If you work for the State of Washington in TRS, SERS, or PERS, you were likely given a choice at some point: Plan 2 or Plan 3. It is one of the biggest financial decisions a public employee in this state ever makes, and once you choose, you generally cannot switch back. Let’s settle the debate with real numbers, so you can see exactly what each plan is actually promising you.
The Core Difference Between Plan 2 and Plan 3
Plan 2 is a traditional pension. For every year you work, you earn 2% of your average final salary as a guaranteed benefit for life. Work 30 years, and you retire with 60% of your average salary, paid out every month for the rest of your life, no matter how long you live.
Plan 3 splits your retirement into two pieces. The pension piece only credits you 1% per year of service, half of what Plan 2 offers. The second piece is a defined contribution account, similar to a 401(k), that you and your employer fund every paycheck. That account is yours to invest and grow, but it also means you carry the investment risk yourself.
What “Guaranteed for Life” Actually Means
It helps to think about why a pension like Plan 2 can promise income for as long as you live, no matter how long that turns out to be. The state is not setting aside a personal pile of cash just for you. Instead, it is pooling contributions from thousands of employees together.
Some retirees will live to 70, others to 100. Because the pool is so large, the state can average out that uncertainty and still promise every single retiree a paycheck for as long as they live. That pooling is exactly what a defined contribution account like the Plan 3 savings bucket cannot do on its own. Your account only holds what you personally saved, so it can run dry if you live longer than expected or draw it down too fast.
A Worked Example: $100,000 Salary, 30 Years of Service
Numbers make this much easier to compare than percentages alone. Let’s say your average final salary is $100,000 and you work 30 years under each plan.
| Plan | Benefit Formula | Guaranteed Annual Income |
|---|---|---|
| Plan 2 | 2% x 30 years = 60% | $60,000 for life |
| Plan 3 (pension side only) | 1% x 30 years = 30% | $30,000 for life |
On paper, Plan 2 pays out double the guaranteed income of Plan 3’s pension side. But that is not the whole story, because Plan 3 also has that separate savings account working in the background. The real question is whether that account can realistically grow large enough to close a $30,000-a-year gap.
The gap scales with your salary and years of service, so it is worth seeing the pattern hold at a different number too. Say your average final salary is $80,000 and you work 20 years instead of 30.
| Plan | Benefit Formula | Guaranteed Annual Income |
|---|---|---|
| Plan 2 | 2% x 20 years = 40% | $32,000 for life |
| Plan 3 (pension side only) | 1% x 20 years = 20% | $16,000 for life |
Same story, smaller numbers. Plan 2 still pays exactly double what Plan 3’s pension piece pays, because the 2%-versus-1% formula does not change based on salary or years worked. Whatever your own salary and service history look like, you can use this same math to estimate your own gap.
Why Closing the Gap Is Harder Than It Sounds
When you draw income from an investment account, financial planners generally recommend a “safe withdrawal rate,” a percentage you can pull out each year without a high risk of running out of money. Today, a common estimate for that rate is around 3%-5% per year depending who you ask.
At a 3% withdrawal rate, every $1,000,000 saved produces about $30,000 a year in income. To match Plan 2’s $60,000-a-year benefit, your Plan 3 savings account alone would need to reach roughly $1,000,000, on top of whatever the 1% pension piece already provides. At 5% distribution, you would only need $600,000 saved to generate that same $30,000 a year of income. This is much more achievable but still takes dedication, patience, and planning. With a higher distribution rate, there needs to be a solid investment plan to make sure you can sustain that high of a distribution
A million dollars is a big number, and most people do not get there. The average Plan 3 account balance for someone with 30 years of service tends to land somewhere between $250,000 and $500,000, sometimes a bit higher on the west side of the state. That means most Plan 3 participants end up with roughly a third to half of the balance it would take to fully match Plan 2’s guaranteed payout.
Where Plan 3 Can Close the Gap
Plan 3 is not without its advantages, and there are a few ways it can narrow the gap with Plan 2.
- An annuity can boost your payout rate. Instead of relying on a 3% withdrawal rate, some Plan 3 participants use their savings to buy an annuity that guarantees a higher payout, sometimes 5%, 6%, or even 7% per year. At a 6% payout, it would only take $500,000 to generate $30,000 a year in income, half the amount needed with a plain 3% withdrawal.
- Waiting to collect your pension grows it. If you stop working before retirement age but do not start collecting your Plan 3 pension right away, that benefit grows by about 3% per year simply for waiting. Over roughly 25 years, that growth can close most of the gap with Plan 2, which does not offer this kind of growth once you leave employment.
- More flexibility around PEBB medical coverage. On Plan 2, you are required to start your pension before you can enroll in PEBB retiree medical coverage. On Plan 3, you can stop working and enroll in PEBB without being forced to start your pension, which gives early retirees more breathing room.
Even with the annuity option, though, notice that it still takes $500,000 in savings just to break even with what Plan 2 hands you automatically. That is real money you would have had to save and lock into an annuity, on top of everything else in your retirement plan.
The Case for Plan 2
For most people, Plan 2 offers the more reliable path to a higher guaranteed income. You are required to contribute around 8% of your pay into the plan, and that percentage can rise over time, just as it has in the past. Some people see that mandatory contribution as a downside, since it is money you cannot direct into the market yourself.
But consider what that 8% is actually buying: a guaranteed paycheck for the rest of your life, on top of Social Security, that does not depend on market performance. Using the safe withdrawal math from earlier, a $60,000-a-year guaranteed benefit is roughly equivalent to having $2,000,000 saved up. That is a substantial benefit for a fixed contribution rate.
A common strategy for Plan 2 members is to pair the pension with additional savings on the side, such as a Roth 403(b) or Roth IRA. That combination gives you the guaranteed 2%-per-year pension plus a separate pool of tax-free growth that you fully control, essentially getting the best features of both plans at once.
The Case for Plan 3
Plan 3 is not automatically the wrong choice. Its defined contribution bucket gives you liquidity that Plan 2 simply does not have. If you want to retire earlier than your full retirement age, that account can help bridge the gap without forcing you into an early-retirement penalty on your pension.
Plan 3 tends to make the most sense for people who expect to leave public employment relatively early in their career, who value flexibility and access to their savings, or who are confident they can consistently save on top of the plan’s contributions. If any of that describes your situation, it is worth running your own numbers rather than assuming one plan is universally better.
Because this decision is largely irreversible and depends heavily on your specific salary history, years of service, and savings habits, it is worth double-checking your own numbers before you commit. You can schedule a personal meeting and we will walk through your actual DRS statement together.
A Few Things to Keep in Mind
- The Plan 3 savings bucket carries market risk. Unlike Plan 2’s fixed formula, your Plan 3 account balance depends on how your investments perform, so a market downturn near retirement can shrink it right when you need it most.
- Averages hide a wide range of outcomes. The $250,000 to $500,000 typical balance mentioned earlier is just that, an average. Your own balance could be higher or lower depending on how consistently you contributed and how your investments were allocated over the years.
- Both plans require you to actually save on the side. Whether you pick Plan 2 or Plan 3, additional savings in a 403(b), DCP, or Roth account will meaningfully change your retirement outcome, so this decision should not be made in isolation from your broader savings plan.
Frequently Asked Questions
Can I switch from Plan 3 back to Plan 2, or the other way around?
Generally no. For most members, the choice between Plan 2 and Plan 3 is made once, early in employment, and is permanent. That is exactly why it is worth taking the time to run the numbers before deciding.
Does this comparison apply to TRS, SERS, and PERS equally?
The core structure, a 2% Plan 2 benefit versus a 1% Plan 3 benefit plus a savings account, works the same way across TRS, SERS, and PERS. Specific contribution rates and plan details can vary slightly, so always check your own plan documents for exact figures.
What is a safe withdrawal rate, and why does it matter here?
A safe withdrawal rate is the percentage of an investment account you can draw out each year with a low risk of running out of money over a long retirement. A commonly used estimate is around 3% per year, which is why it takes about $1,000,000 in savings to replicate a $30,000-a-year income stream.
Is Plan 3 a bad choice?
Not necessarily. Plan 3 offers more liquidity and flexibility, especially around early retirement. It simply requires more personal savings discipline to reach an income level comparable to Plan 2’s guaranteed benefit.
What should I do if I already chose a plan and I am not sure it was the right call?
Since the choice is generally permanent, the more useful next step is building the rest of your retirement plan around whichever plan you already have, including deciding how much to save into a 403(b), DCP, or Roth account on the side.
P.S. If you found this comparison helpful and want more breakdowns like this one on your DRS pension options, come join a community of over 150 members working through these exact decisions together, with free courses and resources included.
