I catch a lot of grief when I bring this up, but that’s OK! I’ve always believed that if you aren’t making somebody mad, then you aren’t doing it right.
In this week’s installment of #MoneySmartMedics, I want to talk about pension plans and how they aren’t everything you might think they are. Now, let me go on the record saying that I’m not against pension plans. I personally have one and I think they are an awesome benefit. Having said that, I still have to warn you about using them as your only means to plan for retirement. There’s a lot of misinformation floating around in regards to retirement plans in EMS and public safety and it’s going to be in your best interest to explore your investment options and start planning ahead.
Most of us understand what a pension plan is, but there’s a lot to them that you might not know. Hopefully I’ll be able to clarify some common misconceptions that we often have when it comes to retiring with a pension, especially in EMS.
Here’s my list of common EMS pension plan myths:
It’s the Only Way to Retire
This couldn’t be further from the truth. Actually, I typically advise people not to depend on their pension plans at all when planning for retirement. When you rely on pension plans, you are putting your retirement in the hands of your employer. For many people, this works out OK, but for many others, it ends up in disaster.
I have seen people leave EMS jobs that they love for the single fact that they aren’t provided a pension plan. I’m sorry guys, but this is crazy. Putting 15% of your income into a ROTH IRA and investing that wisely will provide a very healthy retirement. It also gives you the freedom to change jobs if you want. Have you ever seen a disgruntled employee stick around 5 years longer than they should just to make sure they collect their pension? Don’t be that person!
I look at my personal pension plan as the gravy on top. When I’m planning for retirement, I act like my pension doesn’t even exist. If all goes well and I collect a full pension from my current employer, I’ll either turn that money into a very nice travel fund or pull out the money and invest it on my own. If I decide to leave at some point, it won’t affect my retirement outcome at all. Trust me, taking control of your finances will give you more freedom than you could ever imagine!
It’s More Secure than Investing
People have this fear of the stock market crashing and their retirement funds shrinking, and that’s a legitimate concern. However, we aren’t talking about investing in single stocks. We’re talking about things like mutual funds that are actually huge bundles of stocks tied into a “fund”. You have to understand that these funds come with a much lower risk than single stocks. You can find funds with 20+ year track records of consistent growth. Is the stock market going to drop? You bet. But it always bounces back up. This is one of those things that you just have to sit back and let do it’s thing. It’s actually good to have periodic drops in the market because your 15% contribution is able to buy up a lot more shares, and those shares will be worth a lot more as the market returns.
Pension plans aren’t immune from dips in the market either. Most plans have a guaranteed rate of growth. Mine is 7%. Employers aren’t just shelling out 7% to grow your account, they’re investing the money conservatively to let the market grow it for them. The problem is, if the money isn’t invested right and they don’t make the 7% return, they have to pay the difference. If they don’t have the money to offset the market losses, that can lead to under-funded pensions, which can lead to huge problems as groups of people reach retirement age.
Another thing you have to consider is the risk of losing employment or the ability to work. You have a lot more to worry about than just market growth when you rely on pension plans. If you lose your job or become unable to work due to injury or illness, you lose your employer pension contributions. Also, depending on how long you’ve been working at your job, you might not be eligible to collect large portions of the fund if you aren’t fully vested. Can you see how this could throw a huge wrench in your retirement strategy? You maintain 100% control when you setup your own investment accounts. Given the rate of back injuries in EMS, this is especially important to factor in when planning for retirement.
It’s Better than a 401k
This is not always true. When you invest in a 401k, you actually have some control over how your money is invested. With pensions, you have none. Many 401k plans have some awesome mutual fund options. Not to mention the fact that they usually come with an employer match.
People often assume pensions are “better” because of the guaranteed payout. Here’s the problem with that mindset: While a guaranteed payment sounds nice, it often results in a missed opportunity to grow your investment. If your money is invested in a pension plan, you will receive a flat payment regardless of how the market performs. While many of us would think this is a good thing because we won’t lose money, we have to remember that we also won’t gain money. Here’s a little secret: Your pension fund isn’t losing money. The companies that manage these funds aren’t stupid. They offer a guaranteed payment because they know the fund is going to grow and they’re going to make a profit on it. When you have control of your funds, YOU earn all the profit.
The key thing to remember is that control is everything when it comes to personal finance. Do you want your employer to be in control of your retirement or do you want control?
No investment is guaranteed and this is especially true when it comes to pension plans. What many people don’t realize is that pension funds are actually assets of the employer, NOT the employee. If the company remains stable and continues to grow, this won’t be a problem. However, if the company runs into problems with taxes or files chapter 7 or 11 bankruptcy, your pension account may be depleted to pay off creditors as they liquidate assets. Don’t believe me? Ask the folks who worked for and retired from Enron.
Government employee pension plans can be even worse being that they are managed by politicians. I mean, we all know how well politicians handle money. This is especially important for us in EMS to remember because many of us leave to go work for fire departments so we can “get that pension”. With personal investments you essentially have one thing to worry about: Market performance. With pensions you have to worry about market performance, and the health of the company or service that you work for. With a government pension plan, you now have to worry about all of that plus the possibility of your governing boards changing or even canceling the plan. When you rely on public pension plans, you are literally one politician’s pen stroke away from drastically changing the course of your future. Do you really want the fate of your retirement in the hands of a city council?
Like I said, pensions aren’t a bad thing if they’re taken for what they’re worth. Have a plan that doesn’t involve your employer managing it for you. You can’t experience financial freedom if you don’t have control.
Don’t let a pension plan determine where you work for the rest of your life. Find a job that you love and be smart about your retirement.
I currently live and work as a paramedic in North Texas. I've been involved in EMS since the age of 18, and have essentially spent my entire adult life doing what I love. My passion is helping my fellow first-responders achieve successful and rewarding through healthy minds, bodies and wallets. I love talking to and meeting new people, so please don't hesitate to reach out and say hi!