EP 3 – TRS & PERS Plan 3 Simplified
The focus of this episode is on understanding the Plan 3 retirement system for Washington state employees. The podcast sheds light on the two parts of Plan 3: the Defined Benefit Plan and the Defined Contribution, with particular emphasis on their operation and future expectations.
The discussion also covers contribution rates, the full benefit age, and potential downsides of the plan. Lastly, the host introduces the Plan 3 and DCP investment advice system aimed at providing personalized investment advice based on risk tolerance.
Outline
00:14 Introduction to the Podcast
00:47 Understanding Plan 3 System
01:23 Exploring the Defined Benefit Plan
03:17 Understanding Pension Collection Age
04:58 Introduction to Defined Contribution
07:57 Investment Options in Plan 3
10:25 Drawbacks of Plan 3
13:05 Legal Disclosure and Conclusion
Transcript
EP 3 – TRS & PERS Plan 3 Simplified –
Transcript:
(00:03) [Music] welcome to the Washington State retired planning podcast I’m your host Ethan M I’m here to be your trusted guide on your journey to understanding your retirement benefits as Washington state employee on this podcast we break down the complexities of Washington state system so that you can retire earlier pay and taxes and Savor your well-deserved free time whether you’re a seasoned employee or just getting started out this podcast is going to be a resource to securing a brighter financial future remember if you find
(00:42) Value in this please consider sharing it with a colleague so we can help get this information out there now today’s topic is going to be on how the Plan Three system works specifically we’re talking about how it works for people on the teachers retirement system the public employees retirement system and the School Employees Retirement System so so your plan three is actually divided into two parts one part is called your defined benefit plan and the other is called the defined contribution so we’re
(01:08) going to take some time to talk about how each side works and what you can expect from them in the future and at the end of this I’m going to be sure to tell you some of the downsides of this plans so without further Ado let’s Dive Right In Plan Three is a two-part plan the first we’re going to take a look at is the defined benefit side of things or the pension side this slide is fully funded by the state Washington or your employer the way this works is you’re going to get 1% for every single year
(01:34) you work in Washington states keep in mind that those years work do have to be on a full-time basis or enough to give you one full service credit if you are working at a point 6 or maybe just working part-time your years earned are going to be at that half or that 6 level so it might take you a few extra years to AC that full year working this plan doesn’t actually have any kind of cap on the number of years you can work so if you want to work 35 years you’re going to get paid on all 3 5 years or 35% if
(02:02) you only work 20 years you’ll get paid 20% so it’s pretty easy to do the math on this plan now that percentage is going to be based on the average of your top five years of income that are consecutive so they do have to be in order but the say will keep track of that and calculate it for you now these years of income do include everything above and beyond your base salary so if you’re someone that coaches or has your national board the all that income will also count towards the total income when
(02:29) they do this pension calc potion now because it’s the top five years typically they’re going to be your last 5 years of working but that’s not always the case if you earned more in a previous position prior to that you’re going to get paid obviously over those years and if you take AP parttime or just start working less as you close to retirement you’re not going to get deemed for doing that so it’s going to be off your top five years of income pension here is what they call the full
(02:53) benefit formula or option one if you’re single when you go to collect this is going to be the option you take if you have a spouse when you transition to retirement you’re probably going to want to take a survivorship option so if something happens to you your spouse can still receive a portion of your pension for the rest of their life so anytime we take one of those SP benefits we’re going to get a reduced paycheck so the formula we see here is probably not what you’re going to end up getting so when
(03:16) can you actually start collecting this pension the full benefit age is going to be age 62 as long as you have 30 years of service so as long as you have 30 years of working you can start drawing your benefit in full at age 62 now if you don’t have 30 years of service you’re going to have to go until age 65 now does mean you have to work to those ages it just means that that’s when you can get the benefit in full if you want to collect early now you definitely can however if you’re someone that has less
(03:43) than 30 years you probably want to hold off because there’s a penalty every year you collect it early and the penalty for people that have less than 30 years is pretty significant if you’re in that first category where you have your 30 years of service collecting your benefit one or two years early is a very small reduction and often times it actually makes sense to collect the early and take that hit to many of our clients actually do retire at age 60 with 30 years of service and take their penion at that time as well and take that
(04:09) reduced benefits why because the pensions so little the break even weigh in their late 80s and they much rather either be retired or doing something different at this time because they’ve already been doing this for 30 years so that’s always an option for you as well as long as you can financially afford it one note on this is for people that are hired after May 1st 2013 you do have to work till 65 regardless of number years worked so if you’re one of those new hires it doesn’t matter if you worked 32
(04:34) years or 35 years you have to go to 65 to get your full benefit there is some Penny legislature that’s seeking to change that and if that does pass I’ll be sure to let everybody know now this plan is eligible for a cost of living adjustment so in retirement you’re going to see an increase somewhere between 0 3% of your pension it’s just there to help you keep up with inflation it’s not really going to be much of a raise so you’re not really going to see any more money going to the bank now the second
(05:00) part of Plan Three is your defined contribution so this is your side of the plan this is where your personal contributions go into every single month so the amount of money you’re put in there is somewhere between 5 to 15% and it really depends on what you decided to contribute when You’ signed up for Plan Three if you didn’t sign up for anything and you just got default into Plan Three you’re set to just that minimum of 5% now currently you’re not able to change your contribution rate simply change
(05:27) employers so as long as you’re in your current School District you’re stuck at the contribution rate that you picked and every single month it’s just going to go into that investment account and it’s going to rise and fall depending what the markets do so it’s just like a 401k now this one is unique in that it’s a non-erisa so there’s certain unique Provisions in here that apply the first one is this money is absolutely hands off until you separate service so as long as you’re an employee you can touch
(05:52) this money for any reason at all right so there’s no hardships there’s no loans there’s no I get to certain a give me some of my money none of it as long as as your employeed you can’t touch your money even if you’re 65 years old you still can’t touch your money until you leave so it’s one of the worst rules about this plan that most other T plans out there would let you have access to this money should you need it also all this money goes in there on a pre-tax basis so a lot of people hype up the
(06:19) pre-tax saving and what you do is you’re going to how going to get a tax deduction so if you made $50,000 in a year and you save 5,000 to this plan three they’re only going you’re only going to be taxed on $45,000 of income not the full 50 right so that’s one of the benefits is that pre-tax contribution no as far as where does this money go if you are working before July 22nd 2011 you’re going to be defaulted into the wsib which just stands for Washington State investment board or the tap fund
(06:51) and the one thing know is this fund is aggressive it’s heavy in equities and really private Investments so this fund does well when the market does well and it does poorly when the market does poorly for people that start after July of 2011 you actually got put into a targetting fund which is a little more procreate because what a Target Fund does it lines you up to when you’re going to be h65 and as you get close to that age it’s going to Army adjust your portfolio to include more bonds and fixed income to reduce your level of
(07:21) risk as you get closer the W does not do that it is aggressive max out all the way through and it doesn’t change it doesn’t how old you are so a lot of people find themselves in trouble because they never make this change and they find themselves in the 6s with this really aggressive portfolio and everything’s really at risk it should go wrong in the market so if you’re like man I’m not sure where my money’s at go ahead and make a login into the DRS account and look where your money is now
(07:49) once you log in if you see your money is with wsib you might want to consider changing it now inside plan 3 you actually have two ways you can invest you can stay in the wsib which which the Washington State investment board basically manages the funds for you or you can shift over to the self-directed side now some people get scared when they hear the word self-direct because they’re like I don’t know what to pick so fortunately it’s certainly not that overwhelming they actually have a lineup of Target a funds and they only have
(08:16) seven other investment options so it’s not like you’re going to get totally overwhelmed by the amount of choices there are now these are all mutual funds the risk of you picking one of these and it going to zero is quite low because when you purchase one of these funds you’re not just buying one stock you’re actually getting hundreds if not thousands of different investments in there so one of these is going to be quite diverse but it’s also important to know that you shouldn’t just put your
(08:39) money just in one of these you want to create a portfolio now for a lot of people that’s overwhelming and they don’t want to think about it we don’t have time to research you guys are busy people and I get it so that’s why I actually created a plan 3 and DCP investment advice system so the system is where you’re able to log in let let me know how much risk you want to take and then every quarter you’re going to get personalized advice on how to invest your plan three or DCP accounts so for
(09:09) example if you said hey I want to be conservative it’s going to say you need to put X percentage in the bond fund you should put so much percentage into the global fund and so on and so forth so it’s going to basically tell you exactly how to invest it and then each quarter is going to update you and tell you hey you should make these changes we’re going to shift a little bit more from the stock market into bonds or something like that but every quarter you get updates now if you do have most of your
(09:37) life savings inside this account paying a small monthly fee to get the piece of Mind knowing that you have some kind of professional guidance here on how to invest your money when to make changes should be definitely worth the money and because it’s a fixed cost I don’t care if you have $10,000 or a million do this thing the cost is going to be the same for everybody so trying to make this thing accessible and you currently can’t get this type of advice anywhere else so if you’re interested in that kind of
(10:02) thing and need help with your plan for Investments I invite you to check it out all you need to do is go to our website wurp pur.com that’s W trsp rs.com scroll on to the bottom you’re going to see the get help section under there the second link down is Plan Three and DCP investment advice so once you click on that link it’ll take you right to the page to learn more about it all right let’s get back to the now the draw Downs of this plan is you’re only going to get 1% a year whereas P plan two got
(10:31) that 2% guaranteed so really the purpose of thisi contribution is to hopefully have enough Investments build out they can draw income off of and it should match up to what people would have on that plan two system often times it’s not going to be the case especially if people control their Investments and the markets really don’t work out so one of the reasons why I really don’t like this plan is for that reason is that it’s just not as certain as plan to second is that contribution rates locked in so if
(10:58) you’re someone you know newly hired and able to save say 10 or 15% and you get locked into that and suddenly a few years later you find yourself married with kids it might be a little bit tight to keep making that contribution payment each every month now the third thing I’m really not a big fan of with this is that all the money in Plan Three is pre-tax you currently don’t have the option to choose Roth pre-tax contributions it’s all being marked as pre-tax which on the surface sounds great I can put money away now they
(11:26) don’t tax me on it I’ll pay it later when I’m making less therefore will be an a our tax bracket unfortunately for most the employees that we work with that often isn’t the case while I sure you might earn Less in the future that doesn’t necessarily mean less taxes and because you guys have a pension on top of your Social Security many times your income might be less but not so much less that you’re actually driving tax brackets so people might make $50,000 Less in retirement and still be in the
(11:53) same tax braacket just based on how wide the income bands are for those so it’s a false belief for many people that lower income means lower taxes in the future so because plan 3 doesn’t give you the option to choose pre-tax a Roth and default in this you could be left with a hefty tax bill in retirement in fact that’s where most our clients decide to hire us is they’re trying to figure out how do I pay the least amount of taxes on this giant pre-tax account I’ve accumulated over the years while taking
(12:21) income and making sure that my spouse and kids are going to receive some kind of benefit from this so that’s a specialy that we’ve developed and a process for that that is exclusive for Washington State Employees all right so that’s our stopping point for today’s episode I hope you found this discussion insightful now if you want more information please head over to our website wp.
(12:45) com that’s wsp rs.com if you have any specific questions or topics you’d like us to cover in the future please feel free to reach out to us we’re here to support you on your retirement Journey Don’t forget to share this with a friend or leave us a review so we can reach more Washington State Employees to get this education out there until next time remember that your future depends what you do today 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
(13:13) is the podcast it is designed for educational and entertainment purposes only I don’t know you personally therefore I cannot give you 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
(13:39) of fire systems or any other Washington employer we are a private owned firm that specializes in working with Washington state employes which is why we know so much about this stuff so remember we don’t work for the state in any weight shape or form so please don’t confuse this 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
