If you are on WA DRS Plan 3, whether that is TRS, PERS, or SERS, and you are thinking about retiring before your full pension age, the single biggest factor in how much money you keep is not whether you retire early. It is the order you tap your different income sources in. Get the sequence right, and you can avoid unnecessary penalties almost entirely.
Understand Your Pension Penalty First
If you do not yet have 30 years of service and you want to collect your pension early, the penalties are significant, enough that most people should try to avoid it. The good news is that retiring from your job and simply holding off on collecting your pension carries no penalty at all.
If you do have 30 years of service in, but you are not yet 62, say you are 58, 59, or 60, the penalty structure is much more forgiving. It works out to about 2% for going one year early, 5% for two years early, and 8% for three years early, adding roughly 3% for each additional year until you reach age 55, a full seven years early.
| Years Early (30+ Years of Service) | Approximate Reduction |
|---|---|
| 1 year early | 2% |
| 2 years early | 5% |
| 3 years early | 8% |
| Up to 7 years early (age 55) | Roughly 3% added per additional year |
A 2% or 5% reduction is not going to change your life. It is worth looking at closely before you pull the trigger, but do not let the word “penalty” scare you off from a decision that might otherwise make sense for your situation.
Dollars make this easier to picture. Say your full pension benefit works out to $3,500 a month once you have 30 years of service.
| Years Early | Monthly Benefit | Difference From Full Benefit |
|---|---|---|
| 0 (age 62) | $3,500 | $0 |
| 1 year early | $3,430 | -$70 a month |
| 2 years early | $3,325 | -$175 a month |
| 3 years early | $3,220 | -$280 a month |
Retiring three years earlier for $280 less a month is a trade a lot of people are happy to make, especially once you compare it to what an early Social Security claim would cost over the same stretch.
Why Social Security Should Be Last in Line
One of the biggest mistakes people make when retiring early is turning on Social Security the moment they hit age 62, simply because they can. That decision feels like relief in the short term, but it locks in a permanent reduction, typically 25% to 30% less than what you would have received by waiting until your full retirement age.
Compare that to your pension’s early penalty of 2% to 8% for the same handful of years. If you are ever forced to choose between taking your pension early or taking Social Security early, taking the pension early is almost always the better trade.
The Real Answer: Use Your Plan 3 Bucket First
Here is where Plan 3 has a real edge over Plan 2. Ideally, you do not want to touch either your pension or Social Security early at all. That is where your Plan 3 defined contribution bucket comes in. Once you separate from service, you have access to the account you have been saving into for years.
Tapping into that liquid cash first, rather than reaching for your pension or Social Security, lets you bridge the early retirement years while avoiding penalties on either one. This is the single biggest advantage Plan 3 has over Plan 2 in an early retirement scenario, since Plan 2 has no equivalent bucket to draw from without forfeiting the entire pension.
Here is what that bridge can look like in practice. Say you need $1,500 a month to cover the gap and you want to hold off on both your pension and Social Security for three years.
| Monthly Need | Bridge Length | Total Drawn From Plan 3 Bucket |
|---|---|---|
| $1,500 | 3 years (36 months) | $54,000 |
Drawing $54,000 out of your Plan 3 bucket over three years to fully protect both your pension and your Social Security from any early reduction is often a better trade than it first appears, especially once you consider how much a permanent 25% Social Security cut would cost you over the following two or three decades of retirement.
Healthcare: Plan 3’s Other Big Advantage
PEBB, the Public Employees Benefits Board, is health insurance built specifically for public employees, and on Plan 3 you are not required to start collecting your pension to qualify for it. Your spouse and dependents are eligible too.
While you are under 65, PEBB acts as your primary coverage. Once you turn 65 and enroll in Medicare, PEBB shifts to a secondary payer, working alongside Medicare much like a supplement plan, and your costs typically go down at that point. In most cases, PEBB ends up cheaper than options like AARP-affiliated plans or other private coverage, though it is always worth shopping around to confirm that for your situation.
Because Plan 3 removes the pension requirement from the PEBB equation, healthcare and pension timing become two completely independent decisions. You can enroll in PEBB the moment you retire, then decide separately, on your own timeline, when it makes sense to start collecting your pension based purely on the penalty math above.
Deciding What to Do With Unused Sick Leave
When you retire, you generally have three choices for unused sick leave.
- Use it up before you leave. This simply gives you extra paid time at home before your official retirement date.
- Cash it out. You will owe taxes on the full amount, but you walk away with money you can use however you want.
- Roll it into a VEBA account. The exchange rate is four to one, so you receive a quarter of the dollar value. In return, the money goes in tax-free, grows tax-free, and comes out tax-free for qualified medical expenses, three real tax benefits in one account.
The lower dollar amount from a VEBA rollover can look unappealing at first glance, but the ongoing tax savings, especially if that money grows for years before you need it, can end up being worth quite a bit more than the reduced starting balance suggests.
Savings or VEBA: Which Should You Spend First?
If you have money sitting in a regular savings account that is not earmarked for your emergency fund, spending that down for medical costs before you touch your VEBA is usually the smarter order. Savings accounts pay very little in today’s environment, and any interest they do earn gets taxed.
Meanwhile, your VEBA account is sitting there with three tax advantages working in your favor the whole time it is untouched. Spending down the account that is not doing much for you, while letting the fully tax-advantaged account keep compounding, is generally the better sequence.
A Suggested Order of Operations
Putting all of this together, here is a reasonable sequence for a Plan 3 early retirement.
- Retire from your job, but hold off on collecting your pension if you can.
- Draw living expenses from your Plan 3 bucket first.
- Enroll in PEBB for healthcare, since it does not require you to start your pension.
- Cover medical costs from excess savings before dipping into your VEBA.
- Start your pension once the penalty becomes small enough to be worth it, based on your years of service.
- Delay Social Security as long as reasonably possible, since its early penalty is the steepest of them all.
Every situation is different, and the right order for you depends on your account balances, your years of service, and how much flexibility you have. If you want help building your own sequence before you set a retirement date, you can schedule a personal meeting and we will map out your specific Plan 3 numbers together.
Frequently Asked Questions
What should I draw from first when I retire early on Plan 3?
Your Plan 3 defined contribution bucket is generally the best first stop, since it lets you avoid pension and Social Security penalties entirely while you bridge the early retirement years.
Is it better to take my pension early or Social Security early?
If you must choose one, taking the pension early is usually better. The pension’s early penalty tops out around 2% to 8% for a few years early, while Social Security’s early reduction can run 25% to 30% and is permanent.
Do I need to collect my pension to enroll in PEBB on Plan 3?
No. This is one of Plan 3’s biggest advantages over Plan 2. You, your spouse, and your dependents can enroll in PEBB without needing to start your pension first.
What happens to my PEBB coverage once I turn 65?
PEBB shifts from being your primary coverage to a secondary payer once you enroll in Medicare, working similarly to a Medicare supplement plan. Your costs typically decrease at that point.
Should I cash out my sick leave or roll it into a VEBA?
Cashing out gives you more money upfront, but it is fully taxable. Rolling it into a VEBA at a four-to-one exchange gives you less initially, but that money then grows and comes out completely tax-free for medical expenses, which can be worth more over time.
Does the pension penalty schedule differ between Plan 2 and Plan 3?
The general shape is similar for members with 30 or more years of service: a small reduction of roughly 2% for the first year early, growing by about 3% for each additional year. Always confirm the exact figures for your own plan and service history with DRS.
Is it always better to draw from my Plan 3 bucket instead of collecting early?
Not necessarily always, but it is usually the better default. It depends on how large your Plan 3 balance is, how long of a bridge you need, and how comfortable you are drawing that account down before your pension and Social Security take over.
P.S. If you found this breakdown helpful and want more videos like this on planning a Plan 3 early retirement, come join a community of over 150 members working through these exact decisions together, with free courses and resources included.
