Planning for Early Retirement as a Police Officer

Retiring early as a police officer is a goal that many in law enforcement share. The physical and mental demands of the job, along with the unique pension structures available to officers, make early retirement a real possibility, but it requires careful financial planning. Whether you aim to retire in your 40s or 50s, having a clear strategy leads to the highest chance of maintaining financial security while enjoying your post-policing years.

Understanding Your Pension and Retirement Benefits

1. Know Your Pension System

In Indiana, most departments are on the 1977 Police Officers and Firefighters Retirement Fund. The key aspects of the pension include:

• Years of Service Requirement – You become vested (eligible) for the pension at 20 years of service. However, you must wait to draw the pension until age 52. At 20 years of service, you will receive a 52% pension. For every 6 months of service over 20, 1% is added. This scales up to a maximum 76% pension at 32 years of service.

• Multiplier Factor – At 20 years of service, you will receive a 52% pension. For every 6 months of service over 20, 1% is added. This scales up to a maximum 76% pension at 32 years of service.

• DROP (Deferred Retirement Option Plan) – The 77’ fund offers a DROP program, allowing you to continue working while accumulating pension benefits in a separate account. This can lead to a substantial lump-sum benefit at retirement.

• Survivor Benefit – Your surviving spouse is entitled to 70% of your benefit for the rest of their lives. Children may also be eligible for a 20% survivor benefit.

Understanding these elements will help you estimate your pension income and determine the earliest feasible retirement date.

2. Social Security Considerations

Many police officers do not pay into Social Security while working, meaning their benefits may be insignificant. Only employment subject to FICA counts towards social security calculations. Log in to ssa.gov to view estimates. Fortunately, the windfall elimination provision (WEP) and Government Pension Offset (GPO) have been repealed with the Social Security Fairness Act. This means benefits in retirement and survivorship pension benefits are unreduced.

Supplementing Your Pension with Savings

3. Maximize Your 457(b) Contributions

A 457(b) plan is a tax-advantaged retirement account available to many departments across Indiana. Unlike a 401(k), there is no early withdrawal penalty before age 59½, making it a crucial tool for early retirees.

• Contribution Limits – In 2025, the annual limit is $23,500, with an additional $7,500 for those over 50.

• Catch-Up Contributions – If within three years of retirement, you may be able to contribute double the annual limit with the special catch-up contribution. Starting in 2025, there is also an age 60-63 catch-up contribution of $11,250. Disclaimer: Only one limit may be used at a time.

4. Consider a Roth IRA or Brokerage Account

A Roth IRA allows tax-free withdrawals in retirement, while a taxable brokerage account is only bound by capital gains tax. If you plan to retire early, a mix of tax-deferred and taxable accounts provides liquidity before reaching traditional retirement ages. In any case, consult with a financial professional to select the best supplemental account for you.

5. Health Savings Accounts

A Health Savings Account (HSA) can be a powerful tool for early retirees, especially for covering healthcare expenses before reaching Medicare eligibility. HSAs offer triple tax advantages: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. Consider investing a portion of your HSA funds for greater upside potential.

If these funds go unused, they can be withdrawn after age 65 for any expenses; however, withdrawals are subject to income tax. Further, the funds can be used tax-free to pay for long-term care insurance premiums.

5. Invest Wisely

Your investment strategy should align with your retirement timeline. While your pension provides a safety net, having diversified investments in stocks, bonds, and real estate can help sustain your lifestyle in early retirement. A bucket strategy, where you divide your assets into short-term (cash), mid-term (bonds), and long-term (stocks) investments, can help manage risk.

Managing Expenses in Retirement

6. Budget for Post-Retirement Life

Calculate your expected expenses and compare them to your estimated retirement income. Common costs include:

• Healthcare – If you retire before Medicare eligibility (age 65), you may need to secure retiree healthcare through your department, a spouse’s plan, or a private insurer.

• Taxes – Pension income is taxable in Indiana, and withdrawals from pre-tax retirement accounts are subject to income tax.

• Housing and Lifestyle – Downsizing, relocating to a tax-friendly state, or reducing discretionary spending can stretch your savings.

7. Consider Part-Time or Consulting Work

Many retired officers supplement their income with part-time jobs in security, consulting, or teaching at police academies. This can help bridge the financial gap until full pension benefits or Social Security kick in.

8. Emergency Fund and Insurance Needs

Having an emergency fund with at least 6-12 months’ worth of expenses is crucial. Additionally, review your insurance needs, including long-term care, health insurance, and life insurance, to ensure you remain protected in retirement.

Avoiding Common Pitfalls

9. Failing to Account for Inflation

A pension that seems sufficient today may lose purchasing power over time. Since 1978, the average yearly COLA adjustment for the 1977 Police and Firefighters’ Fund has been 2.46%. The actual inflation rate in the same window has been about 3.5%. Consider investments that can outpace inflation to maintain your lifestyle.

10. Underestimating Healthcare Costs

Medical expenses tend to rise with age. If your department doesn’t offer retiree healthcare, plan for private insurance or an HSA (Health Savings Account) to cover future costs. Once you reach Medicare age, carefully consider your medical needs and the various plans to meet those needs.

11. Relying Solely on a Pension

As you know, your pension will only be a percentage of your salary at retirement. Deferred comp, IRAs, and other investments are necessary to live the same quality of life in retirement. Your pension is a great foundation for a retirement plan.

12. Not Planning for Longevity

With advancements in healthcare, many retirees are living longer. Make sure your financial plan accounts for 30+ years in retirement to avoid running out of money.

13. Ignoring Estate Planning

Ensure your assets are protected by creating a will, setting up beneficiaries on your accounts (including bank accounts), and considering trusts if needed. Proper estate planning ensures your family is taken care of in the event of unforeseen circumstances.

Conclusion - Work with a Financial Planner

Whether you are a DIY planner and investor or new to investing, consider meeting with a financial planner to assess your situation. Law enforcement is stressful, and it is easy to make mistakes or overlook important aspects of the financial picture. Look for the following when choosing a financial planner.

• They are a CFP®

  • A Certified Financial Planner® is required to act in your best interests, has satisfied the requirements of the CFP Board by completing coursework and passing an examination, and holds themselves to the CFP® standards.

• They are law enforcement specialists.

  • Many financial planners are generalists, meaning they work with anyone. Seek out a professional who is a specialist in your unique benefits in law enforcement.

Early retirement as a police officer is achievable with the right financial planning. Maximizing retirement savings, managing expenses, and diversifying income sources will help you retire comfortably. Start planning today, and you’ll be well on your way to financial freedom and a fulfilling retirement.