In this episode of the Washington State Retirement Planning podcast, host Ethan Meikle breaks down the Plan 2 pension for Washington state employees in the TRS and PERS systems.
He discusses in detail how the pension system works, including how to calculate the benefit formula, vesting requirements, and the age at which pension benefits can be accessed. He explains that Plan Two provides a 2% increase for every year worked with no cap on the number of years, unlike Plan 1.
Furthermore, the amount you receive is calculated based on the average of your top five years of income. This amount is guaranteed for life and subject to an annual increase of between 0% and 3% to cover inflation.
Lastly, Ethan highlights the importance of setting up an outside retirement account to supplement the fixed income provided by the plan.
Outline Of This Episode:
00:15 Introduction to the Podcast
00:47 Understanding Plan Two
01:26 How Plan Two Works
02:07 Calculating Your Benefits
03:10 When Can You Start Collecting Benefits
04:52 Vesting Period in Plan Two
06:38 Survivorship Options in Plan Two
07:39 Downfalls of Plan Two
08:08 Importance of Outside Retirement Account
08:36 Conclusion and Additional Resources
09:11 Legal Disclosure
Transcript
Welcome to another episode of the Washington State Retirement Planning podcast. I’m your host, Ethan Meikle. And I’ll be your trusted guide and your journey to understanding your retirement benefits. As a Washington state employee,
my goal is help you guys become more educated on your benefits so you can ultimately make better decisions. Retire earlier. Reduce your taxes and really just enjoy your free time.
So, whether you’re a seasoned employee approaching, retirement or brand new employee that doesn’t even know anything about what pension plans are on. I got you guys covered. In today’s episode, we’re actually going to be covering what plan two is. So specifically. We’re going over the TRS plan too, as well as the. Per his plan to.
So these plans are actually the same the only differences between them. Is the contribution rates. Other than that, everything we’ve talked about today is going to apply to both of them. So the same retirement rule is same. vesting requirements. So I’m gonna go over in great detail, how the pension system works as far as how to calculate the Bennett formula. We’ll cover the vesting requirements
as well as when can actually start collecting and enjoying your pension.
All right. So without further ado, let’s dive right into it.
looking at plan two, it’s pretty straightforward. So it’s what we call a defined benefit plan.
So the way this one works is you’re gonna get 2% for every single year that you work for the school district or any, public employer. That you’re on plan two with, so it’s 2% for every single year you work with them. Now these years are full service credit years. So if you’re in a part-time contract, you probably only only got half a year or something like that.
The important thing to know with this one is they don’t cap the number of years that you work. Unlike in Plan one, where they’ve capped you off at 30 years. This one, there is no cap. So if you wanna work 35 or 40 years, you’ll get full pension credits for those years worked. So as an example, if you worked, 10 years in the Plan two system, you’ve been entitled to 20%.
If you worked 30 years, it’s 60% and this is gonna be guaranteed for the rest of your life. Now what are those percentages based on? For this particular plan, they’re gonna base that percentage on the average of your top five years of income. They do have to be consecutive. So in order now, they’ll do this for you automatically.
But if you wanted to get a rough estimate of what you can expect in the future. This is the formula you used to do that. A couple of things to note here is, even though we’re gonna get our top five years of income, most times they’re gonna be our last five years.
But that’s not always gonna be the case. So if you worked as, an administrator or you made more and money in a different district in the past in a different job, those are the years they’re gonna take. So that also means that if you were to take a part-time position or step down from position to slowly phase out, As you get close to retirement, those years aren’t gonna hurt your pension because you’re already locked in your top five years,
but that’s not always what you’re gonna get and we’ll come back to that in a little bit. So as far as when can I start getting this benefit, it’s really gonna depend on the number of years you worked and how old you are. Under the current law, if you have at least 30 years of service, you can start drawing your benefits in full at age 62.
Now, that doesn’t mean you have to work till age 62. That’s just when you’re entitled to the full benefits. So you have 30 years of service, but you’re only 60 years old. You could indeed retire and just hold off collecting your benefits, and there’s not gonna be any kind of penalty for that. So that’s always an option.
Or if you wanted to collect your benefits, you could do it too. It would just be at a reduced rate. Now, if you have at least 30 years of service, the reduction they take for going early is much less of a hit than someone trying to collect early that doesn’t have 30 years of service. So 30 years of service is really the magic number here.
Oftentimes, if someone has 30 years of service and they’re like 60 years old, it actually makes sense to start collecting your pension at age 60 and take a little bit of reduction. And the reason being is the reduction for going two years early, once you have 30 years is only about a 5% reduction. And if you do the math on it, your break even is somewhere in your late eighties.
So oftentimes it just makes a little more sense that way. If you can financially afford it or may just wanna transition out of education or go into a different industry or just do something different, you could definitely do that and collect your pension at 60 with a small reduction. Or you just don’t touch it and you’ll get your full benefit in a couple of years.
Now for those of you that don’t have their use of service, your full age to collect your pension is gonna be age 65, but keep in mind, you also don’t have to work till 65 to get the benefits. You can retire really at any time you want to and just hold off collecting as long as you’re vested. Now, the vesting period in Plan two is just five years of service.
Any five years, they don’t have to be consecutive, really. So as long as you have five years of service locked in into the Plan 2 system, you’re gonna be entitled to a pension at some point in the future. Most people who have less than 30 years of service credit and try to collect their benefit before age 65 discover that it doesn’t really work out a lot of times because the penalty’s much steeper, often in excess of 10% per year, you go early.
So if you’re in this boat, we often recommend either working till 65 or holding up collecting until 65, so you don’t take that penalty. One extra note though is as it currently stands, if you’re hired after May 1st, 2013, Your full retirement age is gonna be age 65 regardless of the number of years worked.
So if you’re hired after that date, it doesn’t matter how many years you work, whether you work 30 years, 35 years, or 40 years, you have to be at least 65 to be entitled to your full benefit. So the rules really aren’t favorable for those new hires.
Plan, 2 is funded by both your employer and yourself, say about 7% as of the recording of this into your plan. The state can increase that and they usually do every couple of years. So over time, you might have to pay more and more money into this plan. However, I really still think it’s a good deal because you’re going to get a guaranteed paycheck for the rest of your life and you don’t have to worry about the stock market or investing or any of that kind of trouble.
And it’s just really easy living when you have a guaranteed paycheck coming in. So I’m a really big fan of the way Plan Two works. So Plan Two also comes with the cost of Living Adjustment. Now this doesn’t really affect you until you actually go into retirement and start collecting it. But just know that over the years they are gonna increase your pension payout between zero and 3%.
It’s really not gonna be a raise. It’s just really meant to keep up with inflation. So don’t expect to really make any extra money off of that. Now, earlier I mentioned that that full benefit formula isn’t what most people are gonna get, and that’s because there are survivorship options that you can also take as well.
So that formula is what they call the full benefit formula, and really it’s attached to your life only. So as soon as you pass away, your pension is gone. So if you’re gonna retire and you have a spouse that you want to pass the pension onto, you’re not gonna take that option there. If you’re single and you’re gonna retire, the only option you can take is that full benefit formula.
So for those people going into retirement with a spouse, you’re gonna elect one of three different survivorship options, and those options are gonna reduce the amount of income you’re gonna get per month permanently throughout your retirement. And what you’re doing there is really buying insurance from the state.
So should something happen to you, your spouse is gonna get either all of your pension, half of it, or two thirds of it for the rest of their life. Now, if your spouse were to predecease you, the state will automatically change it and bump you up to option one, the full bandwidth formula, so you will see an increase in your pension.
Plan two is a great plan as we just went over. However, there is more that needs to be done to make sure you’re setting up for a successful retirement. Some of the downfalls that we see in plan two is because it’s a guaranteed paycheck. There is no savings component to it, so should something come up and you need additional funds or retirement, this plan doesn’t support that.
It’s just a fixed paycheck, which is nice for that security and consistency of income. But when things come up in the future, which we know they will, there’s no extra money to draw off of. Or say you wanted to retire early and you needed to get by for a couple years so you don’t have to dip em to this pension.
If you don’t have any retirement savings saved up, that’s probably not gonna be an option. Staying up an outside retirement account to save into on a consistent monthly basis to build up that pot of money for the future is always gonna be a good idea, and it’s gonna give you more control over when you can retire and your income that you can get from your retirement in the future.
So we’ll go ahead and dive into those other savings options in another episode. But that’s our wrap for today on how the plan two system works in Washington. State, if you want more information on this, be sure to check out our website. Which is Washington Therese purge. as.com that’s w a T R S P E R s.com. That’s our free educational blog. That goes more in depth on all of your different types of benefits. So go ahead and check that out.
If you found value in today’s episode, feel free to share it with a friend so we can help spread education to more Washington state employee ease. Now, so next time, remember that your future depends what you do today.
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All right, before I sign off, just a real quick,, legal disclosure that we’re required to say as licensed fiduciary advisors. So remember that this is the podcast. It is designed for educational and entertainment purposes only. I don’t know you personally, therefore, I cannot give you for any personal advice.
So please don’t take anything that we say on the show as being personal, financial, legal, or tax advice. If you want that kind of stuff, Make sure you seek out a professional so they can help you with the strategies and investments that are right for you. Also, please remember that despite the name of our show, we are in no way associated with Washington State or the Department of Retirement Systems or any other Washington employer.
We are a private owned firm that specializes in working with Washington State employees, which is why we know so much about this stuff. So remember, we don’t work for the state in any way, shape, or form, so please don’t confuse us as being an official representative of the state. All right, that’s it for the legal stuff.
I’ll catch you guys all next time.