When I quit the fire department last year, the most difficult thing to figure out was what to do with the money I had invested in my pension. I had been putting money into this pension account for years at the fire department. So how do you handle that? What do you do and what are some of the options that you might have? I get to tell you about what I did with my specific pension account at San Bernardino Fire Department, how I got control of it, put it into my own accounts and how it eventually ended up in my ROTH IRA where I could invest it tax free and penalty free
What Is a Pension Fund?
A pension is a retirement plan, an account that the employer puts together and contributes to it on your behalf. The pension provides you with a monthly income, just like a salary, when you retire.
Let me give you a good example. When I was at the fire department, I was “2.5 at 57”. What that means, is, that for every year of service that I had, I would earn two and a half percent of my salary, and, the earliest that I could retire was 57.
Or, let’s say I got into the fire department at 27 years, then I put in 30 years of work, that’ll make me 57. I’d be of retirement age and have earned two and a half percent of my salary for those 30 years. How much of my salary am I going to get? That makes it 75% of my salary, and now I can get paid that for the rest of my life.
If my salary is $100,000 then I’ll be getting $75,000 a year after those 30 years of service. And that’s really the gist of pensions. Pensions range in all different shapes and sizes. Some are set up at 2% at 50, or 3% at 55. There are two types of pension schedules, a Cliff Vesting Schedule and a Graded vesting Schedule. For a cliff vesting schedule, it means you’re entitled to 100% of your pension after completing a certain time; but if you leave earlier, you receive nothing. Let’s say you have a five-year vesting schedule; it means you need five complete years of service in order to become vested. And once you’re vested, if you leave the organization, you can leave the money in your retirement account and then collect it once you reach retirement age.
Now, the thing about that is, is if you leave with only five years of service, that’s like roughly 10%. Let’s take my example again. When you get to age 57, you’re only going to be receiving 10% of your highest year of. It’s not going to be that much when I calculated it all out for me. It didn’t make sense for me to wait for that five-year period to get vested because I was only going to receive a few hundred bucks a month.
So instead, what I chose to do was take my pension money and put it into a rollover IRA. What I wanted to do was take out what I had contributed, invest in my own accounts and be responsible for it. There’s two words to describe pension funds in this respect and that’s, Refundable, and, Non-Refundable. If you’re in a non-refundable pension fund, you don’t get any of that money back. If you leave. You get better benefits though, but you don’t get the money back if you change your mind and don’t want to work there.
I opted for refundable, knowing that I might go to another fire department or leave, before I was fully vested.
So what did I do?
The high-level methodology is to take your pension, remove it from the pension fund by requesting a rollover, and you want to roll out over into your own rollover IRA.
You can use Fidelity, Schwab or Vanguard. I personally use Vanguard. It was really easy to do. All I did was I call Vanguard, called the pension company and I made sure they were both able to do it. And they handled it. Then the money showed up into my Vanguard account and it was all cash. And so, I’m like, “all right, cool I can invest this now”.
So, I purchased some stocks and some ETFs, and then I decided to convert it into a Roth IRA when the market dipped. That was my strategy for getting my money out of my pension, into a rollover IRA, and then into a Roth IRA so that I could be the master of my money and make more money with it.
The whole reason I did this. It was because I ran the numbers. I could have like $800 a month for the rest of my life after I hit age 57, or I could take the $40,000 – $50,000 that they had set aside for me, put it into my own account, invest it my way and grow it into millions. That way I could take advantage of the growth for the next 20 years. And when it comes time, at age 60, I’ll have millions of dollars in that account instead of just being forced to take $800 a month. Not only that, but I can have that extra money and I can pass it along to my children or give it to my wife or invest it in alternative investments, because it’s my money and I have control over it.
“Do you actually control where the money’s being invested and how to get it or, do you not?”. That, for me was the biggest factor. I hope this blog helped. If you have any questions, please drop a comment or DM me on Instagram, catch you later. Be good to feature.