By Allen Giese, CLU®, ChFC®, ChSNC®, and Gary Gonzalez, Retired Miami-Dade Fire Rescue Battalion Chief

If you’re FRS special risk in the pension plan but considering the investment plan, you’ve got to have asked yourself when’s the perfect time to make that change. It’s a huge decision and one that’ll impact your future income, your flexibility in retirement, and the legacy you pass down to your kids.

Today, we’ve got Miami Dade Fire Rescue retired Battalion Chief Gary Gonzalez with us to break it all down.

Allen Giese: You’ve got personal experience in this area. I’d be curious to know what was going through your head before you made the switch over to the investment plan and what it was like emotionally for you.

Gary Gonzalez: Oh, sure. Well, I really was completely open to all of my options, and I actually came to see you three years before my planned retirement date. And I showed you the options. You took a few minutes to look over it, and then you looked at it and said, “This is a no-brainer.”

And we’ve known each other forever. We’ve gone on family vacations together. I mentored your son through our congregation. Still, I’m a very analytical person, and I want to know all the reasons why I should do something. And so, I looked at you and said, “Why is it a no-brainer?”

And you said, “Here, read these books.” And you handed me like four, I don’t know, a library’s worth of books to read.

And about a year and a few minutes later, I went, “This is a no-brainer.”

And even so, even though I understood it from an academic perspective, I hadn’t really lived it. And I will tell you that the day I pushed that button, there was a little bit of hesitation, like “There’s no going back. This is it.” And I pushed that button, and I’m so glad that I did.

Allen: Excellent.

Gary: Yeah.

Allen: But I think it’s important to point out that you are a bit unique. I’d say I knew you really well. I know you really well.

Gary: Yeah.

Allen: Out of 10 firefighters, police officers, corrections officers that come see us, how many do you think we say, “This is a no-brainer. This is what you should be doing.”

Gary: I’d say like one half of one.

Allen: OK, let’s just round that up to one.

Gary: OK, we’ll round it up to one.

Allen: So, for most people, we’re telling them, let’s stick with the pension plan.

Gary: Yeah. And that’s because—so obviously, you knew that handing me five books on very technical information on modern portfolio theory was something I was going to read every page of. Because I’m very analytical.

Allen: No doubt.

Gary: Very stoic. I don’t get emotional about money. And you knew that about me. And so you knew I would be very successful, and which I have been. However, not everyone views the world the same way. And so, for example, although I can show anyone mathematical models that shows which of these tracks will lead to the most wealth, the problem is that there’s human behavior. It has nothing to do with mathematics. And so, if you’re the type of person who’s anxious, who can’t have all of your hard-earned money in the markets, in the stock market, and sleep at night, well, that’s no retirement, no matter what the math shows, right?

Retirement is about, obviously, financial security, but also peace of mind. And if you don’t have that peace of mind, it doesn’t matter how much money you have.

Allen: Yeah.

Gary: So you kind of have to have a certain temperament.

Allen: Yeah. And you’ve learned that it’s not all in just U.S. stock markets. We’re invested in global markets and many different types of markets, and diversification is our mantra.

Gary: Correct. And from my perspective, if you are invested in the whole thing, then the only way other than your own behavior you fail is if the entire system fails.

Allen: In which case, if you’re in the pension plan, where are you?

Gary: It doesn’t matter where you are.

Allen: Yeah.

Gary: However, if you’re someone who thinks, “Look at all that money. Oh my gosh, I can finally buy that 50-foot catamaran I’ve been dreaming about,” or, “Oh my gosh, I’ve built up so much debt. This will get me out of all that debt.” then we would strongly, strongly advise you do not take the investment plan.

The problem is that that has to last you your whole life. You don’t want to outlive your money. That’s an ugly scenario to end up in. And so if you don’t have the discipline to view this as your pension and that there’s no intermediary only giving you a certain amount, you have to be the one who has a discipline to take a prudent amount and not overtax that account—you shouldn’t take it; you shouldn’t take the investment plan.

And honestly, with the DROP now extending out three more years, an eight-year DROP, if you’re not of a certain temperament to be fine and sleep well at night in the investment plan, you’re going to have a great retirement regardless.

Allen: Sure. Sure.

Gary: Yeah.

Allen: So, a lot of what we focus on in our early meetings and discovery meetings with potential new clients is do they have—are there red flags here that maybe the investment plan would—could possibly be a really big mistake for them?

Gary: Yeah. And, you know, when we meet with new clients, and many of them I know from working with them, but not really know deeply, know how their lives work—

Allen: —what’s important to them about money.

Gary: —what’s important, what their dreams are in retirement. We take a very deep dive with them to really get to know them well and to help them understand the risks of these choices and to be able to help steer them to a successful retirement.

Allen: What would you say the biggest obstacle is for a retiree to overcome?

Gary: Well, the kind of hidden risk in any retirement plan is inflation. If you’re not set up to stay ahead of inflation, then you’re falling behind.

Allen: So that’s been one of the biggest problems with the pension plan since the big change back in 2011, was it? 12?

Gary: Yeah, 2011.

Allen: 2011—is that the COLA was stripped.

Gary: Yeah. The cost-of-living increase is gone. So that pension is set for the rest of your life at the same value, but inflation is not going away. So you can find yourself wondering why you can’t buy the things you used to buy.

Allen: So that was pretty much offset for the pensioner by the advancement to eight years with the DROP, if they use it properly.

Gary: That’s correct. The value of an account—DROP account after five years compared to the value of a DROP account after eight years is astounding. The magic of compound interest. And so, yeah, that’s helped quite a bit. So that’s one of the ways, if you are like most people and choose the pension route, that’s one of the ways to offset inflation.

Another way is, as we spoke earlier in an earlier video, to put as much as you possibly can into your deferred compensation plan right from the start.

Allen: So you’re using these other accounts to offset—

Gary: That’s correct.

Allen: —the additional stress you’re going to have to put on by taking more and more out.

Gary: So you build your own cost-of-living resource with your accounts.

Allen: So if you take all that money and go out and buy a luxury RV or that 50-foot catamaran, you kind of—

Gary: You’re still shooting yourself in the foot.

Allen: Even though you’re still on the pension, that pension is going to become a smaller and smaller relative amount.

Gary: That’s correct.

Allen: All right. What reasons can you think of that a person might want to consider switching to the investment plan? Like what are good, compelling reasons to switch?

Gary: Oh, OK. Well, the choices between pension and investment plan each come with risks, right? So, the risk in the pension plan is legislative. Not common, but it’s a risk. And the risk with the investment plan is your own behavior, right? Not understanding that even though you’re in the investment plan, you have to treat it like a pension plan. You have to take a prudent amount of money out so that that money outlives you and you don’t outlive it.

And if it outlives you, then one of the reasons to switch is to leave a legacy for your children, you know, a charity that you’re super committed to, or there are many things you can do by writing things in your will and trust that that will benefit the world for that money.

And with the pension, of course, the day you and your spouse are no longer here, the pension’s gone. Now, you can leave a legacy in your DROP account and your deferred compensation account. So, there are still ways to do that without being in the investment plan. Obviously, the investment plan probably has the most likelihood of leaving the most money to your heirs.

Allen: Yeah. The person with the investment plan probably also has a deferred comp. So, they still have that. They just don’t have the DROP.

Gary: Right. That’s correct.

Allen: Makes sense. All right. Any advantages that you can think of or disadvantages to switching to the investment plan early in a career?

Gary: Well, the only advantage I could see to switching early in your career is if you’re planning on leaving early in your career. And that bears itself out when we’ve had firefighters who made the mistake of switching early, didn’t really know what they were doing, and want to switch back.

Allen: That’s true. We see a lot of younger firefighters—or firefighters, police officers, corrections officers that made that move earlier in their career, but then unfortunately were very conservative in their investment makeup. So, they kind of didn’t even give themselves a chance.

Gary: Right. I encourage you, if this is something you’re considering early in your career, go see someone who knows about this stuff and can guide you and show you the advantages and disadvantages of both paths because it’s sad to see someone who can’t afford—

Allen: Well, someone that understands how capital markets work more from an academic perspective than from a Wall Street perspective.

Gary: Yeah.

Allen: Why might somebody want to wait until the very last minute?

Gary: Well, from my perspective, it’s the most financially sound time to switch. By switching when you reach full retirement eligibility, you’ve seen an impressive growth in your IP amount without facing any financial risk at that point,

Allen: Right.

Gary: Any investment risk.

Allen: Once you’ve reached full retirement eligibility, let’s say you’ve—you would intend to stay another five years beyond that. Is there any advantage to consider switching to the investment plan at that point?

Gary: Yes. Because what happens is once you reach full retirement eligibility, the yearly growth of the investment plan dramatically slows. And so that, at that point, it becomes an analysis of what can you expect in a five-year return going forward. You know, we can’t, we don’t—we do have a crystal ball, but it’s in the shop. It’s not working. And figure out if it’s worth the risk to be in the market for those last five years versus you just want a cruise, you don’t want to worry about it while you’re working, or whatever reason you decide it’s not worth the risk.

Allen: Sure.

Gary: The growth becomes kind of paltry comparatively speaking, but again that paltry risk—I mean that paltry increase happens without any risk.

Allen: We mentioned the pitfall of moving into the investment plan early but then taking too conservative an investment stance.

Gary: Yeah.

Allen: Are there any other pitfalls you can think of that somebody might make or mistakes they might make by moving in the investment plan?

Gary: Moving without a real understanding of how to invest. Even if they’re not conservative, they could end up in an undiversified portfolio, taking way too much risk for the return but thinking that they know what they’re doing.

Allen: We’ve certainly seen that happen.

Gary: Yeah.

Allen: Can you describe someone who shouldn’t be in the investment plan?

Gary: I can.

Allen: We can think of a whole bunch of them right now.

Gary: We can think of nine and a half out of 10 people who shouldn’t.

Allen: Yeah. Are there any common characteristics that you see of people that really shouldn’t be?

Gary: The most common characteristic is they see it as a windfall. They see their investment plan as a windfall as opposed to their income for the rest of their lives. And they don’t understand the impact of buying that 50-foot catamaran that they’ve always dreamed of having on income for the rest of their lives. They tend to be really excited about ways to get rich quick.

And then there’s the person who, even if I can show on paper this is absolutely mathematically the best option, they’re so anxious about their money being in the market that they can’t sleep at night. Again, that’s not what retirement is about. It’s not about the best mathematically sound way to achieve the most money. It’s the best way to be financially secure and to sleep at night.

Allen: So, you have a book that goes into all of this, and it’s not just the mechanics, but a lot of it’s about the decision-making and the correct process.

Gary: Correct.

Allen: How can they get a hold of that book?

Gary: That is very, very easy. They can just call or contact through our website, Northstar Financial Planners. Provide some basic information—address, name—and we’ll shoot you a copy for nothing.

Allen: Excellent. That book’s been around a while, hasn’t it?

Gary: Yeah, it, it birthed a new book. That’s right. It was originally A Firefighter’s Guide to Retiring from the Miami-Dade County Fire Rescue Department, and now it’s A Public Safety Officer’s Guide to Retiring from the FRS, a second edition.

Allen: Yeah. It seems like we’re sending that book all over the state now.

Gary: Yeah. Yeah. And you know, it’s hard to understand this—you have a kind of a ringside seat to it because we work with so many firefighters and police officers and corrections officers—but there’s a special, special bond that is formed when you do a full career in the fire service. And you know, we just—we’re always there for each other. We want to take care of each other in any way we can. And so this is—this is kind of my way—this is one of my ways—of continuing to serve my community, my, my siblings.

Allen: Right. It’s obviously very important to you.

Gary: Yeah.

Contact us for your free FRS special risk retirement guide: info@northstarplanners.com or (954) 693-0030.