HOW TO RETIRE AS A MILLIONAIRE ON A COP'S SALARY
This started out as two Facebook posts I made on January 6, 2018. Within 24 hours there were over 100 comments. Some offered more detailed advice, some offered additional advice. Many commented that they wish they had this information drilled into them at the start of their career and this should be a subject for periodic briefings and a pamphlet given out at the academy. So the posts are reprinted, along with some of what I think you will find to be the more useful comments. Some of the people who made comments were not comfortable with the idea of their names being used, so I have changed them all to "Commenter".
Here are some financial ideas from myself, some retired deputies and veteran working deputies to other active deputies, especially the newer ones. We have absolutely no training in finances and I, for one, do not have a college degree in anything. I was a street cop for about 30 years and that just about covers it. Financially, we made some mistakes and some good decisions. The following is meant to help you avoid our bad decisions and learn from our good ones. I make no promises with this pamphlet. You are responsible for your own decisions in life. To put it another way, the intent of the pamphlet is not to offer advice, but merely expressions of what ideas worked best (or didn't) for those people referenced in the pamphlet. The reader should seek financial advice and direction from qualified financial experts to give advice. Hence, none of us should be held liable in the event someone falls on their face. Just saying..
I retired Oct. 2016, after almost 32 years as an L.A. deputy sheriff. Except for my academy time and about a two and a half years at I.R.C., all of my time was at Carson station. When I came on in 1985, I think I made about $35,000. That includes my overtime pay. I was coming from the 4 years in the Army, so this was a big rise in income for me. When I was hit by a motorcycle in 2015, I was a field training officer and making about $120,000 a year. I'm going to give some unasked for financial tips (NOT GUARANTEES, See Rule #1) to my younger comrades regarding Horizons, or any 401k type investment, and a little about retirement. Here are some of the rules I came up with for myself. You can take it or leave it. If you take it, I am very confident (NOT GUARANTEEING) that you will retire after 30 years of service with a net worth of over two million dollars, even as a plain old deputy sheriff. And for those who wonder, my retired take home pay was immediately more than my working take home pay. (Once this was posted, other deputies chimed in with their two cents, I have included some of their comments)
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Rule #1 - Go to the experts. By experts, I don't mean your lieutenant, or your favorite sarge, or the Old Guy that's been on the department 20 years longer than you. I mean contact Horizons, LACERA, a financial advisor* etc, to verify any info that somebody gives you. Call an expert to verify this piece of advice. When I first came on, one of the Old Guys heard me say I was going to buy my military time back. He asked if I had been an MP (military police). I said, "No". He said I had to have been an MP to buy my military time. I said "Oh". Fifteen years later, I found out he was wrong. By that time, I was married with a mortgage and two kids. I could no longer afford to buy my military time back. 36 years of service time would have meant a bigger paycheck than 32 years of service time.
* (If you consult a financial advisor, you'll probably have two choices. A free consultation, or a consultation you pay for. I would pay for the consultation. The "free" consultation will probably be done by a guy who gets a fee to push certain investments at you.)
Commenter 1- Excellent advice! I wish someone would have told me all of that when I was “young and dumb.” The only mistake you outlined that I didn’t make was to buy my six (6) active duty military years. It made a huge difference when I retired. Also, look at moving your funds out of Horizons after you retire. I did and am now with a wonderful company that truly doesn’t just care about my money, but about ME!
Commenter 2 - When I was a young deputy, living pay check to pay check, I learned that I could buy my military and Inglewood PD (CalPERS) time back, but like many others, I didn't think I could afford it. I cashed out my CalPERS time for $2,500 when I lateraled over to LASD. $2,500 was a ton of money in 1980 and I didn't know any better. Over three decades later, I was ready to file for retirement when I learned that I could buy back my IPD time for $35,000 and....this is very important....I could use my Horizons funds with a direct roll over so I didn't have to pay taxes on it since I didn't touch the money. What did that do for me? I have gotten a check from CalPERS for $1,600 every month (plus subsequent cost of living raises) for the past nine years and they will continue, unless CA finally does completely tank, for the remainder of my life (Divide $1,600 into $35,000 and you'll see the short number of months it took me to earn my $35,000 back). Not buying my time back when it was much cheaper to do was one of the worst decisions of my life but buying it back with my Horizons funds thanks to a "hey, did you know you can do this?" tip from a wonderful LACERA employee was one of the smartest things I ever did. Well, that and marrying my wife who has tolerated my nonsense for nearly 40 years.
*(in case you missed it, Commenter 2 cashed out his Inglewood P.D. (CalPers) time for $2,500 and thirty years later he bought it back again for $35,000. It worked out for him in the end, but he would have saved $32,500 if he had rolled his time over, instead of cashing it in, when he lateraled to L.A.S.D.)
Commenter 3 - I was lucky when we first had the chance to buy military time in the 70's, I had the money and bought mine immediately...Saved me thousands of dollars had I waited many years later.
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Rule #2 - Put as much as you can into your Horizons account.
Rule #2a Put it in an aggressive fund. When I first came on, the only thing I knew about the stock market, was that it crashed in 1929 and people lost a lot of money. So, I put the bare minimum to get the maximum contribution from the county. That means, that in 1985, I put in 4% and got 2% from the county. In addition, I put it in the Stable Income Fund, which paid a whopping 1% interest, or so. Over the next 15 years, I bumped my contribution up to about 6%.
After 15 years I had $86,000 saved. Big whoop. Then I got a partner named Luis Trejo. He saw me looking at my account, asked how long I'd been on (considerably longer than him) and he said, "WHAT THE FUCK ARE YOU DOING?".
I said, "What?".
He said, "You should have a few hundred grand saved by now."
He showed me his account and I was amazed at how much more money he had in his Horizons account, than I had in mine, even though I had been on twice as long as him. He told me to put the money into the more aggressive funds (the Large Cap, Mid Cap and Small Cap Funds). I did and in a month my account had climbed to $126,000. The stock market will go up and down, but generally speaking, historically, it goes up. You have a long time until you retire. Let your money work.
Commenter 4 - Lately I’ve come across deputies that have accounts but their money is in conservative accounts.I showed them my account ($820,000) and explained how compound interest works. They moved their money to mid cap and now have seen large gains.
Commenter 5 - Wait until you retire and roll it into even better performing funds. We have some in one fund that has, thus far, earned a 30% return
Commenter 4 - I want to retire in 3 years which puts me at age 53. Friends tell me to wait until age 55 because I would leave money on the table.I don’t care about the extra money on the table because my house is paid off and my ex-wife does not get any of my retirement money.So, keep in touch because that’s one of my concerns. Too roll money into other accounts or leave them in horizons.
Commenter 5 to Commenter 4 - Bro, stick around until age 55. It's about a 13% increase in your retirement benefits. Then, take that extra 13% that you "don't need" and invest it
Commenter 6 - My confusion is the target years. I’ve never know where to put the percentages
Wayde Farrell - the funds I usually invested in were the small cap and mid cap. I also invested in the large cap and foreign funds. The target year options didn't start until I was nearing retirement and I stayed away from them. this year though I put some money in the 2035 target year and it outperformed the small and mid cap funds while I was in them. I look at Horizons as a supplemental income. I live on my pension. since I don't rely on my Horizons account, I keep the money in the more aggressive funds. But that's just me. I'm not a financial guy. A lot of these comments have good advice.
Commenter 7 - I've had Horizons from the day they let me sign up and I've been maxing out for most of those years (approx 27yrs). In the beginning my money wasn't working much and I was getting frustrated, so I decided to educated myself on different aggressive funds with strong returns and I started making my money work for me.
Right in start of the market crash of 2008, I was playing poker with a money guy from TV and we discussed my account in detail. He said, "Normally you never sell your shares, you just ride the waves of the market, but this is different situation". He told me to go home immediately and sell all my shares and put everything in the Stable Income Fund. He then told me when the market hits 6999 or lower, start buying it all back at 10k, each Monday until I was again fully invested. I did exactly as he advised and it took about 4 years for the market to recover, but I tripled my balance and since that day my account has continued to grow. Lets just say I have done really well.
My advice to everyone, max out your monthly contribution ** or as close as you can get, but do not max out to early and lose your county match. The county match is free money, do not give it away. (**There is a maximum amount that you can put in your Horizons account, but that maximum includes your contribution and the County's contribution. If you meet the maximum with just your contribution, the County cannot contribute.)
Next, get your money into an aggressive fund and watch it grow. Now watch the market and remember when the market drops, you need to relax, take a deep breath, it's no different then a sale at your favorite store. In the other words, when the market drops, shares of stock get cheaper and you are buying them at a discount.
Lastly, do not get nervous and sell anything, keep buying shares and just ride the waves of the market. If you cant do that, keep buying shares, do not sell anything and close your eyes until you retire
Small hint, look at the Horizons Large Cap Fund, read the details on it. Then go look at the S&P500 on any stock market phone app, it is at sitting at an all time high
Commenter 8 - I wish I had gotten into deferred comp from day one like you. I knew nothing about it. Not until a deputy yelled at me one day at East Max did I start an account, and that was 6 or 7 years into my career. Still kick myself for the money I missed out on... Oh well, live and learn. But I tell every new dep I talk to to invest NOW. Don't make my mistake. Hope all is well.
Commenter 7 - Where are you invested now? Maxing out?
Commenter 8 - Can't recall offhand what I am in, but it is medium risk. I am not a huge risk taker anymore, especially with less than 5 years to go. My return has been somewhere around 11-12% over the past couple years. And YES, I have been maxing out for the past several years. Especially with the 50 catch up.
Commenter 7 - I can help you if you want...Log on and find out where your money. Then look at the Large Cap Fund. My return is about 22% or higher. Its not super high risk, I can explain more in detail if you want
Commenter 9 - I did 50 percent mid and 50 Large Cap for years Cha-ching
Commenter 7 - I've been all in Large Cap for years which is the S&P 500 on the stock market...great returns! 22% return right now
Commenter 10 - Same here. 22% for 2017
Commenter 11 - I work with 2 people who are within 3 years of retirement each who have never joined horizons. I'm pretty sure both were unaware of it until recently. I'm not the most savvy person about it, but I at least do have an account.
Wayde Farrell I had a trainee in my last year who told me he didn't have a Horizons account either. I used to work with his brother, like 10 or 15 years ago, so I told him to talk to his brother about it. He came back to me and said his brother didn't have one either. I was frickin flabbergasted. I think I was more on his ass about getting a Horizons account than law enforcement shit.
Commenter 12 to Wayde Farrell - that’s just crazy how somebody wouldn’t have one
Commenter 13 - The new max is $18,500 (year 2018) The county matches 4% of base earnings. The key is to put the right amount in to maximize county contributions before hitting $18,500.
Commenter 13 - There are good youtube videos and or graphs that show the power of exponential growth.... I calculated if someone has $275 in Horizons and works 22 more years.... earning 15% and maxing out (18,500).... It will be worth 8.5M. That is roughly a $300,000 investment. 300k that becomes 8.5M! The key is to start early. Starting 5 years later would "only" be about 4.2M
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Rule #3 - Most of you coming onto this job are coming from a minimum, or slightly above minimum, wage job. You can afford to max out your donation to your Horizons account (I think the max is about 18%, including the matching funds from the county*). You will still have a big ass pay increase over your previous job, if you do that. If you have been on the job awhile, It's harder to do. You're used to spending that money and it's hard to take a big hit like that, but if you take 1 or 2 % out of each raise you get, eventually you will get there.
In my final years as a field training officer, one of the things I would tell my trainees is to invest half of their raise in their Horizons account or a ROTH IRA, and to make that investment out of the first half of the raise, not some time later in the contract period. That way they have made the commitment and there's no excuses later. If I had maxed out my Horizons account, I would probably have between one and a half and two million bucks in it today, even with my other big mistake, which I will describe in Rule #4.
*(The maximum contribution to Horizons can change from year to year, so you need to check what it is for yourself)
Commenter 14 - When I was a sergeant working custody I told the new kids to invest half their raises. "That way you'll still see a raise as well as building up a nest egg for retirement."
Commenter 15 - Something to consider that I just found out about. Our max contribution a year into Horizons is $17,500 per. That includes the county match. If you go over the max by putting in too much, you lose the county match. I was putting in 13% the past couple years and didn't realize I put in too much and lost my county match the last two years. Something to think about. I lowered it to 10% and will be monitoring it throughout the year to make sure I don’t go over.
Commenter 7 - Its now up to 18k or 18,500k I believe, but great advice!!!
Commenter 8 - Mike, you're right. Just went up to $18.5. And if you are 50, it's now $24.5. I screwed up last year and maxed out in mid November. Lost money, damn it!
Commenter 16 - Great advice and if your over 50 max contribution is 24.5k. And max out early in the year who cares about the county match. Bigger nest egg means bigger return on interest. If the market is good. Max county match is around 4.5. Last year I maxed out in 6 months and made a killing. Due in part to the stock market.
Commenter 16 - Some are concerned about the county match. I get it. Free money. But the more if your money invested earlier in a strong market yields greater return. And it also reduces your tax liability. Food for thought.
Commenter 16 - And don't forget the 36K three year catch up
Commenter 17 - What's the 36k 3 year catch up
Commenter 16 - Before you retire you can contribute 36k for a 3 year period. Instead of the 24.5 or 18.5k, the catch is once you commit to the three years your committed for three years. If you stop cuz you can't afford 3k a month contribution. You can't put in 36k later. But in reality it's two years cuz the year you retire you use your buy back money from excess f days save time and the extra buy out money you have saved through the years.
Commenter 18 - Since the three-year catch-up was mentioned, if you plan on using this to shield some of your retirement separation pay out, contact the deferred comp folks at least 3 months before your projected retirement date. I contacted them in early December for my March 31st retirement and the woman I spoke with "checked her chart" and said, 'Yes, you're still a couple of weeks before the cut off, we should be able to do that." She then took my information, said it looked like I would qualify and said one of their case workers would contact me in ABOUT 8 Weeks to begin the process. So, start early!
Commenter 16 - And it's a three year commitment. So plan accordingly. Great post Sir
Wayde Farrell - an exception to using your retirement separation payout is if you are retiring medically and have been out 4850 time and you have not been back to work. If that is your case, your payout check is tax free, so put the money into some other investment. It wouldn't make sense to take tax free money and put it into Horizons, then have to pay taxes on it when you withdraw the money.
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Rule #4- Pay attention to your Horizons account. Check it every payday at least. I rarely did. And because I rarely did, I always forgot my pass code to access it. Just before the stock market crashed again, in about 2008, all of the financial folk were saying we were in a bubble and it was going to burst soon. We had MONTHS of warning. I had about $350,000 or $400,000 in my account at that time, all of it in two of the more aggressive funds (the mid cap fund and the small cap fund). I was going to take it all out and put it all in the stable income fund, which is no risk (and pretty much no interest). I forgot my damn pass code! I tried it a few times over the next couple weeks and never got it. I could have gotten a new pass code, but I blew it off and eventually forgot about it. About two months later the market crashed. My money dropped to about $200,000. THAT'S a big fuckin' hit! HOWEVER, all was not lost. I still owned all of those shares of stock, so it was just a loss on paper. As long as I didn't get rid of the stocks, I was OK. I was screwed in the short term, because the stocks were only worth about half of what they had been, but I still owned them. Some of my friends saw their stock values dropping, and WAY too late, they decided to sell them and put the money they had left into the stable income fund (the safe, but no interest fund). The market eventually came back, my stocks gained their value again, and then some. So I was back in business. My friends who had sold their stocks, were screwed. My paper loss, was an actual loss for them.
Having said all that, IF I had sold my stocks BEFORE the stocks crashed and put the money in the stable income fund, I could have bought those stocks back again when their value started to rise again. And since I was buying them at a cheaper price, I would have been able to buy more of the stocks. And when those stocks increased in value, I would have had more money. Simply put, If I sold 1000 shares at $20 a share and put the $20,000 I made into the stable income fund, then bought the shares back when they dropped to $10 a share, I would have been able to buy $2,000 shares. When those shares reached $20 value again, I would have had $40,000 (if my math is right). If I had done that, like I had planned, I would have probably had an additional several hundred grand in my account now. Not that I'm complaining about what I currently have. I have used my Horizons account to pay for my oldest son's college at UCI and am paying for my youngest son's college at SDSU AND his damn apartment, and I STILL have a little more in my Horizons account than I did when I retired 15 months ago. But, I just think you new guys can do better than I did.
Commenter 19 - I made $82k in 5 years with Horizon.. Let me know if you have any questions... There is a lot of economic information left out of this, but generally speaking is good to follow.. Many other things to consider and much more money to make if you pay attention to the market and don't leave it in when it crashes*
(* I think what Commenter 19 means by this is, if you can get the money out and into less volatile fund, like the Stable Income Fund BEFORE the market has taken a drastic tumble, then you are in a good position to make money when the market rises again. If you sell AFTER the market has taken a drastic drop, then you will be losing money. It is up to you to decide when you are going to sell or buy. If you look at a graph, which is available on the Horizons web page, you will see the market rise and fall. Unless you can see the future, it is impossible to always sell right before the market drops and always buy right when the market is about to rise. It is up to you to decide, how much of a loss (1%, 55, 10%, 50%) you are willing to lose, before you think you should sell. If you don't know much about stocks, I would look at financial articles to see what most are predicting, as a place to start. But you need to be careful there too. Some news organizations are extremely partisan and will make a great economy sound shitty, and a shitty economy sound great, depending on who is in office. As an example, when President Bush Jr was in office, unemployment was down to about 5% ( I think it was about 9% when he first took office. The news was broadcasting how terrible it was that we had 5% unemployment. When President Obama was in office, I think unemployment rose to about 9% and those very same people were talking about how wonderful it was that only 9% of the population was unemployed.)
Commenter 20 - Looks good Wayde. The only thing missing is an explanation of dollar cost averaging. The concept is there in several of the posts, just not labeled as such. The subject/concept is something a newbie could look up and learn more about.about and it's exactly what the typical Horizons investor does
* Dollar-cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high.
** Look up "7 mistakes to avoid with dollar-cost averaging" and Dollar Cost Averaging at Investing Answers.com.
Commenter 18 - A lot of good advice there. One thing I disagree about is trying to "time the market" on your own (ie, moving money to the Stable Income Fund before a crash, and back into stocks after); most people will simply lose more money (and sleep) by tring to do that.
I came on in '85 as well - the minimum back then was 2% to get the County 0.5% match. I had no idea what I was doing, but I joined at the minimum. The highest I ever had going in before joining megaflex 5.5 years ago was 7%. I didn't move my money around, but did make sure I stayed diversified within the plan (some money in stable, some in small cap stock, some in mid cap, some in foreign, etc). I lost over a third of my value in the 2008 crash as well, but stayed the course (ie, let it ride), and the market came back (as it generally does, eventually), and now I have plenty of money in deferred comp.
The most important thing in all of this is join early - let your years of work, work for you in compound interest and market increase, stay diversified to minimize market disruptions, and ALWAYS make sure you have at least enough going in to get the County Match (that's FREE money folks!).
Outstanding topic for discussion Wayde, and should be part of new employee orientation.
Wayde Farrell - I wasn't talking about trying to time the market consistently. I agree with you, a person could get an ulcer doing that. I was referring to a specific time (the 3 months or so, before the 2008 crash) when every time I turned on the news, opened a paper or read a financial article, they all screamed the market was headed for disaster.
Commenter 21 - Great advice. I only want to add, keep an eye on the market, but don’t stare at it second by second! It’ll drive you crazy and it’s a long term investment. I would walk into the office and a couple friends would be cussing about what the market was doing that day and driving them crazy, they know who they are LOL! But by keeping an eye on it loosely, you’ll know when to do something to avoid a big hit. I avoided the huge drop in 2008 by putting it all in the stable income until it got running straight again
Commenter 22 - You never lose anything until you sell. The biggest mistake everyone makes...relying on this money to live on. This is a supplement to your retirement and should not be treated as an off set to your living expenses
Wayde Farrell to Commenter 22 - like you said, its all just a paper gain, or a paper loss, until you move it.
Commenter 23 - Great advice Wayde!! I started trading (buying/selling individual stocks) in my Horizons account about 2 years ago. I have seen my account grow exponentially!! Aside from my individual stocks, i have my money in Small Cap, Large Cap, and the International Fund. The Small Cap fund will spike this year on the tax reform **(2018). The Small Cap companies will have better earnings this year under tax reform, thus increasing their revenues/stock prices. Big gains coming there. I like what you said about moving money out when the fund is high, and buying back when the stock prices are low....Thats referred to as "Buying the dip, and Selling The Rip"
Commenter 16 - Sic. What's your formula...Percentages?
Commenter 23 - Its kind of a combination of things.....I have 33% in the Small Cap Fund, 33% in the International Fund, and 34% in the Large Cap fund.....I also have a Self Directed Account (SDA) through Horizons which i use to trade (buy/sell) individual stocks with the money that goes into Horizons. I trade a lot of biotech stocks, so I make decent profits on those
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Rule #5- Buy a home. A home is like a savings account, but a home usually gains a lot more value than a savings account. The home I bought in 1983 for $225,000, is worth an estimated $900,000 in 2018. A savings account opened in 1983 with $225,000 would probably be worth less than $280,000. The comparison isn't exactly fair, because in this scenario, you are not putting more money into your savings account every month, whereas with a house, unless you bought it outright, you are paying a mortgage every month to pay off the loan. Between March 1983 and March 2018 you would have made about 300 payments (25 years x 12 months). On the other hand, if you hadn't bought a home you would have been paying rent every month. Rent usually goes up every year. Your mortgage will stay the same, unless you refinance, have an adjustable mortgage, or take out a second mortgage. My old apartment rents for more than my house mortgage now. In addition, your house will probably go up in value, so you will regain a good portion, if not all of your mortgage payments when you sell. You don't get any of your rent back.
Commenter 24 - I agree. Also, when buying your first home, I recommend buying a duplex, triplex or 4 plex instead of buying a single house. Live in one of the units and let the other units pay your mortgage. You will be able to save a good amount of money. Then take that money and by your dream house. Keep the other property and continue to collect thousands of dollars in rent (passive income). Now when you retire, not only will you have your Horizons money that Wayde spoke about. You have your retirement money as well as your monthly rental income!
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Rule #6 - Take advantage of other investments. Horizons and other pre-tax retirement accounts are good, because they lower your taxable income. On the other hand, when you take the money out, the money you invested and all of the interest you made becomes taxable income. There are post tax savings investments like the Roth IRA. With these types of investments, the money you invest has already been taxed, so when you withdraw the money, you don't pay taxes on it.
Another idea is to open a college fund for each child you have as soon as they are born. College is expensive and it's not likely to get cheaper in the coming decades. Just make sure the money has to be used for college and that your offspring can't just take the money and buy a new car.
If you don't have to use the money for something you need, you can put your tax return into a Roth IRA. And by, "need", I don't mean, "want". There's a difference and you need to learn it, if you haven't already.
Commenter 10 - Good advice.. My current Horizons account went up over 70k this year. Now almost 500k. Had to take out 60k to finish a home build. Nice having a safety net to need in an emergency. The funds should go up 15-20% this year. Also have a private fund of stocks that have appreciated. In addition you should open a Roth IRA. $5,000.00 per year for individual $10,000.00 per married couple. You use after tax monies for funds, but can take out your initial investment at any time, tax free after 59 1/2 and after five years invested. A great emergency fund.
Wayde Farrell - Do you pay capital gains on Roth IRA earnings?
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Rule #7 - Live within your means. My wife doesn't. Which is why my house isn't paid off, even though it should be. So, instead of having about $900,000 in equity in my home, I only have about $700,000 in equity. I still owe $200,000, which by coincidence is pretty much what I bought the place for in 1983. If you rely on overtime to pay your bills, that is a BIG hint that you are living beyond your means. Overtime should not be spent before you've earned it. If that's your situation, you are making a big mistake. Establish a budget you can live with and if you are single, don't marry a spouse who spends money before, or as soon as, it's earned. If your boyfriend/girlfriend is high maintenance, it's time to move along. (I wish I'd known THAT one!)
Rule #7a - Limit your credit card debt. If you have a bunch of credit cards, even if you don't use them that can hurt your credit score. If you are maxing out your credit cards every month, even if you pay them off each month, that can also hurt your credit score. According to several websites, including Consolidated Credit, your credit card debt, both for individual cards and in totality should be 10% of your credit card limit. At 30%, it begins to affect your credit negatively. You can Google How to establish Good Credit.
Commenter 25 - Pay off your Credit Card Debt. Once it's paid off, don't ever charge anything on your credit card you can't pay off at the end of the month. It keeps you from living beyond your means. There is no sense in borrowing money from banks to live everyday life. Have a savings account for emergencies like a refrigerator replacement or A/C repairs. Don't waste your money buying/leasing new cars every few years. Make sure your house is paid off by the time you retire. Having no house payment gives you a large amount of extra spendable income and no one is going to take your house away from you.
Commenter 26 - If you can't buy it in cash, you can't afford it. I'm with you, a credit card is false sense of income. Spend wisely
Commenter 18 - Agreed! Been paying off the credit cards every month since very early in my career (about the time that credit card interest became non-tax-deductible). Take a look at the part of the bill where it tells you how long it will take to pay off your current balance if you only pay the minimum, and how much you'd be paying in interest - very informative!
Wayde Farrell - I agree! My mistake was when I got married, I let my wife handle the finances. I never had a credit card before that, suddenly I had credit cards out the ying yang! Follow Ed Chenal's advice and if there's something you know you are going to want, or need, like a computer, save for it.
Commenter 27 - My advice is to match whatever the county match is. Put the additional funds in a Roth IRA. although you using taxed monies you can invest Your Roth plan into the same investments as the county does or a slough of others. The big advantage is when you take money out of your county plan that money is taxed. Say your in a 30% tax income bracket. For every one hundred thousand you take out you pay 30 thousand in taxes. Conversely in a Roth IRA all funds you withdraw are tax free. You take 100K out you keep all of it including all investment income you accumulated tax free. Not adding that as income also keeps you in a lower tax bracket. Talk you your accountant or tax advisor.
Commenter 13 - Most of us make too much to contribute to a Roth.
Commenter 4 - That is true Jake, my household income is way over 200,000
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INJURY RETIREMENT
Here's a little information on retirement. I don't plan on being to in-depth , because most of you have a long time until that day comes and things may change. To start with, I was going to retire at the end of January 2015 with 30 years. About mid month, I canceled, because I had a junior in college and a senior in high school. That meant I would have two kids in college in the next school year. I didn't know if I could hack it on my pension. On May 31st, 2015, I stopped two motorcycles. One of them decided he didn't want a ticket and started to take off. Thinking I was faster than I actually was, I tried to grab his right arm in an attempt to keep it from reaching the accelerator. That didn't work out. His rear tire fishtailed and slammed me into the second motorcycle. I was out IOD for the rest of my career.
Hopefully you know this, but I will go over it anyway. When you are out IOD you are out on what's called 4850 time. You can be out for up to a year on 4850 time. After that, if you still can't work, your pay gets reduced. On your paycheck you may have seen something like 80%, 50% pay etc? That's what it is referring to. You start out getting the higher percentage and it works down, eventually to zero, where you don't collect any pay. However, you can make up the shortfall in your part pay checks by burning some sick time. Which is actually a good deal, since when you retire and get cashed out for all of your time, you only get 50 cents on the dollar for sick time. All the other time is paid in full. On top of that you have to pay taxes on that, including the sick time, so you get less than 50 cents on the dollar for sick time. Anyway, If you are out IOD and run out of 4850 time,, you then collect part pay and the shortfall can be made up by burning sick time. So, I knew all that. What I didn't know, was that if you are;
1- OUT 4850 time
2- retire medically, WITHOUT going back to work, even if you are having to burn sick time, because your 4850 time ran out,
3- then when you retire, your cash out check for sick, vacation, holiday time etc, is tax free. To be more correct, the money is tax free. They will take taxes out (they took $40,000 out of mine), but you will get it all back with your tax refund. THAT'S a chunk of change, pal!
This little rule is due to a lawsuit brought by an LASD lieutenant in the '80's. The court ruled that since the LASD allows us to burn sick time ( and vacation time, etc) to make up for our lost 4850 time, that money is all tax free if we retire medically. I never heard that until about 3 months before my retirement. A lot of tax people are not familiar with this obscure law, because it is specific to either just the LASD or just L.A. County employees, I forget which. Anyway, if you are in this situation, and your tax person isn't familiar with this law, or if they think I'm full of shit, call Susan Rahn, my tax lady. She lives in the Palm Springs area. She can send him the pertinent info, or you can go to her, or her daughter will come to you.
Since originally recommending Susan Rahn, some of my former co-workers have balked at the idea of paying $500 and driving out to the Palm Springs area to get a refund worth tens of thousands of dollars. I think they are some cheap-ass bastards. "Frugal" is their self description. Anyway, to save you cheap-ass, frugal bastards a couple of hundred bucks. I was going to copy and paste the lawsuit information, but you're big boys and girls, so you can look it up yourself under, "Givens v. Commissioner, 90 T.C. 1145".
You can take this to your tax guy. If he still balks at the idea, then drive out to Palm Springs, have a nice weekend and pony up the dough. Remember, this only applies if, when you retired, you had been out on 4850 time. It doesn't matter if you did, or didn't, run out of 4850 time and started burning your own time. The fact that you CAN burn your own time if need be is what counts. What DOES matter is that you did not go back to work, even light duty.
Wayde Farrell - Another thing to consider is maxing out your Horizons account using your payout check when you retire. That can be a good idea, unless you retire medically. If you retire medically, and were out on 4850 time AND DID NOT GO BACK TO WORK, your payout check is tax free. So if you take your tax free pay out check money and put some of it into your Horizons account, when you pull that money out of Horizons, you will have to pay taxes on it. Put it into something else
Commenter 1- Excellent advice! I wish someone would have told me all of that when I was “young and dumb.” The only mistake you outlined that I didn’t make was to buy my six (6) active duty military years. It made a huge difference when I retired. Also, look at moving your funds out of Horizons after you retire. I did and am now with a wonderful company that truly doesn’t just care about my money, but about ME!
Commenter 5 -After you retire, look to roll the money, in your Horizons account, into another type of retirement fund. Horizons does well but, there are many out there that do much better. The wife and I are invested in a fund now, that has a 12.33% return this year.
Commenter 28 - With our LACERA retirement and Horizon income, we will always have tax implications. consider roll-overs to and continued funding of a ROTH account which will give you tax free growth and reduce your overall tax footprint and required minimum distributions at 70 1/2.
Commenter 5 - I don’t believe you can roll your 457 investments into a Roth IRA
Commenter 28 -I fund my ROTH each year with the maximum amount in a direct roll-over/distribution to another investment institution.
Commenter 29 - I believe that loop hole just closed with the passing of the new tax plan.
Commenter 20 - 457 to ROTH is allowed, but you will pay income tax on the 457 distribution. Same rule as rolling a traditional IRA to ROTH.
Commenter 30 - Any prudent suggestions on how to remove, or begin to remove Horizons monies at 70 1/2? Soon to face that dilemma. Not relishing having my yearly wages shoot up to another bracket.
Commenter 10 - An IRS chart of IRA required distributions at 70.5 years of age. (This chart would not copy and paste, so you'll have to look it up on the internet yourself.
Commenter 31 - Also, you should talk to Horizons, they deal with this all the time and will be able to tell you step-by-step. (SEE RULE #1)
Commenter 20 - If you wait until 70 1/2 the IRS will dictate your Required Minimum Distribution (RMD). BankRate dot com has a fairly good calculator.
Commenter 32 - If anyone is interested, my tax guy, Maurice Kempner, who is a former deputy has a wealth management company where you can buy in and start buying and renting properties in other states with management companies in place to do the work for you. http://truelegacywealth.com/ **
**(I know absolutely nothing about Mr. Kempner and this pamphlet is not an endorsement of his, or anyone else's services)
Summary From Commenter 33 -
My advice:
1. Start young, If you didn't start young, START NOW!
2. Start with aggressive investments (Small Cap, Mid Cap, Large
Cap, international) Stay away from Stable Income, Bonds, and
Bank Depository Funds until later.
3. Let it ride! Do not attempt to time the market, ride out the ups and
downs, remember, you are in it for the long haul!
4. Start investing in a ROTH IRA for both you and your spouse.
This money can be withdrawn TAX FREE when you are retired,
Horizon withdrawals are taxed!
5. Live below your means and avoid debt! Do you really need that
new BMW when a used Honda will get you where you need to
go?
6. Invest in a 529 Cloverdale education account, for each child, to
help pay for college.
7. Teach your kids to set up and invest in a Roth IRA With their
allowance, or at least as soon as they begin their first job.
My Story: I began investing in Horizons early in my career, but knew little
about investing, so all my money went to Stable Income for the
first 11 1/2 years (ouch). At that time, I had accumulated
$49905.83. I spoke to one of my peers, who had invested
aggressively and found he had amassed over $300K during the
same time frame! I sought out several sage mentors, who
convinced me to move my money to more aggressive
investments and to put half of each raise into Horizons until I was
maxing out every year. 22 1/2 years later, I am 6 weeks from
retiring, my Horizons account has 7 figures (more than
$1,000,000.00) and, I have additional investments in Roth IRAs!
My wife gave up her career to raise our children, which means I
accomplished this on a single deputy income! Anyone can do
this, but it takes a little discipline and sacrifice! When my career
began, I was making less that $2,000 a month, and Horizons
only allowed a max contribution of $6,000 annually. So, it should
be much easier for you newbies to way exceed what I have done
and retire as a multi millionaires!
Good luck in your careers.
Wayde Farrell
Now that you cheap bastards have read all this, maybe you can pay me back by reading a couple of my stories at theretiredcop.blogspot.com and leaving some comments. Don't worry, it's free too.
This started out as two Facebook posts I made on January 6, 2018. Within 24 hours there were over 100 comments. Some offered more detailed advice, some offered additional advice. Many commented that they wish they had this information drilled into them at the start of their career and this should be a subject for periodic briefings and a pamphlet given out at the academy. So the posts are reprinted, along with some of what I think you will find to be the more useful comments. Some of the people who made comments were not comfortable with the idea of their names being used, so I have changed them all to "Commenter".
Here are some financial ideas from myself, some retired deputies and veteran working deputies to other active deputies, especially the newer ones. We have absolutely no training in finances and I, for one, do not have a college degree in anything. I was a street cop for about 30 years and that just about covers it. Financially, we made some mistakes and some good decisions. The following is meant to help you avoid our bad decisions and learn from our good ones. I make no promises with this pamphlet. You are responsible for your own decisions in life. To put it another way, the intent of the pamphlet is not to offer advice, but merely expressions of what ideas worked best (or didn't) for those people referenced in the pamphlet. The reader should seek financial advice and direction from qualified financial experts to give advice. Hence, none of us should be held liable in the event someone falls on their face. Just saying..
I retired Oct. 2016, after almost 32 years as an L.A. deputy sheriff. Except for my academy time and about a two and a half years at I.R.C., all of my time was at Carson station. When I came on in 1985, I think I made about $35,000. That includes my overtime pay. I was coming from the 4 years in the Army, so this was a big rise in income for me. When I was hit by a motorcycle in 2015, I was a field training officer and making about $120,000 a year. I'm going to give some unasked for financial tips (NOT GUARANTEES, See Rule #1) to my younger comrades regarding Horizons, or any 401k type investment, and a little about retirement. Here are some of the rules I came up with for myself. You can take it or leave it. If you take it, I am very confident (NOT GUARANTEEING) that you will retire after 30 years of service with a net worth of over two million dollars, even as a plain old deputy sheriff. And for those who wonder, my retired take home pay was immediately more than my working take home pay. (Once this was posted, other deputies chimed in with their two cents, I have included some of their comments)
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Rule #1 - Go to the experts. By experts, I don't mean your lieutenant, or your favorite sarge, or the Old Guy that's been on the department 20 years longer than you. I mean contact Horizons, LACERA, a financial advisor* etc, to verify any info that somebody gives you. Call an expert to verify this piece of advice. When I first came on, one of the Old Guys heard me say I was going to buy my military time back. He asked if I had been an MP (military police). I said, "No". He said I had to have been an MP to buy my military time. I said "Oh". Fifteen years later, I found out he was wrong. By that time, I was married with a mortgage and two kids. I could no longer afford to buy my military time back. 36 years of service time would have meant a bigger paycheck than 32 years of service time.
* (If you consult a financial advisor, you'll probably have two choices. A free consultation, or a consultation you pay for. I would pay for the consultation. The "free" consultation will probably be done by a guy who gets a fee to push certain investments at you.)
Commenter 1- Excellent advice! I wish someone would have told me all of that when I was “young and dumb.” The only mistake you outlined that I didn’t make was to buy my six (6) active duty military years. It made a huge difference when I retired. Also, look at moving your funds out of Horizons after you retire. I did and am now with a wonderful company that truly doesn’t just care about my money, but about ME!
Commenter 2 - When I was a young deputy, living pay check to pay check, I learned that I could buy my military and Inglewood PD (CalPERS) time back, but like many others, I didn't think I could afford it. I cashed out my CalPERS time for $2,500 when I lateraled over to LASD. $2,500 was a ton of money in 1980 and I didn't know any better. Over three decades later, I was ready to file for retirement when I learned that I could buy back my IPD time for $35,000 and....this is very important....I could use my Horizons funds with a direct roll over so I didn't have to pay taxes on it since I didn't touch the money. What did that do for me? I have gotten a check from CalPERS for $1,600 every month (plus subsequent cost of living raises) for the past nine years and they will continue, unless CA finally does completely tank, for the remainder of my life (Divide $1,600 into $35,000 and you'll see the short number of months it took me to earn my $35,000 back). Not buying my time back when it was much cheaper to do was one of the worst decisions of my life but buying it back with my Horizons funds thanks to a "hey, did you know you can do this?" tip from a wonderful LACERA employee was one of the smartest things I ever did. Well, that and marrying my wife who has tolerated my nonsense for nearly 40 years.
*(in case you missed it, Commenter 2 cashed out his Inglewood P.D. (CalPers) time for $2,500 and thirty years later he bought it back again for $35,000. It worked out for him in the end, but he would have saved $32,500 if he had rolled his time over, instead of cashing it in, when he lateraled to L.A.S.D.)
Commenter 3 - I was lucky when we first had the chance to buy military time in the 70's, I had the money and bought mine immediately...Saved me thousands of dollars had I waited many years later.
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Rule #2 - Put as much as you can into your Horizons account.
Rule #2a Put it in an aggressive fund. When I first came on, the only thing I knew about the stock market, was that it crashed in 1929 and people lost a lot of money. So, I put the bare minimum to get the maximum contribution from the county. That means, that in 1985, I put in 4% and got 2% from the county. In addition, I put it in the Stable Income Fund, which paid a whopping 1% interest, or so. Over the next 15 years, I bumped my contribution up to about 6%.
After 15 years I had $86,000 saved. Big whoop. Then I got a partner named Luis Trejo. He saw me looking at my account, asked how long I'd been on (considerably longer than him) and he said, "WHAT THE FUCK ARE YOU DOING?".
I said, "What?".
He said, "You should have a few hundred grand saved by now."
He showed me his account and I was amazed at how much more money he had in his Horizons account, than I had in mine, even though I had been on twice as long as him. He told me to put the money into the more aggressive funds (the Large Cap, Mid Cap and Small Cap Funds). I did and in a month my account had climbed to $126,000. The stock market will go up and down, but generally speaking, historically, it goes up. You have a long time until you retire. Let your money work.
Commenter 4 - Lately I’ve come across deputies that have accounts but their money is in conservative accounts.I showed them my account ($820,000) and explained how compound interest works. They moved their money to mid cap and now have seen large gains.
Commenter 5 - Wait until you retire and roll it into even better performing funds. We have some in one fund that has, thus far, earned a 30% return
Commenter 4 - I want to retire in 3 years which puts me at age 53. Friends tell me to wait until age 55 because I would leave money on the table.I don’t care about the extra money on the table because my house is paid off and my ex-wife does not get any of my retirement money.So, keep in touch because that’s one of my concerns. Too roll money into other accounts or leave them in horizons.
Commenter 5 to Commenter 4 - Bro, stick around until age 55. It's about a 13% increase in your retirement benefits. Then, take that extra 13% that you "don't need" and invest it
Commenter 6 - My confusion is the target years. I’ve never know where to put the percentages
Wayde Farrell - the funds I usually invested in were the small cap and mid cap. I also invested in the large cap and foreign funds. The target year options didn't start until I was nearing retirement and I stayed away from them. this year though I put some money in the 2035 target year and it outperformed the small and mid cap funds while I was in them. I look at Horizons as a supplemental income. I live on my pension. since I don't rely on my Horizons account, I keep the money in the more aggressive funds. But that's just me. I'm not a financial guy. A lot of these comments have good advice.
Commenter 7 - I've had Horizons from the day they let me sign up and I've been maxing out for most of those years (approx 27yrs). In the beginning my money wasn't working much and I was getting frustrated, so I decided to educated myself on different aggressive funds with strong returns and I started making my money work for me.
Right in start of the market crash of 2008, I was playing poker with a money guy from TV and we discussed my account in detail. He said, "Normally you never sell your shares, you just ride the waves of the market, but this is different situation". He told me to go home immediately and sell all my shares and put everything in the Stable Income Fund. He then told me when the market hits 6999 or lower, start buying it all back at 10k, each Monday until I was again fully invested. I did exactly as he advised and it took about 4 years for the market to recover, but I tripled my balance and since that day my account has continued to grow. Lets just say I have done really well.
My advice to everyone, max out your monthly contribution ** or as close as you can get, but do not max out to early and lose your county match. The county match is free money, do not give it away. (**There is a maximum amount that you can put in your Horizons account, but that maximum includes your contribution and the County's contribution. If you meet the maximum with just your contribution, the County cannot contribute.)
Next, get your money into an aggressive fund and watch it grow. Now watch the market and remember when the market drops, you need to relax, take a deep breath, it's no different then a sale at your favorite store. In the other words, when the market drops, shares of stock get cheaper and you are buying them at a discount.
Lastly, do not get nervous and sell anything, keep buying shares and just ride the waves of the market. If you cant do that, keep buying shares, do not sell anything and close your eyes until you retire
Small hint, look at the Horizons Large Cap Fund, read the details on it. Then go look at the S&P500 on any stock market phone app, it is at sitting at an all time high
Commenter 8 - I wish I had gotten into deferred comp from day one like you. I knew nothing about it. Not until a deputy yelled at me one day at East Max did I start an account, and that was 6 or 7 years into my career. Still kick myself for the money I missed out on... Oh well, live and learn. But I tell every new dep I talk to to invest NOW. Don't make my mistake. Hope all is well.
Commenter 7 - Where are you invested now? Maxing out?
Commenter 8 - Can't recall offhand what I am in, but it is medium risk. I am not a huge risk taker anymore, especially with less than 5 years to go. My return has been somewhere around 11-12% over the past couple years. And YES, I have been maxing out for the past several years. Especially with the 50 catch up.
Commenter 7 - I can help you if you want...Log on and find out where your money. Then look at the Large Cap Fund. My return is about 22% or higher. Its not super high risk, I can explain more in detail if you want
Commenter 9 - I did 50 percent mid and 50 Large Cap for years Cha-ching
Commenter 7 - I've been all in Large Cap for years which is the S&P 500 on the stock market...great returns! 22% return right now
Commenter 10 - Same here. 22% for 2017
Commenter 11 - I work with 2 people who are within 3 years of retirement each who have never joined horizons. I'm pretty sure both were unaware of it until recently. I'm not the most savvy person about it, but I at least do have an account.
Wayde Farrell I had a trainee in my last year who told me he didn't have a Horizons account either. I used to work with his brother, like 10 or 15 years ago, so I told him to talk to his brother about it. He came back to me and said his brother didn't have one either. I was frickin flabbergasted. I think I was more on his ass about getting a Horizons account than law enforcement shit.
Commenter 12 to Wayde Farrell - that’s just crazy how somebody wouldn’t have one
Commenter 13 - The new max is $18,500 (year 2018) The county matches 4% of base earnings. The key is to put the right amount in to maximize county contributions before hitting $18,500.
Commenter 13 - There are good youtube videos and or graphs that show the power of exponential growth.... I calculated if someone has $275 in Horizons and works 22 more years.... earning 15% and maxing out (18,500).... It will be worth 8.5M. That is roughly a $300,000 investment. 300k that becomes 8.5M! The key is to start early. Starting 5 years later would "only" be about 4.2M
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Rule #3 - Most of you coming onto this job are coming from a minimum, or slightly above minimum, wage job. You can afford to max out your donation to your Horizons account (I think the max is about 18%, including the matching funds from the county*). You will still have a big ass pay increase over your previous job, if you do that. If you have been on the job awhile, It's harder to do. You're used to spending that money and it's hard to take a big hit like that, but if you take 1 or 2 % out of each raise you get, eventually you will get there.
In my final years as a field training officer, one of the things I would tell my trainees is to invest half of their raise in their Horizons account or a ROTH IRA, and to make that investment out of the first half of the raise, not some time later in the contract period. That way they have made the commitment and there's no excuses later. If I had maxed out my Horizons account, I would probably have between one and a half and two million bucks in it today, even with my other big mistake, which I will describe in Rule #4.
*(The maximum contribution to Horizons can change from year to year, so you need to check what it is for yourself)
Commenter 14 - When I was a sergeant working custody I told the new kids to invest half their raises. "That way you'll still see a raise as well as building up a nest egg for retirement."
Commenter 15 - Something to consider that I just found out about. Our max contribution a year into Horizons is $17,500 per. That includes the county match. If you go over the max by putting in too much, you lose the county match. I was putting in 13% the past couple years and didn't realize I put in too much and lost my county match the last two years. Something to think about. I lowered it to 10% and will be monitoring it throughout the year to make sure I don’t go over.
Commenter 7 - Its now up to 18k or 18,500k I believe, but great advice!!!
Commenter 8 - Mike, you're right. Just went up to $18.5. And if you are 50, it's now $24.5. I screwed up last year and maxed out in mid November. Lost money, damn it!
Commenter 16 - Great advice and if your over 50 max contribution is 24.5k. And max out early in the year who cares about the county match. Bigger nest egg means bigger return on interest. If the market is good. Max county match is around 4.5. Last year I maxed out in 6 months and made a killing. Due in part to the stock market.
Commenter 16 - Some are concerned about the county match. I get it. Free money. But the more if your money invested earlier in a strong market yields greater return. And it also reduces your tax liability. Food for thought.
Commenter 16 - And don't forget the 36K three year catch up
Commenter 17 - What's the 36k 3 year catch up
Commenter 16 - Before you retire you can contribute 36k for a 3 year period. Instead of the 24.5 or 18.5k, the catch is once you commit to the three years your committed for three years. If you stop cuz you can't afford 3k a month contribution. You can't put in 36k later. But in reality it's two years cuz the year you retire you use your buy back money from excess f days save time and the extra buy out money you have saved through the years.
Commenter 18 - Since the three-year catch-up was mentioned, if you plan on using this to shield some of your retirement separation pay out, contact the deferred comp folks at least 3 months before your projected retirement date. I contacted them in early December for my March 31st retirement and the woman I spoke with "checked her chart" and said, 'Yes, you're still a couple of weeks before the cut off, we should be able to do that." She then took my information, said it looked like I would qualify and said one of their case workers would contact me in ABOUT 8 Weeks to begin the process. So, start early!
Commenter 16 - And it's a three year commitment. So plan accordingly. Great post Sir
Wayde Farrell - an exception to using your retirement separation payout is if you are retiring medically and have been out 4850 time and you have not been back to work. If that is your case, your payout check is tax free, so put the money into some other investment. It wouldn't make sense to take tax free money and put it into Horizons, then have to pay taxes on it when you withdraw the money.
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Rule #4- Pay attention to your Horizons account. Check it every payday at least. I rarely did. And because I rarely did, I always forgot my pass code to access it. Just before the stock market crashed again, in about 2008, all of the financial folk were saying we were in a bubble and it was going to burst soon. We had MONTHS of warning. I had about $350,000 or $400,000 in my account at that time, all of it in two of the more aggressive funds (the mid cap fund and the small cap fund). I was going to take it all out and put it all in the stable income fund, which is no risk (and pretty much no interest). I forgot my damn pass code! I tried it a few times over the next couple weeks and never got it. I could have gotten a new pass code, but I blew it off and eventually forgot about it. About two months later the market crashed. My money dropped to about $200,000. THAT'S a big fuckin' hit! HOWEVER, all was not lost. I still owned all of those shares of stock, so it was just a loss on paper. As long as I didn't get rid of the stocks, I was OK. I was screwed in the short term, because the stocks were only worth about half of what they had been, but I still owned them. Some of my friends saw their stock values dropping, and WAY too late, they decided to sell them and put the money they had left into the stable income fund (the safe, but no interest fund). The market eventually came back, my stocks gained their value again, and then some. So I was back in business. My friends who had sold their stocks, were screwed. My paper loss, was an actual loss for them.
Having said all that, IF I had sold my stocks BEFORE the stocks crashed and put the money in the stable income fund, I could have bought those stocks back again when their value started to rise again. And since I was buying them at a cheaper price, I would have been able to buy more of the stocks. And when those stocks increased in value, I would have had more money. Simply put, If I sold 1000 shares at $20 a share and put the $20,000 I made into the stable income fund, then bought the shares back when they dropped to $10 a share, I would have been able to buy $2,000 shares. When those shares reached $20 value again, I would have had $40,000 (if my math is right). If I had done that, like I had planned, I would have probably had an additional several hundred grand in my account now. Not that I'm complaining about what I currently have. I have used my Horizons account to pay for my oldest son's college at UCI and am paying for my youngest son's college at SDSU AND his damn apartment, and I STILL have a little more in my Horizons account than I did when I retired 15 months ago. But, I just think you new guys can do better than I did.
Commenter 19 - I made $82k in 5 years with Horizon.. Let me know if you have any questions... There is a lot of economic information left out of this, but generally speaking is good to follow.. Many other things to consider and much more money to make if you pay attention to the market and don't leave it in when it crashes*
(* I think what Commenter 19 means by this is, if you can get the money out and into less volatile fund, like the Stable Income Fund BEFORE the market has taken a drastic tumble, then you are in a good position to make money when the market rises again. If you sell AFTER the market has taken a drastic drop, then you will be losing money. It is up to you to decide when you are going to sell or buy. If you look at a graph, which is available on the Horizons web page, you will see the market rise and fall. Unless you can see the future, it is impossible to always sell right before the market drops and always buy right when the market is about to rise. It is up to you to decide, how much of a loss (1%, 55, 10%, 50%) you are willing to lose, before you think you should sell. If you don't know much about stocks, I would look at financial articles to see what most are predicting, as a place to start. But you need to be careful there too. Some news organizations are extremely partisan and will make a great economy sound shitty, and a shitty economy sound great, depending on who is in office. As an example, when President Bush Jr was in office, unemployment was down to about 5% ( I think it was about 9% when he first took office. The news was broadcasting how terrible it was that we had 5% unemployment. When President Obama was in office, I think unemployment rose to about 9% and those very same people were talking about how wonderful it was that only 9% of the population was unemployed.)
Commenter 20 - Looks good Wayde. The only thing missing is an explanation of dollar cost averaging. The concept is there in several of the posts, just not labeled as such. The subject/concept is something a newbie could look up and learn more about.about and it's exactly what the typical Horizons investor does
* Dollar-cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high.
** Look up "7 mistakes to avoid with dollar-cost averaging" and Dollar Cost Averaging at Investing Answers.com.
Commenter 18 - A lot of good advice there. One thing I disagree about is trying to "time the market" on your own (ie, moving money to the Stable Income Fund before a crash, and back into stocks after); most people will simply lose more money (and sleep) by tring to do that.
I came on in '85 as well - the minimum back then was 2% to get the County 0.5% match. I had no idea what I was doing, but I joined at the minimum. The highest I ever had going in before joining megaflex 5.5 years ago was 7%. I didn't move my money around, but did make sure I stayed diversified within the plan (some money in stable, some in small cap stock, some in mid cap, some in foreign, etc). I lost over a third of my value in the 2008 crash as well, but stayed the course (ie, let it ride), and the market came back (as it generally does, eventually), and now I have plenty of money in deferred comp.
The most important thing in all of this is join early - let your years of work, work for you in compound interest and market increase, stay diversified to minimize market disruptions, and ALWAYS make sure you have at least enough going in to get the County Match (that's FREE money folks!).
Outstanding topic for discussion Wayde, and should be part of new employee orientation.
Wayde Farrell - I wasn't talking about trying to time the market consistently. I agree with you, a person could get an ulcer doing that. I was referring to a specific time (the 3 months or so, before the 2008 crash) when every time I turned on the news, opened a paper or read a financial article, they all screamed the market was headed for disaster.
Commenter 21 - Great advice. I only want to add, keep an eye on the market, but don’t stare at it second by second! It’ll drive you crazy and it’s a long term investment. I would walk into the office and a couple friends would be cussing about what the market was doing that day and driving them crazy, they know who they are LOL! But by keeping an eye on it loosely, you’ll know when to do something to avoid a big hit. I avoided the huge drop in 2008 by putting it all in the stable income until it got running straight again
Commenter 22 - You never lose anything until you sell. The biggest mistake everyone makes...relying on this money to live on. This is a supplement to your retirement and should not be treated as an off set to your living expenses
Wayde Farrell to Commenter 22 - like you said, its all just a paper gain, or a paper loss, until you move it.
Commenter 23 - Great advice Wayde!! I started trading (buying/selling individual stocks) in my Horizons account about 2 years ago. I have seen my account grow exponentially!! Aside from my individual stocks, i have my money in Small Cap, Large Cap, and the International Fund. The Small Cap fund will spike this year on the tax reform **(2018). The Small Cap companies will have better earnings this year under tax reform, thus increasing their revenues/stock prices. Big gains coming there. I like what you said about moving money out when the fund is high, and buying back when the stock prices are low....Thats referred to as "Buying the dip, and Selling The Rip"
Commenter 16 - Sic. What's your formula...Percentages?
Commenter 23 - Its kind of a combination of things.....I have 33% in the Small Cap Fund, 33% in the International Fund, and 34% in the Large Cap fund.....I also have a Self Directed Account (SDA) through Horizons which i use to trade (buy/sell) individual stocks with the money that goes into Horizons. I trade a lot of biotech stocks, so I make decent profits on those
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Rule #5- Buy a home. A home is like a savings account, but a home usually gains a lot more value than a savings account. The home I bought in 1983 for $225,000, is worth an estimated $900,000 in 2018. A savings account opened in 1983 with $225,000 would probably be worth less than $280,000. The comparison isn't exactly fair, because in this scenario, you are not putting more money into your savings account every month, whereas with a house, unless you bought it outright, you are paying a mortgage every month to pay off the loan. Between March 1983 and March 2018 you would have made about 300 payments (25 years x 12 months). On the other hand, if you hadn't bought a home you would have been paying rent every month. Rent usually goes up every year. Your mortgage will stay the same, unless you refinance, have an adjustable mortgage, or take out a second mortgage. My old apartment rents for more than my house mortgage now. In addition, your house will probably go up in value, so you will regain a good portion, if not all of your mortgage payments when you sell. You don't get any of your rent back.
Commenter 24 - I agree. Also, when buying your first home, I recommend buying a duplex, triplex or 4 plex instead of buying a single house. Live in one of the units and let the other units pay your mortgage. You will be able to save a good amount of money. Then take that money and by your dream house. Keep the other property and continue to collect thousands of dollars in rent (passive income). Now when you retire, not only will you have your Horizons money that Wayde spoke about. You have your retirement money as well as your monthly rental income!
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Rule #6 - Take advantage of other investments. Horizons and other pre-tax retirement accounts are good, because they lower your taxable income. On the other hand, when you take the money out, the money you invested and all of the interest you made becomes taxable income. There are post tax savings investments like the Roth IRA. With these types of investments, the money you invest has already been taxed, so when you withdraw the money, you don't pay taxes on it.
Another idea is to open a college fund for each child you have as soon as they are born. College is expensive and it's not likely to get cheaper in the coming decades. Just make sure the money has to be used for college and that your offspring can't just take the money and buy a new car.
If you don't have to use the money for something you need, you can put your tax return into a Roth IRA. And by, "need", I don't mean, "want". There's a difference and you need to learn it, if you haven't already.
Commenter 10 - Good advice.. My current Horizons account went up over 70k this year. Now almost 500k. Had to take out 60k to finish a home build. Nice having a safety net to need in an emergency. The funds should go up 15-20% this year. Also have a private fund of stocks that have appreciated. In addition you should open a Roth IRA. $5,000.00 per year for individual $10,000.00 per married couple. You use after tax monies for funds, but can take out your initial investment at any time, tax free after 59 1/2 and after five years invested. A great emergency fund.
Wayde Farrell - Do you pay capital gains on Roth IRA earnings?
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Rule #7 - Live within your means. My wife doesn't. Which is why my house isn't paid off, even though it should be. So, instead of having about $900,000 in equity in my home, I only have about $700,000 in equity. I still owe $200,000, which by coincidence is pretty much what I bought the place for in 1983. If you rely on overtime to pay your bills, that is a BIG hint that you are living beyond your means. Overtime should not be spent before you've earned it. If that's your situation, you are making a big mistake. Establish a budget you can live with and if you are single, don't marry a spouse who spends money before, or as soon as, it's earned. If your boyfriend/girlfriend is high maintenance, it's time to move along. (I wish I'd known THAT one!)
Rule #7a - Limit your credit card debt. If you have a bunch of credit cards, even if you don't use them that can hurt your credit score. If you are maxing out your credit cards every month, even if you pay them off each month, that can also hurt your credit score. According to several websites, including Consolidated Credit, your credit card debt, both for individual cards and in totality should be 10% of your credit card limit. At 30%, it begins to affect your credit negatively. You can Google How to establish Good Credit.
Commenter 25 - Pay off your Credit Card Debt. Once it's paid off, don't ever charge anything on your credit card you can't pay off at the end of the month. It keeps you from living beyond your means. There is no sense in borrowing money from banks to live everyday life. Have a savings account for emergencies like a refrigerator replacement or A/C repairs. Don't waste your money buying/leasing new cars every few years. Make sure your house is paid off by the time you retire. Having no house payment gives you a large amount of extra spendable income and no one is going to take your house away from you.
Commenter 26 - If you can't buy it in cash, you can't afford it. I'm with you, a credit card is false sense of income. Spend wisely
Commenter 18 - Agreed! Been paying off the credit cards every month since very early in my career (about the time that credit card interest became non-tax-deductible). Take a look at the part of the bill where it tells you how long it will take to pay off your current balance if you only pay the minimum, and how much you'd be paying in interest - very informative!
Wayde Farrell - I agree! My mistake was when I got married, I let my wife handle the finances. I never had a credit card before that, suddenly I had credit cards out the ying yang! Follow Ed Chenal's advice and if there's something you know you are going to want, or need, like a computer, save for it.
Commenter 27 - My advice is to match whatever the county match is. Put the additional funds in a Roth IRA. although you using taxed monies you can invest Your Roth plan into the same investments as the county does or a slough of others. The big advantage is when you take money out of your county plan that money is taxed. Say your in a 30% tax income bracket. For every one hundred thousand you take out you pay 30 thousand in taxes. Conversely in a Roth IRA all funds you withdraw are tax free. You take 100K out you keep all of it including all investment income you accumulated tax free. Not adding that as income also keeps you in a lower tax bracket. Talk you your accountant or tax advisor.
Commenter 13 - Most of us make too much to contribute to a Roth.
Commenter 4 - That is true Jake, my household income is way over 200,000
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INJURY RETIREMENT
Here's a little information on retirement. I don't plan on being to in-depth , because most of you have a long time until that day comes and things may change. To start with, I was going to retire at the end of January 2015 with 30 years. About mid month, I canceled, because I had a junior in college and a senior in high school. That meant I would have two kids in college in the next school year. I didn't know if I could hack it on my pension. On May 31st, 2015, I stopped two motorcycles. One of them decided he didn't want a ticket and started to take off. Thinking I was faster than I actually was, I tried to grab his right arm in an attempt to keep it from reaching the accelerator. That didn't work out. His rear tire fishtailed and slammed me into the second motorcycle. I was out IOD for the rest of my career.
Hopefully you know this, but I will go over it anyway. When you are out IOD you are out on what's called 4850 time. You can be out for up to a year on 4850 time. After that, if you still can't work, your pay gets reduced. On your paycheck you may have seen something like 80%, 50% pay etc? That's what it is referring to. You start out getting the higher percentage and it works down, eventually to zero, where you don't collect any pay. However, you can make up the shortfall in your part pay checks by burning some sick time. Which is actually a good deal, since when you retire and get cashed out for all of your time, you only get 50 cents on the dollar for sick time. All the other time is paid in full. On top of that you have to pay taxes on that, including the sick time, so you get less than 50 cents on the dollar for sick time. Anyway, If you are out IOD and run out of 4850 time,, you then collect part pay and the shortfall can be made up by burning sick time. So, I knew all that. What I didn't know, was that if you are;
1- OUT 4850 time
2- retire medically, WITHOUT going back to work, even if you are having to burn sick time, because your 4850 time ran out,
3- then when you retire, your cash out check for sick, vacation, holiday time etc, is tax free. To be more correct, the money is tax free. They will take taxes out (they took $40,000 out of mine), but you will get it all back with your tax refund. THAT'S a chunk of change, pal!
This little rule is due to a lawsuit brought by an LASD lieutenant in the '80's. The court ruled that since the LASD allows us to burn sick time ( and vacation time, etc) to make up for our lost 4850 time, that money is all tax free if we retire medically. I never heard that until about 3 months before my retirement. A lot of tax people are not familiar with this obscure law, because it is specific to either just the LASD or just L.A. County employees, I forget which. Anyway, if you are in this situation, and your tax person isn't familiar with this law, or if they think I'm full of shit, call Susan Rahn, my tax lady. She lives in the Palm Springs area. She can send him the pertinent info, or you can go to her, or her daughter will come to you.
Since originally recommending Susan Rahn, some of my former co-workers have balked at the idea of paying $500 and driving out to the Palm Springs area to get a refund worth tens of thousands of dollars. I think they are some cheap-ass bastards. "Frugal" is their self description. Anyway, to save you cheap-ass, frugal bastards a couple of hundred bucks. I was going to copy and paste the lawsuit information, but you're big boys and girls, so you can look it up yourself under, "Givens v. Commissioner, 90 T.C. 1145".
You can take this to your tax guy. If he still balks at the idea, then drive out to Palm Springs, have a nice weekend and pony up the dough. Remember, this only applies if, when you retired, you had been out on 4850 time. It doesn't matter if you did, or didn't, run out of 4850 time and started burning your own time. The fact that you CAN burn your own time if need be is what counts. What DOES matter is that you did not go back to work, even light duty.
Wayde Farrell - Another thing to consider is maxing out your Horizons account using your payout check when you retire. That can be a good idea, unless you retire medically. If you retire medically, and were out on 4850 time AND DID NOT GO BACK TO WORK, your payout check is tax free. So if you take your tax free pay out check money and put some of it into your Horizons account, when you pull that money out of Horizons, you will have to pay taxes on it. Put it into something else
Commenter 1- Excellent advice! I wish someone would have told me all of that when I was “young and dumb.” The only mistake you outlined that I didn’t make was to buy my six (6) active duty military years. It made a huge difference when I retired. Also, look at moving your funds out of Horizons after you retire. I did and am now with a wonderful company that truly doesn’t just care about my money, but about ME!
Commenter 5 -After you retire, look to roll the money, in your Horizons account, into another type of retirement fund. Horizons does well but, there are many out there that do much better. The wife and I are invested in a fund now, that has a 12.33% return this year.
Commenter 28 - With our LACERA retirement and Horizon income, we will always have tax implications. consider roll-overs to and continued funding of a ROTH account which will give you tax free growth and reduce your overall tax footprint and required minimum distributions at 70 1/2.
Commenter 5 - I don’t believe you can roll your 457 investments into a Roth IRA
Commenter 28 -I fund my ROTH each year with the maximum amount in a direct roll-over/distribution to another investment institution.
Commenter 29 - I believe that loop hole just closed with the passing of the new tax plan.
Commenter 20 - 457 to ROTH is allowed, but you will pay income tax on the 457 distribution. Same rule as rolling a traditional IRA to ROTH.
Commenter 30 - Any prudent suggestions on how to remove, or begin to remove Horizons monies at 70 1/2? Soon to face that dilemma. Not relishing having my yearly wages shoot up to another bracket.
Commenter 10 - An IRS chart of IRA required distributions at 70.5 years of age. (This chart would not copy and paste, so you'll have to look it up on the internet yourself.
Commenter 31 - Also, you should talk to Horizons, they deal with this all the time and will be able to tell you step-by-step. (SEE RULE #1)
Commenter 20 - If you wait until 70 1/2 the IRS will dictate your Required Minimum Distribution (RMD). BankRate dot com has a fairly good calculator.
Commenter 32 - If anyone is interested, my tax guy, Maurice Kempner, who is a former deputy has a wealth management company where you can buy in and start buying and renting properties in other states with management companies in place to do the work for you. http://truelegacywealth.com/ **
**(I know absolutely nothing about Mr. Kempner and this pamphlet is not an endorsement of his, or anyone else's services)
Summary From Commenter 33 -
My advice:
1. Start young, If you didn't start young, START NOW!
2. Start with aggressive investments (Small Cap, Mid Cap, Large
Cap, international) Stay away from Stable Income, Bonds, and
Bank Depository Funds until later.
3. Let it ride! Do not attempt to time the market, ride out the ups and
downs, remember, you are in it for the long haul!
4. Start investing in a ROTH IRA for both you and your spouse.
This money can be withdrawn TAX FREE when you are retired,
Horizon withdrawals are taxed!
5. Live below your means and avoid debt! Do you really need that
new BMW when a used Honda will get you where you need to
go?
6. Invest in a 529 Cloverdale education account, for each child, to
help pay for college.
7. Teach your kids to set up and invest in a Roth IRA With their
allowance, or at least as soon as they begin their first job.
My Story: I began investing in Horizons early in my career, but knew little
about investing, so all my money went to Stable Income for the
first 11 1/2 years (ouch). At that time, I had accumulated
$49905.83. I spoke to one of my peers, who had invested
aggressively and found he had amassed over $300K during the
same time frame! I sought out several sage mentors, who
convinced me to move my money to more aggressive
investments and to put half of each raise into Horizons until I was
maxing out every year. 22 1/2 years later, I am 6 weeks from
retiring, my Horizons account has 7 figures (more than
$1,000,000.00) and, I have additional investments in Roth IRAs!
My wife gave up her career to raise our children, which means I
accomplished this on a single deputy income! Anyone can do
this, but it takes a little discipline and sacrifice! When my career
began, I was making less that $2,000 a month, and Horizons
only allowed a max contribution of $6,000 annually. So, it should
be much easier for you newbies to way exceed what I have done
and retire as a multi millionaires!
Good luck in your careers.
Wayde Farrell
Now that you cheap bastards have read all this, maybe you can pay me back by reading a couple of my stories at theretiredcop.blogspot.com and leaving some comments. Don't worry, it's free too.
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