's 403 B's.
I mean, it's just like alphabet soup as Louie likes to call it.
so we're going to help, demystify some of these terminology as well.
And just so you can talk on a, on a normal level and be able to, explain
it to, to even someone that's not interested in this stuff at all.
And that's really our goal here at the fiscal firehouse.
So let's start with just the basics of, what is a four 57 plan?
Louie, you want to just kind of kick it off
Louie: And just
Jon: give a little, overview of what the four 57 is.
Louie: yeah.
Yep.
Absolutely.
So the 4 57 is a tax advantaged, employee sponsored retirement plan, and that's just
a really full way of saying that it is a.
Retirement plan that you can contribute out of your paycheck.
Your employer has to allow it You know have this plan sponsor the plan and
allow you to Put money from your paycheck directly into the plan it can with 457s.
They can be either Governmental or non governmental?
And even the non governmental is more like a quasi governmental
Jon: yeah it's like non profit stuff yep
Louie: Non profit.
but basically it allows you to contribute money from your paycheck on either a pre
tax, also called a traditional basis, or a post tax, often called a Roth basis.
We'll talk more about that in a, in a minute or so.
but In just to simplify it, because a lot of people know this term,
it's very similar to a 401k.
So if you go to a regular, if you have a corporate job or a regular job with
a big company, you often have access to a 401k while this is the governmental
Jon: or
Louie: Nonprofit version of a 401k.
In fact, it's so similar that the contribution limits
are very often the same.
They're almost always the same.
the rules are also very similar.
I would actually say that 457s are a little better.
And we'll talk about some of those advantages, but.
Just to, just to get you guys in the right mindset, you can think of the
four 57 as our version of a 401k.
there's some confusion though, when we talk about four 50 sevens or, or, or Roth
four 50 sevens, a lot of people will, kind of get confused and think that they're,
we're talking about IRAs or Roth IRAs.
And that is completely separate.
That is not tied to your employer.
Your IRA is a great, it's a great tool, but it's completely different.
So for the purpose of this podcast, we're.
Talking about the the employer sponsored four 57 plan, whether
that's Roth or traditional, we're talking about just the four 57 here.
Anything to add, John?
Jon: No, I think that's a really nice summary of it.
And yeah, so if you just think of it in its most simplest forms
is we're gonna have the bucket The bucket is the 457 plan.
That's the big that's the top number if you will And then you have two little
branches off of that and then you can either have the pretext or like louis
said the traditional Or you can have the raw The Roth or the after tax.
And we'll talk a little bit about, why you might want to choose one of
those, here in the future, but yeah, four 57, it's kind of one or the other.
And the other thing I should mention, because it is an employer sponsored plan.
we have listeners out here that, your employer might not offer the Roth option.
Just just so you know, in fact west metro listeners will will know this Well
as we've only started offering the roth 457 for the last year So this is kind of
new to us and our members and being able to to have this opportunity But there
may be some listeners in here that are like, okay, cool They're going to their
hr department and be like, okay, cool.
I want to do a roth 457 They're like we don't do that here.
So it really is up to the employer to offer that they
don't have to there's nothing
Louie: John, I want to give you some props on that because that you're right.
That wasn't an option that we had until just a couple of years ago.
And that was something that you pushed hard for working in the
benefits SBT to make sure that we got that option working with HR.
I know we had to make some.
Concessions in order to get that totally worth it though.
I mean the Roth 457 is a wonderful plan and we're going to talk about
why in just a minute, but thank you for doing all the work to get us that
plan because that is a cool plan.
And I know there's a lot of guys that are now contributing to that that love it.
Jon: Yep.
the thanks should all be given to our HR department administration for
allowing us the opportunity to do that.
Cause ultimately they are the employer and they, they can kind of
give the green light on that or not.
And this is also a conversation and impetus for those of, The listeners
out here that are not affiliated with West Metro, other union leaders and
stuff, this is something that you could bring to your department as well.
If you don't have the Roth and it's, you know, talking to our
folks, there's there's some payroll adjustments and some other
administrative tasks that go with it.
but I think it's an argument that there are a lot of places
that are offering this as well.
So if you kind of best practices, from an employer standpoint,
retention, recruitment, all these other things, it's just another
layer that you can have on there.
That's like, we really are giving you guys, Best in practice is what's
available as far as, benefits.
So just wanted to highlight that.
Louie: Appreciate it.
And, and John, you mentioned, so, you know, you might not have the Roth IRA
depending on, or I'm sorry, the Roth 457.
See, I heard, here I go.
You might not have the Roth 457 option.
You probably will have a traditional option.
That's the more popular option.
can you talk to us a little bit about, in addition to that option, you
generally have an option for providers.
Jon: Yes.
Yeah, so depending on where you work, and we'll be a little bit specific here, so
we will, we will preface this with that.
This is here at West Metro.
This is what our members have the option for is we've got two different providers.
We've got Fidelity and we've also got a Mission Square, which used to be, it's
rebranded, it used to be ICMA and now they've rebranded and it's Mission Square.
So those are, what is often thought of as custodians.
So those are the people that actually hold the money, if you will, in the plan.
so you really do have, those two different options.
So depending on where you work, you may just have one.
Or you may have three, it really just depends.
So that's something that you're going to want to drill down into
your benefits package, and reach out to your HR departments if
you're curious or questioning.
so this is something, and honestly, we used to have another provider, nationwide,
but because we didn't have a lot of uptake and, and participation in that, it kind of
just, they were like, this is not worth it because it caused them money to administer
a plan as well, the providers themselves.
So from like an accounting standpoint and everything else,
it just didn't make sense.
So we've narrowed it down to.
two different plan providers, and that is, Fidelity and Mission Square.
So,
Louie: And John, I gotta, I gotta ask you this question.
We're not, just to preface this, we're not sponsored.
We're not, we're not pushing.
We're not going to say that we are endorsing anything.
This is not even a, what the West Metro department podcast, this is just a, two
guys from the union having a conversation.
But I get this question a lot and I'm sure you do too.
If you're a new guy or you're someone who's just thinking about
opening a 457, who do you go with?
Who do you open it
Jon: you go with?
So, there's, there's definitely some different preferences on both of those.
the biggest thing is, fidelity.
I will say they are, they have more options and more options.
What I mean by that.
And Louie and I can get in some of some of the discussions about what
some of your investment options are.
but really what I mean by more investment options is they have
what's called a brokerage link.
so that is something that you can actually get full access to
basically the whole stock market and not just a couple of, investments
that they have, that the plan has.
Selected for you.
So that is one thing that, you know, as a planner, something that I'm very, in favor
of is having options and opportunities and the more diversification you can have
in that is just something that I think, you should be, you should be mindful of.
The other thing that's kind of nice from just a, keeping everything in house is
FPPA and Fidelity are, they're not one in the same, but they, they FPPA uses
Fidelity as their custodian of choice when it comes to all this other stuff.
So when you're looking through all your statements, Louis, we were just talking
about, you know, off air beforehand, trying to consolidate that stuff and have
it under one custodian is so much easier.
You don't have to worry about a login accesses.
You don't have to worry about passwords.
You don't have to worry about forgetting to submit something or tracking something.
I mean, All the research really tells you.
And if you meet with an advisor or someone that's giving you some financial
advice, or they are managing your money, they almost always recommend bringing
it into one house and then they can just manage it from that aspect of it.
Cause if you've got a, if you've been with a lot of different employers and
had different 401k plans or different IRAs throughout your life, it can
just be, you don't want to be confused about all those things about where are
all my accounts and the accesses to
Louie: or even like even the security risk of having numerous logins and
numerous passwords at different places.
I mean, that is definitely.
Onerous in order to kind of manage and track all those things.
So yeah, and I I agree with you So I I like fidelity.
I think fidelity is a great company.
I think they're one of the like the gold standards of financial investment houses
they're really good whether you just want a regular taxable brokerage with them or
You want your ira there or whatever they can do it all and like you said they have
a ton of A ton of options and because they offer a ton of options and because
they service so many investors, their costs are generally very competitive.
So they're, they're on par or even below Vanguard and Schwab and some of these
other what are called discount brokers.
they're very, very competitive with them and they're able to
provide you with really good
Jon: um,
Louie: really good value for your investments.
Jon: and really comprehensive service or, or just their platform.
You know, whether you're talking about, you know, the 4 57 plan in
this case, or you have a a an IRA or if you open up a brokerage account
or you have a 5 29 plan for you.
I mean, it's just like they really do.
Louie: They do it all.
They
Jon: of a one stop shopping.
but Louie did make a good point and, you know, kudos to him and really what
got him involved in the benefits SPT from West Metro is, you know, he came
in here as a new guy and was like, Hey, this whole mission square thing,
or ICMA at that time, they were like, dude, these costs are through the roof.
What are you guys doing here?
Like, this is not, this is criminal.
Like we shouldn't, we shouldn't be allowing
Louie: put it in a spreadsheet and I was like, we can't do this.
Like if I would have had these, this, my investments put over here and ICMA at the
time, it would have been exponentially more over the course of my career.
So that's actually what got me into, to union service.
Anyway, I know we kind of, John and I briefly talked about how
we got involved in the union, but that was like the, Impetus for me.
I think I went to read a Norwood and was like, Hey, I see something here
that I feel like we can do better on and we can fix, how do I do it?
And he was like, let me tell you about the benefits SPT.
Let's get you involved at the, with union stuff.
And that just kind of naturally flowed into me becoming more involved with
the union, because that was my way to.
Actually help make a change.
So, and, and to their credit, you know, mission square now has, has reduced
their fees on, on a lot of funds.
And they've even brought in some Vanguard funds for their target date retirement.
and that has made a huge difference.
So if you are with.
and then you're like, I've been with them, my RHS is with them and
this is just where I want to stay.
That's okay.
We can, you know, you can choose some options there that are, really
good, cheaper options for your funds that are not going to just kind
of eat away your expense ratios.
Don't have to be off the roof with mission square either.
So huge,
Jon: huge shout out to you.
And, and once again, that's something from, you know, listeners outside of West
Metro and you're involved at all in the benefits package of the organization.
This is just something that you should look at.
and if you've got questions like, you know, Louie and I, like, we were
obviously very passionate about this, but if you send me something about
like, Fees specifically in your plan providers and be like, does this seem
like this is totally outside of the realm?
Like I'll give you my honest opinion, so we were actually able to negotiate some
lower fees, with those plan providers.
and now I would say, as far as from a cost perspective, they're
definitely on equal playing fields.
So maybe we should talk about, this might be a good opportunity.
So we're talking about costs.
So if a member is evaluating costs, what, what would you tell them?
How would you tell them to go ahead and do some research or
what are you talking about?
Costs?
Yeah,
Louie: that's a great, that's a great idea, John.
There's when it comes to cost for these employer sponsored
retirement plans, companies can charge you in a couple of ways.
There's often, like a quarterly or a monthly account service fee.
So it's an administrative fee or an account service fee.
You'll hear it called different things.
but that can generally be a flat rate.
It could be like a 10 a month rate or 10 a week.
quarter rate, or it could be a percentage of your assets, often very
low percentage for good companies.
Like they'll charge a very low amount, but it covers their overhead as it relates
to being able to administer the plan.
And then the other way, and probably the, I would say very often the Bigger way
that companies charge fees is by expense ratios and expense ratios are charged
on the funds that you are invested in.
So if you have a fund that charges a 1%, expense ratio, that means that.
Every year, 1 percent of your money in that fund is collected as a fee
that you pay to the fund provider.
there There are a lot of range of fees of expense ratios.
and so what I try to tell people when I'm giving them, you know, suggestions
for how they're going to, invest their money is pay attention to those expense
ratios because those can eat away.
If you have a 1 percent expense ratio across the board, you
will end up with dramatically less money than if you had a 0.
05 percent expense ratios.
So we haven't got to talk about, You know, my, my favorite
child, which is index funds.
We really haven't talked too much about that.
We probably will in a little bit, but the, one of the beautiful things
about index funds is not just that you get a really good return consistent
with the market, but you also pay very little for those index funds.
Whereas if you have an actively managed fund, now all of a sudden
you are paying somewhere like 0.
5, 0.
7, 0.
8, 1%.
So you're going to probably Not be able to beat the market.
You're probably going to perform worse than the index fund, but even if you
performed as good as the index fund or a little better, those expense
ratios are going to eat into your returns and make it so that you have
less when you eventually retire.
Jon: retire.
And that's really, and that's the name of the game here is we're going
to try to control what we can control and we can't control the market.
No, anyone that tells you, they can tell you what the market's going to do.
They're selling snake oil.
Cause no one knows, no one knows what tomorrow will bring.
so that is the, one of those things, like when we were talking enough, The
four 57, and we're talking about costs.
And then furthermore, we'll talk about taxes here in a little bit.
Like, these are the things that you can control, at least based on what
the government will allow right now.
So definitely wanted to talk a little bit about costs.
Cause that's some of those things that kind of gets lost in translation.
So it will be very easy when you get into your four 57 plan, you know,
whether that's here at West Metro or any other listeners, they, there
is a certain requirement that each, that each plan provider has to give
you a certain amount of options.
They can't just give you like one option and be like, Take it or leave
it like there is, based on some risk tolerance and some other rules, they,
they do need to require a certain type of fund and a certain amount of funds.
So one of the things that Louie specifically mentioned
is the expense ratio.
So when I think about costs, that's generally what I, Try to
advise people of is if you're just trying to compare apples to apples,
like that's the best comparison.
Some of these other like administrative fees, like quite frankly, we
just can't get around those.
Like that is just what it costs to administer the plan.
We just kind of have to eat those.
And honestly, most plan providers are aware of administrative fees and that's
a business and they're trying to be very competitive with the other providers.
But really when you're looking at, at fees, look at that expense ratio.
So it's something as simple as you can click on a fund.
And typically it'll be presented at a certain in a certain manner It'll
typically give you like the fund performance, you know year to date
over three years over five years And then it will also give you something
that might be abbreviated as exp Or it might just say expense ratio and that
will typically be a percentage So, you know some of these depending on what
type of investment you are can be as low as like Louis said which is 0.
01 or 0.
02 percent and they can be all the way up to I've seen some What was the most
egregious one I saw it was like a global real estate investment fund and it was
something like two and a half percent
Louie: through a, through one of our four 57
Jon: No, this was this was not in one of our And one of our options, from the West
Metro people, no, this wasn't something else that was completely egregious.
And I'm just like, wow.
So it really, it really does make a difference, you know, year over year.
And when you're compounding all that stuff, so just
Louie: and a half percent, you said,
Jon: something, something to be mindful of.
So just pay attention to that.
And really, and you should be able to go into, if you got multiple
providers, you should be able to, have access to the plans to see, compare
and contrast and, you know, case in point, what is very common is something
like an S and P 500 index fund.
You know, that's very common.
Like if you read anything right now, that's almost what everyone associates
a benchmark with right now is 500.
So if you look at one.
Plan provider, let's say it's Fidelity and they're 02, you should also be able
to go to Mission Square and they will also have something that's similar to
an SMP 500 and those costs should be very close and if they're agreeing, if
they're, you know, 10, basis points apart.
Well, I'm gonna go with the, with the provider that's got a lower cost and
really, you know, to Louie's point that we, from West Metro's perspective, it
is basically apples and apples from Fidelity to Mission Square on costs.
Like they really have come down
Louie: come down a lot.
Jon: So just something to be mindful
Louie: And, and, and just to kind of add onto that, The last thing
I'll say about costs is that, I'll just, this is to give you an example.
John brought up the S and P 500.
if a member, let's just, just, just make a little example here.
If a member were to contribute a 10, 000 into an S and P 500 with no expense ratio,
let's just say they had no expense ratio.
It was a free S and P 500 fund, over the course of that 40 years, at the end
of the 40 years, $10,000 a year, would give that member about $850,000 in their
retirement account at the end of 40 years.
Okay.
And that's just based off of historical numbers?
Yeah.
If that same member invested into a fund that had the same performance
of the s and p 500, which as we know.
is very unlikely.
You're probably going to underperform, but let's say it was able to match the same
returns, but they charged a 2 percent fee.
So John, you were talking about that two and a half percent fee.
Let's just say it's a 2 percent fee.
If that member, if another member invested in that fund, same returns, but
with a 2 percent fee, they would, they would have lost about half or 50 percent
of their investment that they would have with the S and P 500 fee or fund.
So basically they would go to.
About 380, 000.
Jon: so more than half, more
Louie: than half.
So you're
Jon: than half's getting,
Louie: getting eroded because of a 2 percent fee.
So you hear 2 percent and you're like, oh, that's, that's not that big.
Right.
It's huge.
Over time, you've eroded your returns from about 850, 000 to about.
380, 000.
So that's why we're, that's why John and I are so passionate about cutting, fees
and cutting expense ratios, because that's more money in your pocket when you retire.
And that's what we want you guys to have.
Jon: I think is important for people to understand, like those fees, they kick in
every year, whether you made money or not.
So if you lost money, they're still collecting money, you know?
So it's not just like, Oh, you did really good.
We're going to take a fee off of this.
They take it regardless.
So.
I think that's a really good point.
so just so, the West Metro peeps know.
so if you open up a 457 and you just tell, you just elect how much money you
want contributed in each paycheck, the default, if you don't actually select
an investment, the plan provider has done is they basically take whatever
is considered like your normal retirement age and I think for us,
I think it's 55 if i'm not mistaken.
they're gonna look at your age And they're gonna basically do the math
backwards So if you're 30, they're basically gonna say like, okay,
we anticipate that in 25 years.
You'll probably be retired They are going to look at what is called a target date
retirement fund, and they're going to match that target date with the closest,
most approximate to you turning 55.
Typically the way that target date funds work is I've seen it different
ways, but most of the time they're like on five year intervals.
they'll do like 2030 2035 2040 All that year is basically saying is that is the
anticipated year in which you know, you're gonna retire So the way that target date
funds work is and honestly for a lot of people This is a very effective kind
of hands off like the fact that this is the selected option I'm, really happy
about because before this happened.
Do you know what it was?
Louie: I don't, please don't tell me it was like a, either a bond
Jon: Is a money market fund
Louie: And a
Jon: a money market fund for everyone, if you've never really heard about
that, basically that's more or less like what a savings account is
going to bear, like the interest.
And we know, besides the last couple of years, 10 years ago, a savings
account offered you almost nothing.
So unfortunately we had members that, that, Didn't really
elect an investment option.
So the default was a money market and they put, 15 years worth of contributions
and they're four 57 and basically didn't
Louie: got nothing.
Jon: didn't gain anything.
check with your department, your plan provider on what the default is, but
they will place you into a target date fund that closest represents what they
think is your typical retirement age.
So once again, getting back to the target date fund is it is
automatically by the fund design is going to make you more conservative.
As you get closer to retirement.
So typically what that means is the younger you are, the more time you have,
your time horizon, you're going to be more invested in stocks, or you also might
hear it, called equities, which typically will give you more growth long term,
but they're also more volatile just by the nature of the risk reward premiums.
as you get closer towards retirement, that fund automatically is going to, once
again, by design become more conservative.
So you are going to hold more safe.
Assets safer assets.
So bonds and fixed income.
If you've ever heard of something called rebalancing, that's
basically what it's doing.
It's making you as you get closer to retirement It's making you more
conservative because once again, if you don't have time to make up if you lost a
bunch of money they don't want you to all of a sudden be behind the eight ball and
be like, oh man I was super aggressive.
I was 100 in stocks and now I'm a year away from retirement and i've lost 40
And we've seen that happen Saw that happen in 2007 2008 around here and and
our folks weren't the only people in there They were just super aggressive.
They didn't really take that whole, risk tolerance that whole,
risk reward thing And so I love the target date fund for that.
It by design does that
Louie: Yeah.
So, yeah, John, add onto that a little bit, as you get closer to retirement,
that fund by itself, without you doing anything, will sell off your
stock funds, your stock index funds, and it'll buy more bond funds.
And that kind of smooths out your ride and it makes it less volatile.
When there's ups and downs in the market.
So by the time you retire, if you, you know, if you retire and if you have
a 2030 fund and you retire in 2030, you're probably going to hold somewhere
around 60 percent of that target date fund will be in stocks or stock funds.
And the other 40 percent will be in bond funds.
I think that's what it shoots for when you retire good funds though, for
people that are hands off and like, look, I want to set it and forget it.
And I don't want to have to do anything.
It's a great option now.
It's they're conservative versus what a lot of people recommend a lot of like
CFPs would recommend at that point so you're You're not going to have the same
return as you would if you had just an s& p 500 index fund or a total stock
market Index fund but that's okay like that's that's the benefit that you get
from it is not that you're getting the same return as an S& P 500 index fund.
It's that you don't have to keep playing with it and fiddling with it.
Whereas if you have an S& P 500 fund, yeah, you're getting a great return.
You're paying rock bottom fees, awesome things.
Those are both things that I'm very passionate about, as you know, but what
that means is that as I get closer to retirement, I got to go in there and
manually sell off some of those, some of that index fund and buy more bond funds
so that I'm not a year out of retirement and And totally 100 percent invested in
the S& P 500 and then the stock market goes down by 30 percent and I'm like,
ooh, I don't know if I could retire now.
So,
Jon: definitely way more work from the, the members aspect of it, from the
management of that, and kind of just, you know, looking through that whole thing.
So, and the other, the only other plug I will make on the, on the target date.
And I, I hope with more, competition, and just the awareness of, of the target
date funds as costs go down, they are more expensive, you know, typically a lot
of the, the, target date funds, you'll find them at, Like 60 basis points.
So that's like 0.
6%, which is, considerably more expensive than a lot of the index funds.
So that's my other thing is if you're paying that kind for a long time, that
can add up in, in some of the fees.
when you're talking about investment selection though,
this is something we can't.
We can't give any advice on from a podcast standpoint because it is so
individualistic i'm more than happy to share what I do louie same thing, but
this is for our circumstances and our circumstances are unique to ourselves
so we're not going to give you any more as far as investment selections.
It's just being mindful of costs Kind of what a fund is what an index fund
is what a bond fund is what a target date fund is so we're gonna Spend some
more time in another episode, because I'm sure there's a lot of questions
that people will get from this, we just wanted to talk about what a lot of the
common options are, whether it's here at West Metro or, other organizations,
you're going to have some options.
Louie: Yep.
Jon: Anything more?
I think that's pretty good.
All right.
So let's talk about, how much the, good old IRS is going to let us contribute to
these, golden ticket plans, if you will.
so starting, and this is updated, the IRS just released their guidance.
so you can contribute up to, 23, 000.
500 in 2025.
there is something that is called a catch up contribution.
So this is if you are, 50 years or older, you can add an additional 7, 500.
So what is that?
So that would be 31, 000.
Basically you could contribute, if you're over the age of, 50.
So that's something that's a lot of money.
Louie: Yeah, that's a great amount of investment every year
if you were able to do that.
Jon: Yep.
That is a tremendous amount of money.
So that's something that, if you have, the ability, to contribute, like, you know,
we've got some people that are brand new and they are maxing out their four 57s.
I don't know, honestly, I don't know how they're doing it.
If they're living in a van down by the river, or if they're
just very, frugal in certain, in
some circumstances, and they're, you know, maybe working a bunch of
overtime or whatever, and they're just funneling all this money in there.
So hats off
Louie: Can you imagine if, if all the firefighters just started
maxing out of, 457 on day one.
Like that is nuts.
Jon: right?
That is super incredible.
So we just wanted to highlight what some of the contribution Limits are and I
will also say that there is something new This is something that the secure 2.
0 took effect.
So starting next year So in 2025, they are going to allow what are
called super Catch up limits.
so what that is going to be for the, 457 plan, that's going to be 11, 250.
So if you, are, between the ages of 60 and 63, this is something that you
could potentially be eligible for.
I will preface it.
for West Metro, this will not be in effect for 2025.
I talked with our HR department.
they're still working through some, some design changes with the plan.
and they just don't have the availability to offer this
for our members for next year.
Once again, this is a, a, a.
an employee sponsored plan.
So they have, certain rights as far as what they're going to, what they're
going to allow and what they're not, I know they are planning on this
for 2026, this will be something.
So if you're, one of the, salty members out there, we'll just call them.
Right.
And you're between the ages of 60 and 63, there is an additional
special ketchup contribution.
but that won't take effect for West Metro members, for at least another year,
but, Once again, if you're listening out there affiliated with a different
agency, this might be something that you have the option for for 2025.
That's just a new rule change, but just wanted to highlight that because
that is something that is new.
Yeah,
Louie: and and 20, you know, 23, 500 is Plenty.
I mean, you can, put a lot of money in there for a lot of people.
And then we can talk about, you know, IRA contributions if you
needed to save more, but just know that if you're able to max out your.
You're 4 57, especially you were saying John, younger guys maxing it out.
I just did a calculation real quick.
If you were to max it out, if you put it all in a total stock market index fund.
Mm-Hmm.
since day one when you worked here, you worked here for 30 years,
contributing $23,500, you would have $2.2 million in that retirement account.
Yeah.
At the end when you retired, like wow, that would be a sweet
Jon: top of the pension
Louie: Yeah.
Yeah.
That's the cherry on the pension cake.
And that's, I mean, that's enough to withdraw like 88, 000 a year without
ever outliving that pile of money.
So, if you're motivated to be a multi millionaire and have 2.
2 million in investments, start putting 23, 500 into
your 457 and that's, that's it.
Jon: and we know, realistically, for the majority of our, our members,
that's just not financially going to be feasible, and we don't, You know,
that's just one of those things.
If you do have the availability to it, maybe you're, you have a spouse and
you have another income or whatever your circumstances are, it's just a
really good idea if you can fund that.
So basically we're, we're just advocating for funding that as much as, as you
can, without obviously sacrificing any other, you know, security issues.
and, you're, you're not going to be disappointed in that.
Louie: Yeah,
Jon: The, and the last thing I will mention, and I don't see it on our,
our show notes here is the, so there is something, within the four 57
plan that is very unique, and that is a, basically a special provision,
the three year special provision.
So basically when you are three years from retirement, the plan
will allow you to basically do.
Double the amount that you could put in in each year.
So for right now, if it's for 2025, but that's going to be 23, 500, you
could actually put in, what is that?
47, 000.
You could put into that plan as just a special ketchup contribution.
it's something that's very unique to the four 57 plan.
It's very unique.
to public safety, providers as well.
So even if you're a person that works in another four 57 plan,
like a nonprofit, this might not be something that's available to you.
So this is something specifically to firefighters.
and the reason that I bring this up is, so when we talked about the difference
between, fidelity and mission square for West metro providers, there is
a difference in their interpretation of how they're going to apply this.
So, Fidelity requires you to at least be the age of 50 before you put in for
Louie: what they consider the normal retirement age for a
Jon: Yep.
So, yep.
And it's basically, if you're within three years of that,
they're basically saying it's 50.
If you actually look at the IRS regulations, it is pretty clear on this
and it says that you must be at least the age of 40 and have at least 15 years
of service in order to qualify for this.
So mission square will let you do that.
Mission square will let you be 40 and as long as you got 15 years of service So
if you're hired at 25, you could actually put in for the special provision This
is something that has to be conducted through your HR department And the
reason is is they have to go back and make sure that you actually have room
available for that What I mean by that
Louie: have to have under contributed in previous years
in order to make that additional
Jon: you're one of our members that right out of the gates, you funded your four
57 every year, and now you get to this point to the max, you won't qualify for
this because you don't have any unused
Louie: boohoo boohoo feel so bad
Jon: is a catch all.
And most of our members that will not apply to, right.
We understand that people.
From the, from the first day, very few can go ahead and contribute that
to the max, but it is a very unique provision and it's something that
is very specific to firefighters.
and we just wanted to make a full awareness for not only our members, but
other firefighters listening out here.
that is something that.
Potentially you could have access to, so get ahold of, your HR department.
Who's ever, orchestrating your benefits and ask them about that.
But cause you are going to need their
Louie: True.
And if you do it on a pre tax basis, that's going to dramatically
lower your tax bill, for For those contributions, which is awesome.
and
Jon: a tremendous amount.
Louie: Yeah.
And speaking of that, maybe now that's a good segue to talk about pre tax and
post tax or traditional versus Roth.
So, John, we just mentioned that in our four 57, our options
include both the traditional or the pre tax for 57, as well as the.
post tax or Roth 457 option.
Can you tell us a little bit about the pre tax and post tax ideas of contribution?
Yep.
I would,
Jon: I would love to so kind of like Louie already alluded to so we'll start
with the traditional of their pretext That's probably what most people are
the most familiar with So basically the contributions that you're making in
that year they go in tax free, you don't pay tax, taxes on those contributions.
They then go into your 457 account.
And then depending on whatever investment selection you have,
hopefully there's some growth with that.
And that growth, will continue to grow tax deferred, until you withdraw those Those
distributions so one of the things so that is the traditional Pre tax 457 everyone.
I think has a pretty good idea on that What's really nice about that is you're
saving taxes on the front end because you're reducing your taxable income so
you're going to pay less taxes because your taxable income is going to be lower
which is very advantageous and especially if you're in a higher tax bracket that
can save you a significant amount of money up front so I think people definitely
in the 401ks and everything else.
I think people really understand that Yeah what exactly the tax deferred growth is.
So money comes in, so you're not paying taxes on that.
It's going to grow tax deferred.
So you're not paying taxes on any dividends and any
earnings, anything like that.
But when you do take a distribution, so what is unique about the four 57, which is
a different than like a 401k plan is you can basically take that and Distribution
when you separate from the fire department, which is very unique, right?
the really cool thing about the four 57 that makes it a little bit more unique
and really tailored to firefighters is that you can take distributions before
the typical age of 59 and a half.
So basically the way the four 57 is structured, at least from the
pre tax setting is you can take it.
Basically whenever you separate from service So if you're 50 years old, you
can go ahead and start taking those pre taxed distributions And then when
it comes out, basically you're gonna be taxed on everything that comes in
Yeah, so both the contributions and the earnings because you've never
paid tax on either of those so It's really easy when you think about it.
It's, you know, if you pay, if you take out 20, 000, you're going to be pet
taxed on all 20, 000 of those dollars at whatever your marginal tax rate is.
So that's how the distributions work in the taxation works from a
pre tax or a traditional four 57.
So now we have the cousin of the traditional and that, or maybe
the, maybe not the cousin, maybe the, the uncle Rico, I don't know.
I was thinking something suave, something that's cool is the Roth.
So once again, Roth 457, anything that has Roth before it, whether it's
an IRA, it doesn't really matter.
You can add whatever alphabet soup you want after it.
Roth basically just means that you're going to pay taxes on it right now.
So whatever your marginal tax rate is, you're going to pay that,
but then it's going to have the opportunity to grow tax free until
you take out those distributions.
You pay taxes now.
Paytax is now tax free growth and tax free withdrawals in retirement.
Yes.
So, but like anything, if it sounds too good to be true, it might.
So one of the things, and I don't think this is once again, common knowledge.
And for a lot of our members too, they've just had access
to the Roth 457 for a year.
So this is just some good, the more, you know, statements.
So the way in order for it to be what is considered a qualified distribution,
and that is how you get to those tax free withdrawals is you have to be
59 and a half years and you have to have a Roth opened for five years.
Yes.
So you have to have both of those two qualifications in order to
have your distributions tax free.
Once again, though, there's some more nuances to this, and this is where,
once again, if you start getting involved in this and you just want
some more clarification or guidance, this is really where you do want to
seek some tax advice, whether it's.
Work with a tax professional to really see what some of these implications
are, just generally speaking.
But the way that the Roth works is distributions are always
taken out in a certain order.
So it always starts with your contributions first.
And then if you made a conversion, And then if you didn't make a
conversion, then it goes to earnings.
So it's going to go contributions, then conversions, then earnings.
That's how the money always comes out.
So if you were someone, let's just take an example.
You're that 20 year old firefighter.
That's like, Oh yeah, I think I want to do the Roth.
I'm going to open up a Roth for 57 and you do that for 30 years.
You never change.
You don't go to a traditional, you just stick with a Roth and you've made
the 30 years worth of contributions, any money that you take out, even
before the age of 59 and a half, you're going to just be taking contributions
out and you won't be taxed on that because you've already paid the tax.
You're not taking your earnings.
You're not taking the earnings yet.
You're just taking your contribution.
You're taking your contributions.
So that is something that is kind of unique and it's a subtlety,
but it's definitely something that you don't want to violate those.
You don't want to violate those rules.
So it's just something to be aware of.
So, well, you know, If you're, if you're on the fence, you know, this is something
that Louie and I get asked a lot.
I mean, this is probably one of the most common questions between like,
Hey, I think everyone knows about the four 57 at least, but now they're
like, they have this option and they're like, well, what do you think?
Which one do I do?
Yeah.
And that one, there's a lot of different schools of thought.
Yeah.
And this is once again, a very personal decision.
So, you know, one of the things, and some of this just depends on
what underlying tax policy looks like moving forward in the future.
Yeah.
Most of us.
Probably like I'm under the pretenses is like taxes right now, even though
you feel like they're high, they are basically at historical lows.
Yeah.
They've never been really lower for the broad.
Spectrum of the population.
Yeah, they just really haven't.
Yeah If you look at just some of the spending and some of the other things
that's happening with government never been higher It's never been higher so
at some point we feel like there is going to be some type of equalization
there and Most people I think would argue that at some point taxes.
They can't go they you know They can't go You would think that they can't go
lower, but realistically, I feel this is my own personal belief that if I'm,
if I'm advising someone 15 or 20 years down the road, I feel like they're
going to be a higher tax bracket.
I just do.
I feel like they can, you know, over a given amount of time they can only go up.
So if you're one of those people that are, you know, younger and
you're definitely in a lower income, the Roth to me is a no brainer.
I totally agree with you, John.
I feel like, you know, we, we don't know.
I, the traditional advice that a lot of financial advisors give is,
you know, when you retire, you're going to be in a lower tax bracket.
So defer your taxes.
Basically what they're saying is contribute to a traditional 457
account now to get the tax break.
Now that you're making money.
And then when you retire, you will, Have less money.
You'll be in a lower tax bracket.
So pay the taxes at the income rates that are lower.
Well, that works great.
If you feel like, you know, what those tax brackets are going to be, but like you
said, we have record levels of spending.
We have really low tax rates already.
And I just, I'm not confident enough in the government and the tax rates
that I'm willing to put everything in pre tax traditional four 50 sevens.
Now I'd rather pay the taxes on the.
Right now that I know the rates and know that when I retire I am that that's
all mine Everything in that account is mine Now an exception to that would
be you know, if if you're married to I don't know a doctor Or a dentist.
Let's say you're a firefighter and you're doing real well.
You married a, I'll kick your coverage.
You married a PA maybe, or a doctor or a dentist.
Oh yeah.
I know a couple of those.
And they're made, they're just crushing it.
They're making a lot of money.
Well then for you, it very well is probably going to be the case that
when you retire, you're going to be in a lower tax bracket than you are now.
So in that case, maybe it does make sense to, Contribute to a traditional 457 to
get the tax break now But if you're uh, if you're a you know, single firefighter
or your spouse doesn't make a ton of money Then boy paying that tax now and
having tax free growth for the rest of your career Is a very attractive option.
And then I don't tell when I always get asked this question a
lot, John, you probably do too.
One thing that I do tell people just to try to illustrate this is let's say
you have two firefighters, firefighter a and firefighter B firefighter a
has contributed this 10, 000 just like firefighter B into a four 57.
The only difference is.
One of them contributes on a pre tax basis on a traditional basis.
And the other contributes on a four 57.
And let's say the returns are exactly the same.
So at the end of their career, they have, they both have a million dollars.
Firefighter a has a million dollars in a traditional four 57 and
firefighter B has a million dollars in a Roth four 57 who has more money.
The Roth, the other, because he's not paying or she's not paying taxes on those.
Yep.
He or she has already paid their taxes on that.
So at the end of the day, the two accounts are not the same.
The money, even if the amounts are the same, the money in the Roth 457 is more
because the government doesn't get.
Any more of it.
You've already paid your taxes.
I just find that appealing.
I find that good.
And we can get into the weeds.
We're not going to, but we could get into the weeds about tax
efficiency and where else you should put that money and paying taxes.
Now, I just like to tell people, Hey, you know what you're
paying right now with the Roth.
It's a great option.
I love her.
I love Roths.
I, I love Roth four 50 sevens and Roth IRAs.
So I always encourage people that that's, that should be the
first one that they look at.
Yep.
And I think that's a pretty sage and sound advice.
Um, and hopefully what I'm hoping in the future, um, for, at least for West
Metro and some of the other listeners might already have this option is I'm
hoping in the future that we will kind of be able to split the difference.
So where you'll be able to, you know, Contribute half to a Roth and then
half to a traditional and play them against each other and be like, I'm
going to have options at the end where I'm going to have half of my
money is going to be traditional.
The other half is going to be Roth, and then I'm going to have a way, a lot
of flexibility, a lot of flexibility.
And that's something I think in the future, once again, speaking for
West Metro, I think we're going to be able to, once they get some stuff set
up with payroll and some accounting and just some of the tracking.
Once again, this is sponsored by the employer.
So the onerous is on them to, to get this set up and it's a, it's a heavy lift.
Yeah.
But we are working towards that.
So, and if you're not with West Metro check with your department, because
a lot of departments already allow you to split your contribution up.
Ours is like a record keeping issue and, and a bookkeeping issue right now.
So that's why we're having the issue, but we, that's totally something
that we can figure out in the future.
We're looking at that in the future.
Yep.
And then John, just, just Point that I want to make between traditional and 457,
just to highlight a difference is with the traditional 457 account, you have,
at some point you have to take what's called a required minimum distribution.
So at age 73, you will be forced to withdraw a certain percentage
of your account balance.
And the government calls that a required minimum distribution.
There's a formula that you can find an IRS formula that kind of Tells
you how much you have to take, but they forced you to take it because
uncle Sam wants his, his money.
He's, he's, he's been letting you deferred it long enough.
It's been differing for 50 years.
Exactly.
And now he's like, all right, you gotta, you gotta pay uncle Sam.
He wants his due.
So you are forced to take that money and pay taxes on it, which boy, that
sounds as when, when I was younger, I was like, that's not a big deal.
Who cares?
You're 73 years old.
You're you're on the road.
Yeah.
But I know that there are some people who are in retirement that are 73.
My father in law is one of them who it now has like this tax headache
associated with that required minimum distribution on the opposite end of that.
If you have your money in a Roth for 57, there are no
required minimum distribution.
Yeah, that's a new update.
So you can leave that money in there.
As long as you want and you don't have to take it.
So if you're 78 and you're like, I want, I don't want this money to be taken out.
I don't want to be forced to withdraw it.
I just want to keep it there.
You can keep it there.
And the reason why is because uncle Sam already got their money.
They're not entitled to anything that you withdraw.
So they have no incentive to force you to withdraw your money.
Where I'm going with that is It turns out that Roth accounts, whether it's
a Roth IRA or a Roth 457 or a Roth 401k are much, much, much, much better
to inherit than traditional accounts.
There's a lot of rules and we're not going to go into it, but when you, when
you inherit a 401k or an IRA account on a traditional basis, there's a lot
of tax headache that goes into that.
And there's different things with tax basis and things like that.
But with Roth, it's clean.
It basically is just, it's an account that Is super easy to inherit that doesn't have
all the tax headaches that the traditional accounts have So if you're one of those
people who feel like you've been doing well and you've saved a lot and you want
to make it as easy and as Inexpensive from a tax bill perspective on your children
or your heirs Roths are great accounts for that too, because they don't have
those required minimum distribution.
And because of a few other tax advantages that the traditional
accounts just don't quite have.
Yeah, no, I think that's a really solid from like a legacy standpoint,
um, planning aspect of it.
Like, what do you want to leave your, your kids or your heirs or whatever?
And they're definitely going to inherit more money.
That's going to be available to them without a significant tax burden that
they're going to end up paying on that.
So that's a, that's a really good point, Louie regarding, regarding that.
And some, sometimes it's often get lost.
So, you know, once again, I think you guys see, we're trying to keep
all biases out of the, out of.
Uh, the conversation, but we all have our kind of our own biases.
And this is definitely one that's, you know, uh, general advice,
you know, younger people, lower tax bracket Roth all day long.
Yep.
If you're one of those people that are in a high tax bracket, we're talking
the 32, 35, 37%, you know, seek, seek some tax advice on what's the best
way to mitigate your tax or long term.
And the other, the thing that I would say is probably not appropriate is for
the people that are the very end of their career and they don't have a Roth account.
Okay.
Is, you know, once again, the really benefit of that Roth is that long
term growth and being able to accrue all of those things, you know, tax,
tax deferred, and then ultimately you take out the distributions tax free,
you know, if you're in your last year or two, you know, I don't want to say
it's too late, but you're not going to have the advantage of that person that
opened up the account 25 years ago, unless you're just planning on not to.
Not touching that account for 30 years, but just something to be mindful of.
Cause we do have a lot of members in that circumstance.
They're like, Oh man, this sounds really good, but just remember the
seasoning period, that five year rule, and then also 59 and a half in order
to have a qualified distribution, which basically means you can take.
All of that money out and the Roth tax free.
Yeah.
So hopefully we've explained that enough.
There's some nuances with that, but a little complicated.
And the truth is John and I aren't going to beat you up if you are a pre tax
guy, a traditional 457 guy or a Roth.
Yeah.
We just want you to contribute to it.
Like honestly, like we can split hairs and start talking about what
is more tax advantageous or what's going to be better in the long run.
But the truth is, It doesn't matter at the end of the day what you contribute to.
If you start putting money into your four 57, you are going to be, you're
going to have a much better retirement.
You're going to have much more money in retirement, and it's going to be
much easier for you to supplement your Uh, pension in retirement, which
brings me to kind of, you know, the meat and potatoes of why we decided
we wanted to do this episode is John.
I'm sure you've been asked this.
I know I've been asked this, and I know there's a lot of people thinking it.
Well, why, why do I really need a supplemental retirement account?
I have a pension.
Like we, we were, we're told that we have this defined benefit pension
and it's going to make, it's going to be there when we're retired.
And I put so much money, every paycheck into that retirement account.
Well, why do I need a pension?
this 457.
And I'd like to get your thoughts, but I, you know, I, I try to tell people is
it's important to know that the, that the pension is not truly inflation adjusted.
And what I mean by that is in a year, when the, when the inflation rate
is 7%, you are not going to get a 7 percent increase on your pension.
There's just, there's not the money for that.
And to make sure that the pension is a viable in the future,
They will not give you that.
They might give you 0.
3%, which is a huge hit to your, to your pension, pension amount
to the power of your pension.
And we'll discover the pension in a later episode.
And that's probably going to be in the next one or two episodes
that we'll talk about it.
And it's still a great thing.
The pension is wonderful.
But the point is, there's not cost of living adjustments
that keep up with inflation.
So if you want to keep up with inflation and if you want to be able to buy to have
the same purchasing power in 25 years as you have the day you retire, you need
to have something else other than the pension to help supplement your income.
And the best tool for that for, for us firefighters is the four 57.
It has a high contribution limit.
There's no income limits to it.
You can do it on a pre tax or a post tax basis and it will make
sure that you can cover the gap in funding between your pension.
and what you need to spend.
So as simply put as possible, this makes sure that you can give
yourself a cost of living adjustment and a comfortable retirement.
In addition to the pension, the pension will get you a lot of the
way there, maybe, maybe 80 percent of the way there, or 75 percent of
the way there or something like that.
But don't, you know, don't end your drive at the, at the 20 yard line, right?
Don't end it in the red zone.
This, This will make sure you get into the end zone.
If you have that four 57 that you can withdraw from in retirement.
So I think that's why John and I are super passionate about him.
And that's why we think everyone should contribute to a four 57.
Yeah, you're really, you're, you know, by doing that, you're taking
matters into your own hands and kind of taking some accountability for that.
And yeah, so.
You know, when we talk about the pension, we're talking about specifically for
Louie and I and West Metro members and people in Colorado, it's the FPPA pension,
fire, police, pension association.
And there's been a lot of dialogue.
I actually sit on a committee right now in which we're reporting back to
the Colorado professional firefighter, CPFF on specifically this topic,
because they are a lot of retirees that are frustrated that they're not
getting cost of living adjustments.
Yeah.
And if you look at the plan documents, there's nowhere in there that it
basically says that colas are guaranteed.
So cost of living adjustments, colas are not guaranteed.
It's basically ad hoc.
It's up to the board based on investment returns, based on payouts, based on
accurate actuarials, all sorts of things.
So, you know, the, the pension, and we'll talk about this more, cause it really
does deserve a full episode to get into kind of the granular details of the
pension, but really right now is they're taking a formula where they basically
The inflation adjustment, the CPI, they, they put a certain formula with that.
And depending on how the plan is doing the funding status of the plan, there
may be the opportunity for an individual check, basically they call it a 13th
check that gets distributed in October.
So that is supposed to make up for some of the inflationary issues
or challenges that we're having, but that's not guaranteed either.
Cause that's based on inflation for one CPI, but it's also
based on fund performance.
So, and it's also important to know that it's not base building so that that check
is paid out, but it's not compounding.
Exactly.
So even though inflation was 7%, those prices stay 7 percent higher
than they were the year before.
And then they raise again the next year.
Whereas, Your you get that one time payout, but then your pension
goes back to what it was before.
So, so that's a very good point.
And, and I mean, and if you can't tell by now in the podcast, Louie and I are
Pretty fiscally conservative on a lot of these things and we always kind of like
to take the worst case scenario, right?
Yeah, and and that's how we always address this and how
we talk to members about this.
It's I want to have control of my financial future.
This is one of the ways in which you can pull those levers.
You can do it with a four 57, which Louie and I are huge fan of, you
know, there's now the drop account.
So that is potentially when you enter retirement, that's something that you
could also use to help supplement.
So we'll talk a lot more about that in a future episode because
that deserves its own attention.
But really, yeah.
As far as our members are concerned and our listeners, you know, from
Louie's and I standpoint, I do not look at the pension as any form
of a cost of living adjustment.
I just don't.
And if there is money at the end of the day, they pass legislation,
whatever that looks like, great.
That's just another windfall, but I'm not planning on that.
I'm going to, I'm, I'm thinking like, nope, I'm not going to
get any type of adjustment.
And I think that's a, that's a wise way to do it.
That's how I look at it too, which what that means, John, is that.
Let's assume that that inflation is two and a half percent a year Which
is I think what the fed generally tries to target somewhere around there
That would mean that in 25 years The purchasing power is cut in half, right?
The purchasing power of a dollar is cut in half So the year that you retire 25 years
from then your pension will be worth half of what if what it is The day you retire.
So if you retire with a 50, 000 pension in 25 years, you will only have a 25, 000
pension in order to purchasing purchasing power wise, in order to make up for that.
You need to have something else.
That's that, and that's why John and I are hopping on it.
That's why we thought like this has to be one of the big episodes, because of
the sooner we can get people to put into a four 57 and contribute, the better
off they're going to be in retirement.
So we told you we're passionate about getting you out when you want to get
out and retire when you want to retire.
We can't do that for you unless you start putting money into a four 57.
And like John said, there's a couple other ways, but.
Man, you have so much flexibility to start contributing to a 457 now.
You definitely do.
And there's so many unplanned things that might come on in
your life and you're just never.
You know kind of the louise part when he started out this conversation I've
never once heard anyone say that they wish They hadn't contributed to their 457
in any capacity and it's always always more to the to the liking of I just
wish I had More I wish I had more time.
I wish I could would have contributed more when I was younger That is
the overarching thing always.
Yeah, very good.
Very good talks And it's just really hard to think about when you're really
thinking 20 25 years in the future It's just really tough mentally for us to
comprehend like what inflation does what it's going to look like and it just does
I mean any any research studies you talk about people do just not do not appreciate
just how much you know compounding over time that makes a huge effect.
So, you know, and really good points on that.
So we've kind of talked about what the four 57 is, the different buckets, if
you will, the different taxations of the plans, different investment selections
that you might have within your plan.
Talked about the importance of keeping up with cost of living
adjustments and using the four 57.
Is there anything else potentially that.
Firefighters have as an advantage for their 457 or where or why they might want
to contribute Beyond just to those and really it's kind of a rhetorical question
but this is something that I put in in our little document and something that
I wanted to bring up because I think a lot of retirees might know about this,
but there's also some that might not.
There are some additional tax benefits to the 457, specifically the traditional or
the pre tax 457, if you use it for health care premiums or long term care premiums.
So this has been something that's been in place.
I think when I did the research, it's been since 2006.
There's something called the HELPS.
Act.
It stands for health care enhancement for local public safety retirees.
So this has been something that's been enacted, uh, you know, since
2000, actually 2007, I think is when it went into place, but basically it
allows you to use up to 3, 000 as a retiree to use for your health care
premiums or long term health care.
Care premiums.
All right.
And that's, so it's not, it's not meant to be used for like qualified
expenses, like co pays and medications.
It is specifically for premiums, which pretty much everyone that
I know of is going to have to do.
We're all going to have them.
Yeah.
If you retire before Medicare age, you're going to be paying out
some type of healthcare premium.
And it's really nice because it's 3, 000 every year.
That you can use towards paying for those premiums, which is a really nice thing.
And what's nice is starting president Biden signed this and I think
it was 2022 as part of secure 2.
0 is before it was kind of a, my understanding is a kind of
an administrative nightmare.
So you basically had to go to your plan provider.
They then had to send it to the insurance company for reimbursement.
Like that's how that how all got orchestrated through.
So there was a lot of record keeping and just, it wasn't,
the ease of use wasn't there.
So we got some lobbyists behind us and some action groups
behind us to advocate for this.
And they changed it with a secure 2.
0 is now you as a member can basically get those reimbursements.
So you don't have to go through the plan provider.
It's basically an election that you make on your tax form.
So there's a lot more to come with that.
But if, if, if you find yourself.
As a retiree or nearing retirement right now, just something to be mindful of is
that because of this helps act, you can use up to 3, 000 per year to be able to
use for healthcare premiums or long term healthcare insurance, either one of those.
So this is something that you would, this is something that you'd want
to use your traditional for though.
Do not use your Roth for this one.
Use your traditional because basically.
You're not going to pay tax on that.
It's a, it's a qualified subsidy, if you will, a credit
that you can use towards that.
So just something that I wanted to put that out there once again, when
I've been researching some of these things, there is a level of frustration.
So this is another one of those things that is not indexed for inflation.
So this has been in place since 2007, and it's been 3, 000 now we're in 2025.
Once again, I did the fast math on that.
Once again, if you're keeping up with the inflation, it should be like 4, 700.
Much like what we talked about on the last episode with the dependent
care and that being stuck at 5, 000.
And it really should be like 15, 000.
So this is something that, you know, I wanted to give a shout out to our own
Senator from Colorado, Senator Bennett.
Sponsored a bill a couple years ago.
I don't think it's really gotten anywhere, but basically he is trying to get this
helps act inflation adjusted for one.
So you'd be able to use that 3, 000, but now adjusted for inflation.
It's probably going to be closer to like 4, 700.
We'll see what happens with that and see if there's, if there's anything that
comes of that, but just know that right now, though, the current legislation,
you are able to use 3, 000 out of your four 57 monies to be in retirement.
To be used for health care premiums and or long term health care insurance.
So just something I thought was super important.
Cool.
Yeah Thanks for that.
Yep So once again when Louie and I are trying to think about topics and stuff, we
want it to be applicable to all age groups Diversification whether it's brand new
or you're retired and you're listening to this Some shout out to any, any retirees.
You're living the good life, hopefully.
And really just everywhere in between.
So just wanted to bring that to your, your guys attention.
All right.
That's kind of a long episode.
Yeah.
Talked about a lot of stuff.
We did it.
We nailed it.
We got through it.
We only had a timeout once on our little recording device.
But really, hopefully this just helps give some clarity, some guidance,
maybe just raise some awareness.
Yeah.
All of these other things are the missions and the goals here at the fiscal firehouse
and, and providing firefighters with creditable information first and foremost.
Right?
But just, you know, just raising awareness and, and planting that seed.
And it's really up to you guys on, on if you follow through with it or not.
But I, the last thing I want to do is have, but follow through with
it, but, but follow through with that through your future self.
Well, thank you tremendously.
And your family and people that rely on you or, yeah,
they're all going to thank you.
That member that's getting ready to retire next year and taking his
family on the road and going to spend five years going to all sorts of cool
places, you know, take it from them.
Oh, man.
It's an amazing opportunity.
Yeah.
So don't waste it.
So for those of you that have been listening on 2x speed and have been
shoveling snow and doing other stuff, as you're listening to this and
you've glossed over some of the things that we talked about, some of the
details, just to recap, 457, awesome.
Doesn't matter if it's pre tax or post tax, they're awesome.
Contribute to one, max it out.
That'll give you a cost of living adjustment when you retire, and
it'll help get you out of here.
When you want to get out of here, they're awesome accounts.
They have some benefits that 401ks don't.
And there's not a good reason to not contribute to a 457, man.
Like John said earlier, no one else, no one has left.
I've never heard a retiree be like, man, really wish that I.
Didn't put that money in a four 57.
Every, the only thing we hear is I wish I would have saved more
in a four 57 or man, I'm so glad that I had money in my four 57.
That makes a huge difference.
So yeah, there's, there's, there's no tricks.
It's just solid contribute contributions and solid investing.
Yeah.
There's no replacement for just.
Doing the work, you know, just putting in the money, paycheck over paycheck, year
over year, that slow methodical snails or turtles pace and 25, 30 years, you
hopefully will be buying Louie and I an adult beverage and saying, Hey, thanks
for, thanks for the heads up on that one.
That one, this rounds on me, so to speak.
So really do appreciate you guys.
And one of these things we are trying to grow the podcast, you
know, just when I talked to other members outside of West Metro.
Their members have the same questions our our people do.
We want to share this.
This should not, we don't have a patent on any of this information.
We want this available to everyone.
Hopefully we have a manner in which this is, uh, you know, receivable
from our members and it's digestible and we're always working to improve.
So if you guys got feedback for us, you know, where to get to us,
how to reach us, but I, you know, we're always working to improve.
Leave us a review.
I never thought I'd be in a place where you leave us a review, smash that
subscribe button, you know, really do though, we are trying to tailor this
to a broader audience and we really do want members, within the Denver Metro
region, but outside of there as well.
So much of this is applicable and is important.
We want to be the torch bearers for sound financial decision making and
really for you, for everyone out there to have a quality of life and retirement
in which you can enjoy all the things that you have worked really hard for.
And you deserve.
So without further ado, we'll leave it to next week.
Who does Michigan play this week?
Anyone?
Who cares?
Who cares, dude?
Their season's over.
We got next season.
Next season.
All right.
Signing off from the Fiscal Firehouse.
Everyone have a wonderful day.
Be safe out there and we'll be talking to you soon.
See you guys.
The Fiscal Firehouse Podcast is a podcast curated specifically
for local 1309 members.
This podcast is for informational and educational purposes only,
and should not be construed as professional financial advice.
Should you need professional advice, consult a licensed
financial advisor or tax advisor.
The opinions of John Beatty, Louie Barela, and their castmates are
solely their own, and don't reflect that of West Metro Fire Rescue.