Plan 2 Vs Plan 3 (TRS & PERS)

WA DRS – Plan 2 Vs Plan 3 (TRS, SERS, PERS) – Which Pension Plan Holds the Key to Your Retirement?

Are you a Washington state teacher, carefully considering your retirement options? In the intricate landscape of pension plans, the choices you make today can significantly impact your financial well-being tomorrow. Welcome to this comprehensive analysis of the Plan 2 and Plan 3 options within the Washington State Department of Retirement Systems (DRS). We are here to guide you through the complexities, comparisons, and crucial considerations surrounding these retirement plans.

Unraveling the Debate: Plan 2 vs. Plan 3

In today’s video, we embark on a journey to resolve a long-standing debate among Washington state educators: Is Plan 2 superior to Plan 3, or does the latter hold the key to a more financially secure retirement? It’s a question that has lingered in the minds of many, and by the time you’ve delved into the depths of this article, you’ll be well-equipped to make an informed decision about your future.

Plan 2 and Plan 3: A Closer Look

Before we dive into the intricacies of these pension plans, let’s ensure we’re on the same page. Plan 2 and Plan 3 are the retirement options offered to employees under the Washington State Department of Retirement Systems. Plan 2, a defined benefit plan, provides a fixed percentage of your average salary for each year of service, while Plan 3 integrates a defined contribution component that allows you to save for retirement alongside your pension benefits.

Understanding the Math Behind the Plans

Let’s crunch some numbers to better comprehend the potential outcomes of these two plans. Imagine your average annual salary is $100,000, and you’ve committed to 30 years of service.

  • Plan 2: This plan offers a compelling 2% benefit for every year of service. Multiply that by 30, and you have a guaranteed 60% of your average salary, amounting to $60,000 per year for life.
  • Plan 3: Here, the rate is halved, providing only 1% for each year of service. With 30 years of commitment, this results in 30% of your average salary, totaling $30,000 annually throughout your retirement. This is just the first part of plan 3. You actually have a second component known as the defined contribution plan to help you make up the income gap.

The Crucial Role of Defined Contribution

Plan 3 introduces a new player into the arena—the defined contribution component. Imagine this as a dedicated bucket of money you consistently contribute to, aimed at supporting your retirement. It’s an investment in your financial future, ensuring you have a source of income beyond the pension benefits.

The Safety Net: Safe Withdrawal Rate

When you’re ready to tap into your retirement funds, it’s vital to avoid draining the well too quickly. Enter the concept of the safe withdrawal rate. This figure represents the percentage of your retirement savings you can withdraw annually without jeopardizing your financial security. Currently hovering around 3%, it provides a prudent guideline to ensure your funds last throughout your retirement years.

Equating the Payouts: Breaking Down the Numbers

Imagine you wish to replicate Plan 2’s $60,000 annual payout using Plan 3. To achieve this, you’d need to accumulate a substantial $1 million retirement fund. Why so large? If you take the $1 million dollars multiplied by 3% you get $30,00 for the year. This vast figure underscores the challenge for most individuals to amass sufficient savings to equal Plan 2’s guaranteed benefits.

Of course, you could always take out more than 3%, it’s your money after all. Going over 3% means you wouldn’t need to accumulate as much money to generate the same amount of income, but it also increases the chances of not having enough money in the long run. It is certainly doable, but having the right income plan, tax plan, and mindset to carry it out each year is crucial and may require professional guidance. 

Realistic Scenarios: Plan 2’s Advantage

In reality, many educators find it challenging to reach the million-dollar mark in their retirement savings journey. The average Plan 3 balance after 30 years of service typically falls between $250,000 and $600,000. This discrepancy clearly positions Plan 2 as the frontrunner for those seeking more financial security in retirement.

Exploring Alternatives: The Annuity Option

Plan 3 offers an alternative route to bridge the gap. By investing in an annuity, you can secure a higher payout rate, potentially doubling your income compared to the base Plan 3 benefits. An annuity essential turns your savings into another guaranteed income stream, just like your pension and Social Security.  They offer a payout percentage based on your age that is guaranteed to pay you and even your spouse for the rest of your lives.

To illustrate, a six percent annuity would only require a $500,000 investment to yield $30,000 annually ( 6% x $500,000 = $30,000 annual income). However, this approach requires careful consideration, as it involves locking away a substantial sum of money that might otherwise be invested elsewhere. Basically, any money that goes into an annuity is hands-off and can’t be taken back out for any reason. 

Liquidity and Flexibility: The Plan 3 Edge

Plan 3 boasts a distinct advantage in terms of liquidity and flexibility. Should you choose to retire earlier than expected, the dedicated savings bucket grants you the freedom to access funds without penalty. This versatility contrasts with Plan 2, which lacks such flexibility. However, Plan 2 advocates can build their cash reserves through supplemental savings mechanisms like DCP and 403b plans.

Plan 3’s Hidden Advantages

Plan 3 isn’t without its hidden benefits. If you separate service after 20 years of service and you decide to delay drawing your pension benefits, the system rewards your patience with a three percent annual increase in your pension. This unique feature doesn’t apply to Plan 2, providing a compelling incentive for those willing to postpone their retirement.

Deciphering the Break-Even Point

The point at which Plan 3’s delayed benefit catches up with Plan 2’s earlier, but unchanged, benefit lies around the 25-year mark for most people. Trying to This means that if you retire early with Plan 2, it takes roughly 25 years for the benefit increase in Plan 3 to offset the difference. If you foresee a shorter career span, Plan 3 might emerge as a more attractive choice.

The Medical Factor: PEBB Enrollment

For those considering early retirement, the medical coverage scenario plays a pivotal role. Plan 3 permits you to retire, forgo pension collection, and still qualify for the PEBB medical plan. However, Plan 2 necessitates pension collection before PEBB eligibility, potentially impacting your retirement strategy. New legislation is currently in the works to change this for Plan 2 members.

Balancing the Scales: Individual Goals Matter

Your unique circumstances play a central role in determining the most suitable plan. If early retirement is on your horizon, Plan 3’s flexibility might resonate. Conversely, if guaranteed income and long-term financial security are paramount, Plan 2’s 2% annual benefit offers a solid foundation.

Contributions: The Fine Print

One facet to consider when comparing these plans is the contribution requirement. Plan 2 mandates an approximately 8% annual contribution, subject to potential future increases. While this might seem restrictive, the guaranteed payout and financial security it offers arguably outweigh the contribution commitment.

Plan 2: The Power of Compound Growth

Choosing Plan 2 doesn’t mean you’re limited to a single retirement avenue. With a separate retirement account, such as a 403b plan, DCP or Roth IRA, you can capitalize on compound growth and diversify your retirement strategy. 

A Hybrid Approach: Best of Both Worlds

Think of Plan 2 with supplementary retirement accounts as a hybrid model—an amplified version of Plan 3. With the guaranteed 2% benefit and the added flexibility and growth potential of individual retirement accounts, this approach provides a comprehensive solution for long-term financial well-being.

The Ultimate Decision: Plan 2 or Plan 3?

As you stand at the crossroads of retirement planning, remember that the primary goal is securing a stable and fulfilling post-career life. Plan 2’s powerful 2% benefit stands as a beacon of financial security, while Plan 3 offers flexibility, early retirement options, and the allure of personalized investment growth.

Ready to Take Control of Your Future?

This journey through the intricacies of Plan 2 and Plan 3 has equipped you with a wealth of knowledge to navigate your retirement path. Ready to start taking control of your future? Schedule a meeting with us here: Schedule a Meeting

FAQs: Unveiling the Mysteries of WA DRS Plans

1. Can I switch from Plan 2 to Plan 3 or vice versa?

No, switching between the plans is not allowed. The choice you make at the beginning of your employment typically remains irrevocable.

2. What happens if I retire early with Plan 3?

Retiring early can lead to reduced pension benefits. Plan 3’s defined contribution component can partially compensate for this by providing some income, but careful planning is essential.

3. Can I contribute more than the mandatory percentage to Plan 2?

No, the contribution rate for Plan 2 is fixed at approximately 8%, and additional contributions aren’t allowed.

4. Are there any tax advantages to Plan 3’s defined contribution component?

Yes, contributions to Plan 3’s defined contribution component are tax-deferred, meaning they can reduce your taxable income for the year in which they’re made.

5. What’s the best strategy for someone starting as a Washington state teacher today?

For those embarking on their teaching careers, Plan 2 supplemented by personal retirement accounts offers a comprehensive strategy, combining guaranteed benefits with individual growth opportunities.

In conclusion, the choice between Plan 2 and Plan 3 is a nuanced one, heavily reliant on your career trajectory, risk appetite, and retirement aspirations. While both plans have their merits, the allure of guaranteed income from Plan 2 and the potential for growth and flexibility through supplementary accounts might hold the key to your retirement happiness. Remember, your future deserves the utmost consideration—choose wisely.

Ready to Take Control of Your Future?

Navigating the complexities of retirement planning demands a strategic approach. By comprehending the nuances of WA DRS Plan 2 and Plan 3, you can craft a retirement strategy that aligns with your aspirations. If you’re seeking personalized guidance to ensure a prosperous retirement, schedule a meeting with us.

Get Personalized Investment Advice on your TRS 3 & DCP Plans

As you embark on this journey towards a secure retirement, expert financial guidance can prove invaluable. Connect with us at Scenic Financial to receive tailored investment advice on your TRS 3 and DCP plans. Your financial future awaits—let’s make it exceptional.

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