Are you offered a Deferred Compensation Plan?
Please, please find out ASAP!!!
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” —Albert Einstein
First and foremost, please get started now! If you are a brand new officer, or in the middle of your career, or about to retire, it is never too late to start investing in YOURSELF or YOUR FAMILY.
So what is a 457 Plan?
The keeping it simple definition of a 457 Plan is it’s an automaticway to save money now. When this money is taken out of your check it is taken out before taxes and placed in an account to grow. This money will not be taxed until you withdraw it, and it will be taxed at your current tax rate for the year of withdrawal.
I am not a big fan of definitions and just talking…but I do like stories. Here is a short story for you titled The Tale of Two Officers by Me.
Officer One started his career at age 22. Before becoming a police officer, he was working at a clothing sales store making $50,000 per year. When he was hired as a police officer he was initially making $70,000 per year.
Officer Two started his career also at age 22. Before becoming a police officer, he was working at a grocery store making $50,000 per year. When he was hired as a police officer he also initially made $70,000 per year.
Officer One went to Human Resources (HR) to sign up for benefits, but he didn’t know or understand what a 457 Plan was. Officer One did not put any money into his 457 Plan. Officer Oneenrolled into the state’s public safety retirement system. He will earn 2.7% per year worked. He’s eligible to collect his retirement at age 57. So we will estimate his highest year’s earnings were $120,000, and he worked until age 57.
33 years of service x 2.7% = 89.1
$120,000 high year salary x 89.1% = $106,920
$106,920 = what Officer One will earn annually from his pension.
Officer Two went to Human Resources to sign up for benefits, but he didn’t know or understand what a 457 Plan was. Officer Two asked if he could do some research and maybe sign up the next day. Officer Two went to ‘Google’ and searched ‘457 Plan.’ Officer Two found this story and returned to HR. Officer Twodecided he could live on $50,500 per year. AKA: Live like a recruit. Officer Two maxed out his 457 Plan placing $19,500 per year in it. Officer Two also enrolled into the state’s public safety retirement system. He will earn 2.7% per year worked. He’s eligible to collect his retirement at age 57. So we will estimate his highest year’s earnings were $120,000 and he worked until age 57.
33 years of service x 2.7% = 89.1
$120,000 high year salary x 89.1% = $106,920
$106,920 = what Officer Two will earn annually from his pension.
AND OFFICER TWO’S 457 PLAN:
Initial Investment $0, Monthly Deposit $1625, Period 396 months, Annual Interest Rate 4%
Total Principal (invested into 457) $643,500, Interest Amount $694,361.12.
Total Value $1,337,861.12
(plus $106,920 per year from his pension)
Officer Two’s amount that he invested into his 457 Plan account has more than doubled. According to historical records, the average annual return since the stock markets inception in 1926 through 2018 is approximately 10%–11%. The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8%. If Officer Two invested that money like John C. Bogle in low cost mutual funds and index funds, he probably would have received the average annual return of 8% (our story above shows 4%). Then the Total Value of his 457 would be $3,163,121.52.
Don’t fret, it’s never too late to start reaping the rewards of compound interest!
15 years later, Officer Two gets assigned to a patrol squad with Officer One. Officer One and Officer Two are talking one day and they start talking about retirement. Both Officers are now 37 years old. Officer Two mentions a website and shares with him The Badge and Budget Investor link. Officer One decides to open a 457 Plan after reading The Badge and Budget Investor’s Blog.
OFFICER ONE’S 457 PLAN at age 37:
Initial Investment $0, Monthly Deposit $1625, Period 240 months, Annual Interest Rate 4 or 8%
Total Principal (invested into 457) $390,000, Interest Amount $207,995.47,
Total Value (4%) $597,995.46
Total Value (8%) $963,539.23
The time is now. Take advantage of your 457 Plan today. In order to be different, you have to be different from the norm! This amount can usually be changed throughout the year, so if you go big and start putting too much into your 457 Plan, you can scale down or vice versa.
457 Plan Quick Facts:
2020 Max Contribution $19,500/ year.
Or $1,625/ month.
Or $750/ pay period (26 paychecks/ year).
*Age 50 or older then you can contribute $26,000/ year.
Deductions are taken out Pre-tax.
Reduces your taxable income now.
Usually emergency withdrawals are allowed–check with 457 Plan Institution.
Not subject to early withdrawal 10% penalty for early retirement, prior to age 59 1/2.
Again I’m just a regular guy, a cop like you, providing you with information. Please do your own research prior to make any financial decisions. My articles are meant to be for educational purposes only.
Your Assignment.
Not in a relationship—Start putting some money into your 457 Plan.
In a relationship—Start putting some money into your 457 Plan. Check if your significant other has a 401(k) or 457 Plan and start putting some money in.
P.S. Remember you can change how much you put into your 457 Plan per pay period pretty easily. So add or deduct from how much you save as needed.