Talking to Your Members About Retirement Planning

Talking to Your Members About

Retirement Planning

Across North America IAFF Local leaders are the #1

resource of information and support for our nation’s

professional Fire Fighters

Day in an day out IAFF Leaders fight tirelessly for increased staffing,

improved safety equipment, better compensation and benefits, stronger working relationships with decision makers, and improved retirement

systems

Local leaders must adopt an attitude that preparing their members for retirement is just as important as

preparing their members for responding to an emergency call

As a Local Leader would you –• Accept your members operating without

adequate turnout gear?• Accept your members operation without

adequate SCBA?• Accept your members working with

equipment that is not maintained or updated?

As IAFF Local Leaders we must accept that it is our responsibility to insure that our members have

the tools and information necessary to retire with dignity

Retirement tools

• Pension Plan• Personal Savings• Social Security• Health Care

• Plan for survivors• Information

Retirement Facts•Average Fire Fighter will retire at age 55•Retirees will survive on average to the age

of 77•Your members will spend nearly 2/3rd’s as much time retired as they did on the job•Many enter retirement totally unprepared for the financial requirements they will face

Retirement FactsContinued

Most financial experts agree that it will require a minimum of 80%

(adjusted annually for inflation)of pre-retirement income to maintain the

same lifestyle your members enjoyed while they were working

Example

• Fire Fighter earns $60,000 per year (base salary + overtime)

• 80% of that salary is $48,000 + inflation• If a defined benefit pension plan pay 2% per year

of service and the member works 30 years, his benefit will be $36,000

• Without personal savings, social security, annual COLA, or retiree healthcare this member WILL NOT be able to maintain his pre-retirement lifestyle

Retirement Tools

1. Pension

2. Social Security

3. Personal Savings

Retirement Tools…Pension

For most professional Fire Fighters the back bone of their retirement plan will be their employer

sponsored pension plan. Whether they are Defined Benefit, Defined Contribution, Hybrid Plans, Social Security Exempt or Social Security inclusive, these

pension plans must be monitored, maintained, and constantly scrutinized to insure that the promises made to your members can be fulfilled when they

retire.

Retirement Tools…Social Security

Nation’s governmental pension plan is becoming increasingly less relevant for our members in

their retirement equation. Many agencies are social security exempt, and for our members

who will receive this benefit, the solvency of the fund must be considered when factoring this

benefit into an individual retirement plan.

Retirement Tools…Personal Savings

As Defined Benefit pension plans come under attack, as employer matches to Defined

Contribution plans are scaled back, and with major Presidential candidates describing Social Security as a “Ponzi Scheme,” aggressive participation in individual personal savings plans must become a priority of IAFF Leaders when they communicate

with their members.

Defined Benefit (DB) versus

Defined Contribution (DC)

A Defined Benefit Pension Plan is an agreement between an employee and an employer that states simply that for every year of service, the employee will accumulate a defined percentage of benefit to

be considered as income in retirement.


Defined Contribution (DC)In a typical DB plan, an employee pays in a set percentage – for example 6% of salary – the employer contributes a set percentage – for

example 20% - and for every year of service the employee accrues a benefit to be paid monthly upon retirement – for example 2% per year of

service capped at 30 years and calculated on the FAS of your best 3 of your last 5 years salary.


Defined Contribution (DC)Over the past two decades DB plans nationwide have come under attack as private sector employers seek

to drive down the cost of subsidizing public employee DB pension plans through their taxes. At the same

time, bankers and investment firms recognized there was vast wealth to be managed and massive fees to be charged if these DB plans could be dissolved and

converted into individual retirement accounts.


Defined Contribution (DC)Nationwide DB plans have gone unmaintained.

Employee groups have failed to scrutinize the management of these plans. Employers have

taken “pension holidays” unchecked by employees during good years in the market. Actuaries have been employed to manipulate unrealistic actuarial assumptions to lessen the

annual contribution employers make to the plan.


Defined Contribution (DC)This assault on DB plans has led to many

becoming so underfunded that employers are left with three choices –

1. Raise Taxes2. Cut benefits for current and/or future

employees3. Convert the plan to Defined Contribution


Defined Contribution (DC)In a typical Defined Contribution plan, rather than receiving a guaranteed benefit upon retirement, the

employee is given a lump sum annually or an “employer match” monthly to invest in a retirement

account. Upon separation from the employer at retirement, the only income the employee will have will be the principle and interest he can draw from

the funds in this account.

Importance of Personal Savings Retirement Accounts

While it is absolutely critical for IAFF Leaders to dramatically increase their literacy in regards to their pension plans, it is equally critical that we

develop a level of comfort in talking to our members about the need to save money

separate from their pension plan in tax deferred employer sponsored individual savings accounts.

Types of Personal Savings Accounts

457 Deferred Compensation Plans> Supplemental to Primary Pension Plan> Payroll deducted, Pre-tax, earnings grow tax deferred> Contribution Limits: Annual max - $16,500Over age 50 – $5,500 (additional)

3 year Catch up - $33,000


457 Deferred Compensation Plans> Flexible Plan features> Distribution Options are numerous > Roth 457 option now available (after tax contribution) > IAFF FrontLine 457 Plan available for all Locals * Administered by Nationwide* In partnership with IAFF-FC* Since 2004 has grown to over $1 Bil in assets


401(k) Plans> Private Sector Retirement Plan option> Employer match > HCE testing> Gov’t Employers must had Plan in prior to

Jan, 1987


Other> Individual Retirement Accounts (IRA’s)> Roth IRA’s> Rollover accounts ( from previous Employers) > Personal savings accounts> Cash Value from Life Insurance policy’s

Impact of Social Security Offset

Windfall Elimination Program (WEP)Most individuals who contribute to Social Security are entitled to receive as benefits: 90% of the first $531 of their average monthly wages; 32% of the next $2,671; and 15% of anything above that (these numbers based on a worker who turned 62 in the year 2000, and are adjusted annually for inflation). Most fire fighters, however, do not have Social Security contributions deducted from their paychecks.


Windfall Elimination Program (WEP)Under a law called the Windfall Elimination Provision (WEP), the 90% figure could be reduced to as little as 40% – even if you contributed to Social Security long enough to qualify. If you have worked jobs for which Social Security taxes were deducted, in the 35 years prior to retirement, the time spent at those jobs can be used to increase the percentage of benefits received. If, for instance, you have worked in such a job for 30 or more of the 35 years prior to retirement, you are eligible to receive full Social Security benefits. On the other hand, if you have done so for 20 or fewer of the previous 35 years, you are entitled only to 40% of your average.


Windfall Elimination Program (WEP)Sources 1. IAFF Financial Corps, Social Security Offsets2. Social Security Administration, Windfall Elimination Provision, Publication No. 05-10045

http://www.iaff-fc.com/services-deferred_LM5.aspx


http://ssa.gov/pubs/10045.pdf


Government Pension Offset (GPO)Under current law, many individuals who have worked at jobs that are not covered under Social Security are eligible for Social Security benefits if the program covers their spouse. In such cases, individuals can receive 50% of their spouse’s Social Security benefit. But because of a law called the Government Pension Offset (GPO), this provision is modified for fire fighters and other public employees who receive government pensions.


Government Pension Offset (GPO)Under a provision of the GPO, fire fighters who receive government pensions receive drastically reduced spousal Social Security benefits. And even these modest benefits cannot be received if 2/3 of the fire fighter’s pension would be greater than the amount of the spousal Social Security benefit. In order to calculate the spousal Social Security benefits for which you are eligible, you must use this formula: (Spouse’s SS Benefit/2)- (Fire fighter’s pension x (2/3)).


Government Pension Offset (GPO)Sources1. IAFF Financial Corps, Social Security Offsets2. Social Security Administration, Government Provision Offset, Publication No. 05-10007


http://ssa.gov/pubs/10007.pdf

Post Retirement Health Care Affordable Retiree Healthcare primary decision today for employees

> Health Reimbursement Accounts (HRA’s)> Collectively & Non Collectively bargained Plans> VEBA Trusts – IRS Section 501(c)9 – one option > This is a Health & Welfare benefit, not a Retirement Plan

Post Retirement Health Care

> reimburses retiree for “Qualified Medical Exp’s”

> Tax-free contribution, tax-free accumulation, tax-free distribution

> No “Use it or Lose it” > No limits on contributions> Numerous methods of funding the Plan

Health Savings Accounts (HSAs)

A HSA is a tax-exempt trust or custodial account to pay or reimburse certain medical expenses. You need to work with a qualified HAS trustee such as a bank, insurance company, etc.


HSA benefits include; tax deduction for contributions even if you do not itemize, contributions may be excluded from your gross income, contributions remain in your account from year to year.


Interest or other earnings on the assets in the account are tax free, distributions may be tax free if you pay qualified medical expenses. HASs are portable so it stays with you if you change employers or leave the work force.


To be eligible for HSAs you must be covered under a high deductible health plan (HDHP), you have no other health coverage, you are not enrolled in Medicare, you cannot be claimed as a dependent on someone else’s tax return.


The amount to contribute depends on the type of HDHP coverage, your age, eligibility date. For 2011 the self-only coverage contribution maximum is $3,050. Family coverage maximum is $6,150.


Source

1. Internal Revenue Service, Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans

http://www.irs.gov/pub/irs-pdf/p969.pdf

http://www.irs.gov/pub/irs-pdf/p969.pdf

Health Care Enhancement for Local Public Safety Officers (HELPS)

IAFF Legislative Support (HELPS)The IAFF won an unprecedented congressional victory with the passage of the Health Care Enhancement for Local Public Safety Officers (HELPS) act. Under it, retirees can receive a tax-free distribution of up to $3,000 from retirement plans to help pay for health insurance or long-term care insurance premiums. The IAFF encourages affiliates to remind retirees about the HELPS benefit.


What is the HELP Benefit? A large number of retired fire fighters have to pay for their health insurance. As an active employee, they were able to pay their premiums or health care costs with pre-tax dollars. HELPS extends this pre-tax benefit into retirement (for up to $3,000). It could be an annual tax savings of around $750.


Eligibility If you are a retired fire fighter, law enforcement officer, chaplain, or member of a rescue squad or ambulance crew, you are eligible for HELPS. Eligible retirement plans include qualified defined benefit pension plans, section 403(a) plans, section 403(b) annuities and section 457(b) deferred compensation plans.


SourceInternational Association of Fire Fighters, HELPS Summary

http://www.iaff.org/ET/HELPS/HELPS.htm

http://www.iaff.org/ET/HELPS/HELPS.htm

DROP LegislationIAFF Legislative Support (DROP)

DROP language includes the elimination of the 10% penalty for withdrawals from DROP accounts prior to age 59.5. On January 1, 2007 retirees gained access to DROP money at age 50.

Deferred Retirement Option Program(A.K.A. “Forward DROP”)

A DROP plan is an arrangement under which an employee who would otherwise be entitled to retire and receive benefits under an employer's defined benefit / retirement plan instead continues working. However, instead of having the continued compensation and additional years of service taken into account for purposes of the defined benefit plan formula, the employee has a sum of money credited during each year of the continued employment to a separate account under the employer's retirement plan.


The account earns interest (either at a rate stated in the plan, or based on the earnings of the trust underlying the retirement plan). The account is paid to the employee, in addition to whatever benefit the employee has acquired under the defined benefit plan based on earlier years of service, when the employee eventually retires.


Source International Association of Fire Fighters, Pension Resources Department, Glossary

http://www.iaff.org/pensions/documents/PensionGlossary.pdf

Living Trusts

Agreement that determines how a person's property is to be managed and distributed during his or her lifetime and also upon death.

Living Trusts

Creation of a Living Trust involves three parties, the Grantor who creates the trust, the Trustee, who holds title to the trust property and manages it according to the terms, and beneficiary who is the person(s) or entity that will receive income or principal from the trust.

Living Trusts - Advantages

In addition to the savings in probate expenses, the avoidance of probate administration has other advantages. The administration of a revocable living trust at the settlor's death is normally a private matter between the Trustee and the beneficiaries. Unlike probate, there are few public records to reveal the nature or amount of assets or the identity of any beneficiary.


Property can often be distributed to the beneficiaries shortly after the settlor's death, avoiding much of the delay encountered with probate administration. Also, probate court approval is not necessary to sell an asset in a trust, thus avoiding further delay.


Real estate, businesses, and other assets can continue to be actively managed by a successor trustee in central administration much the same way as a settlor would have done before the settlor died or became incapacitated. For example, a trustee can use trust assets to pay utility bills to keep the pipes

Living Trusts - DisadvantagesSince a revocable living trust is a more complex legal document that must be funded by changing property titles while the settlor is alive, it is more costly to establish than a will, which can have higher expenses after death. Also, accounts need to be retitled, deeds and other transfer documents must be prepared transferring the settlor's assets to the trust, and beneficiary designations need to be changes to the trust— all processes which can require a substantial investment of the settlor's time.

Living Trusts - Disadvantages

The use of a revocable living trust requires more ongoing monitoring to ensure that assets remain in the trust and that newly purchased assets are titled in the trust. For example, a settlor who moves a certificate of deposit (perhaps to obtain a better interest rate) must remember to advise the new institution to title the new account in the trust.


After the settlor's death, some of the income tax rules applicable to a trust are not as liberal as those available to a probate estate. For example, a probate estate may elect to use a fiscal year as its tax year, while a trust is restricted to the calendar year. Trusts must pay estimated income tax payments while a probate estate is exempt from this requirement for the first two years. Trusts are also subject to other tax rules that do not apply to probate estates.


Source Missouri Bar: What is a Revocable Living Trust?, January 2011

Documents

Talking to Your Members About Retirement Planning