Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I spend a lot of time talking with Washington State public employees about what to do with their DCP savings, their IRAs, and the other investment accounts they've built alongside their pension.

And one of the most common things I hear is some version of this: "I've got a chunk of my money in a few individual stocks. They've done well. I don't see a reason to change."

I get it. When something is working, it feels right. But a recent academic study caught my attention, and the data behind it tells a story that I think every pre-retiree needs to hear.

A Century of Data, One Surprising Finding

Finance professor Hendrik Bessembinder at Arizona State University recently published a study called One Hundred Years in the U.S. Stock Markets.¹ It covers nearly 30,000 individual stocks over the full century from 1926 to 2025.

The headline number is familiar. The overall U.S. stock market returned roughly 10% per year over that period.¹ A dollar invested in the broad market in 1926 would have grown to over $15,000 by the end of 2025.¹

That sounds great. And it is.

But when you stop looking at the market as a whole and start looking at individual stocks, the picture changes dramatically.

The median return across all nearly 30,000 individual stocks measured was negative 7%.¹ Not positive. Negative.

Let that sit for a moment.

The Numbers That Should Worry Stock Pickers

Only about 48% of stocks generated a positive return over their lifetime.¹ Fewer than half.

It gets worse. When you compare individual stock returns to Treasury bills (essentially a cash equivalent), only about 41% of stocks managed to beat that low bar.¹ Said another way, if you had randomly picked a single stock and held it for its entire life, there was roughly a 60% chance you would have been better off just holding cash.

And only about 28% of stocks outperformed the overall market.¹ Roughly three out of four stocks trailed what you could have earned in a simple index fund.

Bessembinder's earlier study, published in 2018 and covering data through 2016, found similar patterns with a slightly smaller dataset.² The updated research just makes the case even stronger.

Where the Wealth Actually Comes From

So if most stocks lose, how does the overall market do so well?

The answer is concentration. A tiny number of extraordinary companies do the heavy lifting for everyone else.

According to the study, just 46 companies (out of nearly 30,000) created half of all the net wealth generated in the U.S. stock market over the past century.¹ And only about 3.7% of all companies accounted for 100% of the market's net gains.¹ The other 96% of stocks collectively just matched Treasury bills.

The top five wealth-creating companies alone (Apple, Nvidia, Microsoft, Alphabet, and Amazon) accounted for over 21% of all wealth created.¹

And here is what really struck me. The concentration has gotten more extreme in recent years. In Bessembinder's earlier study using data through 2016, it took 89 companies to account for half of all net wealth creation.² In the updated study through 2025, it only takes 46.¹

What This Means If You're Approaching Retirement

If you have a pension and are getting ready to retire, you already have something most investors don't. A pension. That guaranteed income stream provides a foundation that changes the way you can think about your other investments.

But it doesn't eliminate the risk of holding a concentrated stock portfolio in your DCP account or your IRA.

Here is the concern. When you're still working and contributing to your accounts, a bad stock pick is painful but recoverable. You have time, and you're adding new money.

In retirement, the math changes. You're pulling from your portfolio, not adding to it. A concentrated bet that goes wrong can do real, lasting damage to your retirement income plan.

A Better Approach

This research reinforces something I talk about with clients all the time. Broad diversification through low-cost funds is not a boring strategy. It is how you make sure you own the small handful of companies that will drive the market's returns going forward.

Nobody knows which 46 companies will create half the wealth over the next century. We do know that trying to pick them in advance is a bet against the odds.

There are also ways to be more intentional about how you own the broad market. Evidence-based strategies allow you to tilt a portfolio toward characteristics that academic research has linked to higher expected returns, like smaller companies, value-oriented companies, and companies with higher profitability. You still own the whole market. You just own a little more of the areas the evidence suggests are likely to reward you over time.

This kind of approach can also help reduce the concentration risk that comes with a traditional S&P 500 index fund, which today is heavily weighted toward a handful of mega-cap tech stocks.

Three Things Worth Doing

If this data has you thinking about your own portfolio, here are a few steps worth considering.

First, take an honest look at any individual stock positions you hold. If a large portion of your retirement savings is tied up in just a few companies, the historical odds are not working in your favor.

Second, resist the urge to chase whatever is working right now. Nineteen of the top 30 wealth-creating companies from the last nine years were not in the top 30 over the prior 90 years.¹ Tomorrow's biggest winners probably are not today's headlines.

Third, remember that time is still on your side. If you're in your 50s, you may have a 30 or 40-year investing horizon ahead of you. The companies with the biggest cumulative returns in this study were not always the flashiest. Many were simply businesses that compounded at solid rates for a very long time. Small differences in annual returns lead to enormous differences in outcomes over decades.

Your pension from DRS provides a stable income floor. That is a real advantage. Pairing it with a broadly diversified, evidence-based investment portfolio in your DCP and other accounts is, in my view, the most reliable way to build the retirement you're working toward.

​Sources

1. Bessembinder, Hendrik. "One Hundred Years in the U.S. Stock Markets." March 21, 2026. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6438198
2. Bessembinder, Hendrik. "Do Stocks Outperform Treasury Bills?" Journal of Financial Economics, May 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

​The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I had a conversation recently with a client who had done everything right.

She had 27 years of PERS 2 service. A healthy DCP balance. An IRA from a previous job. She was 56 and thinking seriously about retiring at 58 or 59.

We were talking about Roth conversions when she stopped me: "Wait. If I convert this year, I cannot touch that money for five years, right?"

It is one of the most common questions I hear. And the answer is almost always: it depends.

The Roth conversion 5-year rule is one of the most misunderstood pieces of the tax code. Even reputable financial publications get it wrong.1 There are actually two different 5-year rules, one for contributions and one for conversions, and mixing them up can lead to unnecessary taxes or unnecessary fear of a strategy that could save you real money.2

A quick refresher on Roth conversions

A Roth conversion is when you move money from a pre-tax account (like a Traditional IRA or your DCP) into a Roth account. You pay income tax on the converted amount that year. But after that, the money grows tax-free, withdrawals are tax-free, and there are no required minimum distributions.3

For Washington State public employees with a pension, the years between retirement and claiming Social Security can be a golden window for conversions. Your taxable income may drop significantly once you stop working. That creates room to convert at lower tax brackets.

But before you convert a single dollar, you need to understand how the withdrawal rules work. And that starts with two simple questions.

Two questions that simplify everything

Here is the easiest way to figure out how the 5-year rule applies to your situation. Answer these two questions:

1. Do you currently have a Roth IRA that was funded at least 5 tax years ago (with any dollar amount)?
2. Are you age 59 ½ or older?

If you answered yes to both, you are in what I think of as the golden scenario. You can withdraw everything from your Roth IRA (contributions, conversions, and earnings) completely tax-free and penalty-free. Full stop.2

This is the part that surprises people. If you are over 59 ½ and you have had any Roth IRA open for at least five tax years, a brand new conversion you do today is accessible immediately. No new 5-year waiting period on the converted amount.4

The scenario that matters most for pre-retirees

Let me walk through a hypothetical that comes up frequently.

Say Tom is a 57-year-old county maintenance supervisor with 25 years of PERS 2 service. He opened a Roth IRA eight years ago and put in $500 just to get it started. He is now thinking about doing a $50,000 Roth conversion from his Traditional IRA.

Tom might assume he has to wait five years before touching that $50,000. But here is what actually happens.
Because Tom is under 59 ½, this conversion does start its own 5-year clock for penalty purposes. If he tried to withdraw the converted amount before five years pass and before he turns 59 ½, he would face a 10% early withdrawal penalty.2

But here is the key. When Tom turns 59 ½ (about two and a half years from now), that penalty clock becomes irrelevant. The 10% penalty only applies to early withdrawals. Once you are 59 ½, you are no longer "early." And because Tom already has a Roth IRA that is more than five tax years old, he satisfies both conditions for a qualified distribution.4

At 59 ½, Tom can withdraw the full $50,000 conversion plus any growth, tax-free and penalty-free. No five-year wait required on the conversion itself.

This is the piece that gets misreported constantly. The conversion-specific 5-year rule is an anti-abuse rule designed to prevent people under 59 ½ from using Roth conversions to dodge early withdrawal penalties.1 Once you are past 59 ½, it simply does not apply to you.

Where people actually get tripped up

The scenario that can catch you off guard is when you are over 59 ½ but have never had a Roth IRA before.
In that case, you can access your converted principal right away (you already paid tax on it). But any earnings on that conversion are not tax-free until the Roth has been open for five tax years.2 It is a narrow issue, but it matters if you are converting a large amount and it grows significantly in the first few years.

This is why starting a Roth IRA early, even with a tiny amount, is such a valuable move. It starts the clock. And once that clock has run, it never resets, even if you close the account and open a new one later.1

One thing every Washington State employee can do right now

If you do not already have a Roth IRA, open one and fund it with any amount. Even $50.

If your income is too high for a direct Roth IRA contribution, you can do a small conversion from a Traditional IRA instead. Either way, you start the 5-year clock.2

This is one of those rare pieces of financial planning advice that costs almost nothing, takes 15 minutes, and could save you real money down the road. Especially if you are a PERS, TRS, or LEOFF 2 member planning to retire in your late 50s and considering Roth conversions during those bridge years between retirement and Social Security.

Now that the 2017 tax rates were made permanent by the One Big Beautiful Bill Act, the old "convert before rates go up" urgency has faded. But the underlying math has not changed. Roth conversions remain one of the most powerful tools to manage your tax bill across a multi-decade retirement.5

​The 5-year rule is not a reason to avoid the strategy. It is a detail to understand so you can use it with confidence.
And as always, work with your CPA or financial advisor before making any conversion decisions. The rules are nuanced, and your individual tax situation matters.
 

Sources
1. Slott, Ed. "The most misunderstood Roth conversion tax rule." InvestmentNews. October 8, 2019. https://www.investmentnews.com/ira-alert/the-most-misunderstood-roth-conversion-tax-rule/169866
2. Kitces, Michael. "Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions." Kitces.com. January 1, 2014. https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
3. Internal Revenue Service. "Roth IRAs." https://www.irs.gov/retirement-plans/roth-iras
4. Taylor, Joy. "What to Know About the Five-Year Rules for Roth IRAs: The Kiplinger Tax Letter." Kiplinger. January 14, 2025. https://www.kiplinger.com/taxes/five-year-rule-on-roth-ira-contributions-and-payouts-kiplinger-tax-letter
5. Internal Revenue Service. "Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)." https://www.irs.gov/publications/p590b

​The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

There is a question I hear in almost every initial meeting with a new client.

It is some version of: "How do I know I am not going to run out of money?"

I get it. You’ve spent 25 or 30 years saving, and now someone is telling you to reverse the habit. To start spending.

But here is what caught my attention recently. A Morningstar research report looked at nine different withdrawal strategies for retirees. And buried in the data was a pattern I keep seeing.1

The biggest risk for many retirees is not overspending. It is underspending.

Research has shown that retirees with at least $500,000 in savings had spent less than 12% of their nest egg nearly 20 years into retirement. More than a third had actually grown their wealth.2

People who saved diligently their entire careers are reaching the end of their lives with more money than they started with. They skipped the trips. They said no to helping their kids with a down payment.

For Washington State public employees with a pension, this pattern can be even more pronounced. You already have a guaranteed income floor. And yet the instinct to not spend from the portfolio stays strong.

Why the 4% rule makes it worse

The traditional 4% rule was developed by financial planner Bill Bengen in the early 1990s. Take 4% of your portfolio in year one, adjust for inflation each year, and your money should last 30 years.3

It is a fine starting point. But that is exactly what it is. A starting point.

Even Bengen himself has said he uses closer to 5% for his own portfolio.4

The core problem is that the 4% rule does not adapt. Your portfolio drops 30%? Same withdrawal. Your portfolio doubles? Same withdrawal. It was built for the worst-case scenario, which means in most scenarios you leave a lot of money on the table.

For someone with a Washington State pension providing $3,000 or $4,000 a month in guaranteed income, that rigidity is especially costly. Your pension already covers a significant portion of your basic expenses. Your portfolio does not need to do all the heavy lifting.

What flexibility actually looks like

The Morningstar research tested several flexible withdrawal strategies that outperformed the 4% rule. My personal favorite and the one we use with our clients is called the Guardrails method, originally developed by financial planner Jonathan Guyton and computer scientist William Klinger.5

Here is how it works in plain language.

You start with an initial withdrawal rate. Morningstar's research found the Guardrails approach supports a starting rate of 5.2%, compared to roughly 4% with the traditional fixed method.1

Each year, you check whether your withdrawal rate has drifted too far from that starting point. If your portfolio has done well and the withdrawal rate drops more than 20% below your starting rate, you give yourself a raise. If markets have struggled and the rate climbs more than 20% above, you take a modest temporary pay cut.

That is it. Only one of four things happens each year: you skip the inflation adjustment after a down year, you adjust for inflation normally, you get a raise, or you take a small cut.

The beauty is in the simplicity. You are not guessing. You are not reacting emotionally. You have a set of rules that tell you exactly when to spend more and when to pull back.

How this plays out for a PERS 2 member

Let me walk through a hypothetical example.

Say we have a 58-year-old county employee with 28 years of PERS 2 service. Her pension will pay roughly $4,200 per month. She and her husband have $700,000 in their DCP and IRA accounts combined. They will also have Social Security.

Using the traditional 4% rule, Karen would withdraw $28,000 per year from her portfolio. That is about $2,333 per month on top of her pension.

Using the Guardrails approach at 5.2%, she would start at $36,400 per year, or about $3,033 per month. That is an extra $700 per month in the first year alone.

Over 30 years, the Morningstar data showed the Guardrails method produced roughly 16% more in total lifetime spending compared to the fixed approach, while the median ending portfolio balance was still significant.1

That extra money could bridge health care costs through PEBB retiree coverage until Medicare at 65. Or fund travel in those early, active retirement years. And when markets cooperate, the guardrails tell her it is safe to spend a little more. When they do not, she pulls back modestly. No panic. No guesswork.

The real problem is not math

Here is what gets overlooked in these conversations.

The spending problem in retirement is not really a math problem. It is a psychological one.

Research shows retirees spend about 80% of the income they receive from guaranteed sources like pensions and Social Security. But they spend less than half of what they could from their investment accounts.2

Same dollars. Same purchasing power. But money that arrives as a paycheck gets spent. Money sitting in a brokerage account feels untouchable.

That is why rules-based frameworks matter. When you have clear guardrails telling you when it is safe to spend more and when to pull back, you are essentially turning your portfolio into a paycheck. And for my clients with DRS pensions, that portfolio paycheck is supplementing an already solid foundation.

What to do with this

If you are a Washington State public employee within a few years of retirement, here is what I would think about.

First, know what your pension and Social Security (if you have it) actually covers. Log into your DRS account and look at your estimated benefit.6 That number is the foundation for everything else.

Second, stop thinking of the 4% rule as a ceiling. It was built as a worst-case floor. If you are willing to be flexible with your spending, the research suggests you can start higher.

Third, consider whether a rules-based withdrawal strategy fits your situation. If you need perfectly consistent income with zero variability, a more rigid approach might suit you better. But if you can tolerate modest adjustments, the potential payoff in lifetime spending is meaningful.

Your pension gives you a head start most retirees do not have. The question is whether you are going to use it.

​Sources
1. Arnott, Amy. "The Best Strategies for Boosting Starting Withdrawal Rates in Retirement." Morningstar. https://www.morningstar.com/retirement/best-strategies-boosting-starting-withdrawal-rates-retirement
2. "Retirees can be too frugal with their spending." CBS News. https://www.cbsnews.com/news/retirees-can-be-too-frugal-with-their-spending/
3. "Determining Withdrawal Rates Using Historical Data." RetailInvestor.org. https://retailinvestor.org/determining-withdrawal-rates-using-historical-data/
4. "The inventor of the 4% rule just changed it." MarketWatch. https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557
5. Guyton, Jonathan. "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?" 2004. https://www.semanticscholar.org/paper/Decision-Rules-and-Portfolio-Management-for-Is-the-Guyton/384c2ebfa36a69f9c346f9456c5cbca63306b4c9
6. Washington State Department of Retirement Systems. "Online Account Access." https://www.drs.wa.gov/

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I keep a running list of the questions I hear most often in client meetings. And if I had to pick the one that comes up more than any other, it would be some version of this:

"But what do we do about health insurance?"

It usually comes right after we've looked at the pension numbers. Right after we've mapped out Social Security timing and portfolio withdrawals. Right after the whole plan starts to come together and the idea of retiring at 57 or 58 feels real for the first time.

Then healthcare enters the conversation, and everything stalls.

I get it. The gap between early retirement and Medicare at 65 can feel like a giant question mark. And when you start searching for answers online, the numbers you find can be genuinely alarming.

But here's what I've noticed after working with Washington public employees: the healthcare gap is almost never the dealbreaker people think it is. It's a real cost that requires real planning. But it's solvable. And I've watched too many people work years longer than they needed to because they never sat down and put actual numbers to the problem.

The scary headlines (and what they're actually saying)

Let's start with what you'll find if you Google "healthcare costs in retirement."
Fidelity's 2025 Retiree Health Care Cost Estimate found that a 65-year-old retiring today can expect to spend an average of $172,500 on healthcare throughout retirement¹. That number has been climbing steadily since Fidelity started tracking it in 2002.

Meanwhile, a recent survey from the Nationwide Retirement Institute found that 73% of U.S. adults list healthcare expenses going out of control as one of their top retirement fears². And about two-thirds of respondents said they couldn't even estimate what those costs would total².

Those are real numbers. But context matters.

That $172,500 Fidelity figure? It assumes enrollment in Medicare Parts A, B, and D. It covers premiums, copays, and out-of-pocket costs spread across the entire retirement¹. Nobody writes a check for $172,500 on their first day of retirement. It's an ongoing budget item, not a lump sum.

And here's the part that rarely makes the headlines: according to Fidelity's own breakdown, about 44% of that total goes to Medicare Part B and Part D premiums, which are predictable, fixed monthly costs¹.

What does the gap actually cost in Washington?

For Washington State public employees, the healthcare question from retirement to Medicare at 65 really comes down to two options: PEBB retiree coverage (or some other association coverage such as WSCFF) or the ACA marketplace.

Let's talk about PEBB first, because this is one of the biggest advantages you have as a state employee.

If you're a vested member of a Washington State retirement plan (PERS, TRS, SERS, LEOFF, or others) and you meet certain eligibility requirements, you can continue your PEBB health insurance into retirement³.

That's a significant benefit. You're not shopping for insurance on the open market with no employer backing. You're staying in the same pool you've been in your entire career.

Now, the cost is real. For 2026, the PEBB retiree monthly premium for UMP Classic (subscriber only, non-Medicare) is $970.43 per month⁴. For subscriber and spouse, it's $1,935.11 per month⁴. That's meaningful money.

But compare that to what the broader market looks like. According to recent data, average monthly ACA marketplace premiums for a 55-year-old are around $1,084, and for a 60-year-old, they climb to roughly $1,319 for a mid-tier Silver plan⁵. For a couple in their late 50s or early 60s, the math adds up fast.

And employer-sponsored health benefit costs keep climbing. Mercer's National Survey of Employer-Sponsored Health Plans found that health benefit costs per employee rose 6% in 2025, with an even higher increase of 6.7% projected for 2026, the highest in 15 years⁶.

The point isn't that healthcare is expensive (it is). It's that these are knowable numbers. You can plan for them.

Putting it in your retirement plan

Here's how I think about this with clients.

Let's say you're a hypothetical PERS 2 member, age 56, planning to retire next year. Your spouse is also a public employee. You've got a combined $800,000 in retirement accounts and other savings.

The healthcare gap for both of you is roughly nine years (from age 56 to 65). At current PEBB retiree rates, you're looking at around $1,935 per month for the couple. That's about $23,200 per year, or roughly $209,000 over nine years before Medicare kicks in.

That's a lot of money. But it's a line item in your plan, not a mystery. And when you factor in your pension income, your DCP withdrawals, and eventual Social Security, this becomes a budgeting exercise, not a guessing game.

From a tax perspective, those early retirement years before Social Security and required minimum distributions start can actually be the lowest-income years of your entire retirement. That creates an opportunity. You can do Roth conversions in lower tax brackets, pull from taxable accounts strategically, and potentially qualify for ACA premium tax credits if you go the marketplace route instead of PEBB.

The tax planning and the healthcare planning are connected. You can't do one well without thinking about the other.

What actually works

After working through this with numerous public employee families, here's what I've seen make the biggest difference.

Know your PEBB eligibility before you set a retirement date. The rules changed for PERS 2 members separating on or after January 1, 2024. Make sure you understand the age and service requirements that apply to your specific plan³.

Budget for healthcare like you budget for other expenses. It's a large, predictable expense. Build it into your cash flow projections from day one. Don't treat it as an afterthought.

Compare PEBB retiree coverage to the ACA marketplace every year. Depending on your income in retirement, marketplace subsidies could make a significant difference. This is especially true in those early retirement years when you're controlling your taxable income through strategic withdrawals.

Think about the bridge, not just the gap. PEBB continuation coverage (COBRA) can serve as a bridge to PEBB retiree coverage if you need it³. Understanding the timeline and enrollment deadlines is critical. You generally have 60 days from when your employer-paid coverage ends to enroll in PEBB retiree coverage³.

Don't forget about Medicare planning ahead of time. When you do turn 65, you'll want to enroll in Medicare Parts A and B. If you're on PEBB retiree coverage and become Medicare-eligible, you're required to enroll in Medicare to keep your PEBB benefits³. Start that process a few months early to avoid gaps.

The real cost of waiting

Here's the thing that doesn't show up on any premium schedule.

Every year you work past the point where you could have retired is a year you didn't spend doing the things that matter most to you. For my clients, that's usually more time with grandkids, traveling while they're healthy, or just having a Tuesday morning where nobody needs them to be anywhere.

The healthcare gap is real. But it's not a wall. It's a bridge you have to plan for and pay for. And once you see the actual numbers, most people realize the cost of the bridge is a lot less than the cost of the extra years they were thinking about working.

If you're a Washington State public employee within five years of retirement and you've been putting off the healthcare conversation, now is the time to sit down and put real numbers on it. The answer might surprise you.

​Sources

1. Fidelity Investments. "Fidelity Investments Releases 2025 Retiree Health Care Cost Estimate." July 30, 2025. https://newsroom.fidelity.com/pressreleases/fidelity-investments--releases-2025-retiree-health-care-cost-estimate--a-timely-reminder-for-all-gen/s/3c62e988-12e2-4dc8-afb4-f44b06c6d52e
2. Nationwide Retirement Institute. "Rising Health Costs Force Even Insured Americans to Skip Preventive Care." 2025. https://news.nationwide.com/rising-health-costs-force-even-insured-americans-to-skip-preventive-care/
3. Washington State Health Care Authority. "Retiree Eligibility." https://www.hca.wa.gov/employee-retiree-benefits/retirees/retiree-eligibility
4. Washington State Health Care Authority. "2026 PEBB Retiree Monthly Premiums." Effective January 1, 2026. https://www.hca.wa.gov/assets/pebb/51-0275-retiree-monthly-premiums-2026.pdf
5. Kiplinger. "Average Cost of Health Care by Age and US State." December 12, 2025. https://www.kiplinger.com/retirement/average-cost-of-health-care-by-age
6. Mercer. "National Survey of Employer-Sponsored Health Plans." 2025. https://www.mercer.com/en-us/solutions/health-and-benefits/research/national-survey-of-employer-sponsored-health-plans/

 

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I was reviewing a portfolio for a county employee, 24 years in PERS Plan 2.

Nearly every holding was a high-dividend stock or fund. AT&T. Verizon. A couple of utility companies. And a variety of mutual funds.

Her pension alone will cover most of her essential expenses in retirement. And yet, she had built her entire investment portfolio around generating dividend income.

"I just want my investments to replace my paycheck when I retire."

I hear this all the time. For 25 or 30 years, your paycheck just showed up. Then one day, it stops. According to a recent Schroders survey, 87% of non-retired Americans are concerned about how to generate income once they stop working.⁶ Dividends feel like they solve that problem.

But here's what I've learned working with Washington State public employees: you already have a paycheck replacement. It's called your pension. And that changes everything about how your portfolio should be built.

The birthday cake problem

A dividend isn't extra money being created out of thin air. It's a portion of the company's value being removed and handed to you.

Think of it like slicing a piece of birthday cake and putting it on a separate plate. You didn't create more cake. You just moved it. Research from Dimensional Fund Advisors confirms this. They examined the 10 largest companies in the S&P 500 High Dividend Index over 20 quarterly dividends each. The average dividend was $1.00 per share, and the average price decline on those ex-dates was $1.15.⁷

If you reinvest that dividend, nothing really changes. But most retirees aren't reinvesting. They're spending those dividends. And that's where the tax problem begins.

The tax drag nobody talks about

Here's the part that hits home for me as a CPA.

Every time a dividend shows up in a taxable brokerage account, the IRS sees income. You owe taxes on it that year, whether you need the money or not.¹ Qualified dividends are taxed at capital gains rates (0% to 20%). Ordinary dividends get taxed at your regular income rate.²

You don't control the timing. The company pays the dividend, it hits your tax return, and you pay the bill.

A Cambria Investments study found that a top-100 dividend yield strategy returned roughly 14% annually before taxes from 1974 to 2022. At the highest tax bracket, after-tax returns dropped to about 8.6%.⁸
Tax drag compounds. Every dollar that goes to taxes is a dollar that can't grow for you over the next 20 or 30 years of retirement.

Now, some of you might be thinking: most of my money is in my DCP or an IRA. Dividends aren't taxed inside those accounts, so this doesn't apply to me.

The annual tax drag doesn't hit you the same way inside a tax-deferred account. But if you're selecting funds based primarily on which ones pay the highest dividends, you may be owning slower-growing, lower-quality companies without realizing it. A big dividend doesn't automatically mean it's a strong company. The Cambria study found that a straightforward value approach outperformed the high-dividend strategy even before accounting for taxes.⁸

Why this matters even more for Washington State public employees

As a PERS, TRS, LEOFF, or SERS member, you're going to have multiple income sources on your tax return in retirement: your DRS pension, Social Security, DCP withdrawals, and investment income.³ Add uncontrolled dividend income on top of that.

Those dividends could push you into a higher tax bracket, increase how much of your Social Security becomes taxable, and trigger higher Medicare premiums through IRMAA.⁴

You don't get a say in any of that if your portfolio is generating dividends on its own schedule.

"I just spend whatever my portfolio pays out"

I hear this one a lot too. Some people tell me they just live off whatever dividends and interest their portfolio generates, so they never have to worry about withdrawal strategies or selling anything.

But here's the thing. When your income is determined by what your portfolio happens to distribute rather than what your retirement plan actually calls for, you've handed the controls over to a dividend schedule that knows nothing about your goals, your spending needs, or what's happening in the rest of your financial life.

Maybe you need more income one year because of a big expense. Maybe you need less. Maybe your tax situation changes. The dividend schedule doesn't care. It pays what it pays, the tax bill follows, and you deal with the consequences.

That's not a plan. That's just reacting.

What actually works better

A total return approach puts your retirement plan back in the driver's seat. Instead of relying on whatever income your portfolio happens to generate, you build a diversified portfolio and withdraw strategically based on what your plan actually calls for.

Your pension is your paycheck. Your DRS pension already provides the stable, predictable income that dividends try to replicate. Your portfolio doesn't need to duplicate what the pension already does.

You decide when to create income. You choose when to sell, how much to take, and which account to pull from. You can coordinate withdrawals around your tax bracket, Social Security, and Medicare premiums.

Your DCP gives you built-in tax flexibility. Washington's DCP now offers both pretax and Roth options.⁵ You can pull from either depending on what makes the most tax sense in any given year.

A war chest of bonds handles volatility. Keep several years of withdrawals in high-quality, short-duration bonds. When stocks drop, spend from bonds. When they recover, replenish.

You can use the tax code to your advantage. This is the part that gets me excited as a CPA. With a total return approach, you might intentionally realize some capital gains in years where your taxable income is low enough to fall within the 0% long-term capital gains bracket. ²  That means in the right year, you could sell appreciated investments and owe zero federal tax on the gain. You can't do that when dividends are forcing income onto your tax return whether you want it or not.

The piece most people miss

Dividend investing feels safe. It feels like you're not touching your principal. But you are.

The same Cambria study found that a simple value strategy excluding the top 25% of dividend payers outperformed the high-dividend strategy on both a pre-tax and after-tax basis.⁸ The value premium did the heavy lifting. The dividend just came with a tax cost.

There are simpler, more tax-efficient ways to get that same exposure without generating unnecessary taxable income.

So if the math is this clear, why do so many retirees still build their portfolios around dividends?

The Cambria researchers use a great analogy. Back in 1975, Pepsi ran blind taste tests. Over and over, people chose Pepsi. But Coke kept outselling Pepsi by a wide margin. When researchers showed the labels before the taste test, preferences flipped. Most people chose Coke. The brand overpowered their own taste buds.⁸
Dividend investing works the same way. The brand of dividends (passive income, steady checks, never touching principal) creates such a powerful emotional pull that it often overrides what the data actually shows. Investors fall in love with the story, even when the math tells a different one.

I'm not saying this to be harsh. I'm saying it because once you recognize that your instinct might be protecting a belief instead of evaluating evidence, you can step back and look at the numbers objectively.

If you don't believe me, maybe you'll believe Warren Buffett

Warren Buffett's Berkshire Hathaway has almost never paid a dividend. In fact, the company paid a single 10-cent dividend back in 1967. Buffett later joked that he must have been in the bathroom when that decision was made.⁸

Think about that. One of the greatest investors of all time runs an enormously profitable company and chooses not to distribute those profits through dividends. Why?

Because Buffett has long believed that reinvesting earnings back into the business creates more value and higher after-tax returns for his shareholders than sending that money out as a taxable dividend. He'd rather keep the capital working inside the company, compounding for decades, than hand it to shareholders and let the IRS take a cut along the way.

And the results speak for themselves. Berkshire's track record is so strong that even if the stock dropped 99% from its current price, it would still be ahead of the S&P 500 over its lifetime.9

That's the power of keeping capital invested and letting it compound, rather than pulling it out as dividends. And it's the same principle that applies when you're building your own retirement portfolio. Total return, not yield, is what determines how much wealth you actually build and sustain.

What to do with this

If you're a Washington State public employee approaching retirement, a few things worth considering.

Look at your taxable brokerage account. Is it full of high-dividend funds chosen for yield? A total-return approach might serve you better from a tax standpoint.

Think about what your pension already provides. If your DRS benefit covers core expenses, your portfolio has a different job.

If you're still years from retirement, contribute to both pretax and Roth options in your DCP for more control later.⁵

And talk to someone who understands how the pieces fit together. Your pension, DCP, Social Security, and Medicare premiums are all connected. A portfolio built around dividends doesn't account for that coordination.

The goal isn't to avoid every company that pays a dividend. It's to stop chasing yield and start focusing on what actually drives long-term retirement success: total return, tax efficiency, and a plan that puts you in control.

​Sources

1. Internal Revenue Service. "Topic No. 404, Dividends." https://www.irs.gov/taxtopics/tc404
2. Internal Revenue Service. "Topic No. 409, Capital Gains and Losses." https://www.irs.gov/taxtopics/tc409
3. Washington State Department of Retirement Systems. "Deferred Compensation Program (DCP)." https://www.drs.wa.gov/plan/dcp/
4. Social Security Administration. "IRMAA Sliding Scale Tables." https://secure.ssa.gov/poms.nsf/lnx/0601101020
5. Washington State Department of Retirement Systems. "Adding Roth to DCP." https://www.drs.wa.gov/wp-content/uploads/2023/02/Roth-Employer-FAQ.pdf
6. Schroders. "Schroders 2025 US Retirement Survey." October 21, 2025. https://www.schroders.com/en-us/us/institutional/media-center/schroders-study-reveals-americans-not-willing-to-delay-social-security-benefits-for-higher-payments/
7. Crill, Wes. "A Slice of Dividend Accounting." Dimensional Fund Advisors. January 3, 2024. https://www.dimensional.com/us-en/insights/a-slice-of-dividend-accounting
8. Faber, Meb. "Is the Best Dividend Strategy to Avoid Them?" Cambria Investments. November 2024. https://www.cambriainvestments.com/wp-content/uploads/2024/11/Cambria-DTAX-11.13.24.pdf
9. Di Pizio, Anthony. "If This Warren Buffett Stock Plunged by 99% Today, It Would Still Have Outperformed the S&P 500 Since 1965." The Motley Fool via Yahoo Finance. January 9, 2026. https://finance.yahoo.com/news/warren-buffett-stock-plunged-99-103700019.html

​Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I was re-reading one of my favorite pieces of financial writing last week.

It’s an essay by Morgan Housel called “The Three Sides of Risk.” Housel is a bestselling financial author, and the piece tells a deeply personal story about a ski trip that ended in tragedy. Two of his closest friends were killed in an avalanche when they were seventeen years old. He survived only because he declined, on a whim, to join them on a second run.

He uses that story to make a point about investing. Not about volatility. Not about routine market corrections. About something far more serious.

About the kind of risk that can end everything.

The three sides you need to know

Housel argues that most people think about risk in two ways.1

First, the odds of something going wrong. Second, the average consequences if it does.

Those two feel manageable. You can wrap your head around them. A 10% chance of losing 15% of your portfolio in a bad year is uncomfortable, but it’s survivable. You run the math. You plan around it. You move on.

But there’s a third side of risk most people never think about until it’s too late.

The tail end consequences.

The low-probability, high-impact events that don’t make daily financial headlines but make the pages of history books.1 Pandemics. Depressions. A market crash that wipes out half your portfolio the year you planned to retire.

These are called “tail risks.” And in my experience working with Washington State public employees planning for retirement, this is the risk that almost nobody has a real plan for.

Why this matters more if you’re retiring early

Consider a hypothetical situation I encounter often in my work.

A PERS 2 member, let’s call her Karen, a budget analyst with 28 years of service, is planning to retire at 57. She’s done everything right. She has her DRS pension lined up, a healthy DCP account, and a solid portfolio of personal savings. She’s run the numbers. She feels confident.

But here’s the problem.

Karen is looking at the average risk. The likely scenarios. A normal market correction she could ride out. A healthcare expense she could absorb. Average consequences. Survivable ones.

What she hasn’t thought through are the tail end consequences.

What happens if she retires in 2008, and her portfolio drops by half in the first eighteen months? She’s 57. Medicare is still eight years away.5 The sequence of withdrawals during a crash that early in retirement can permanently damage a portfolio in ways that average market returns alone cannot fix.

This is sometimes called “sequence of returns risk.” But it’s really just tail risk wearing a different hat.

Your pension helps, but it doesn’t solve everything

Here’s something I genuinely appreciate about working with Washington State employees.

Your DRS pension is a real buffer against tail risk in ways that most retirees don’t have.6 A guaranteed monthly benefit that doesn’t depend on market performance means you aren’t starting from zero during a crash. That matters enormously.

But the pension doesn’t cover everything. Most of my clients rely on a combination of their DRS pension, Social Security, and a portfolio of personal savings. The pension handles the floor. The portfolio is supposed to handle the rest.

And it’s the portfolio that’s exposed to tail risk.

What actually works

The good news is there are practical, proven ways to reduce the damage a tail event can do to your retirement.

Keep a war chest

I build every retirement income plan around what I call a “war chest.” This is typically four to five years of expected withdrawals held in high-quality, short-duration bonds. When a market crash hits, you pull from the war chest instead of selling equities at the bottom. This gives your portfolio time to recover without forcing you to crystallize losses at the worst possible moment.

It sounds simple. It is simple. But simple works.

Own the whole market

We use broadly diversified, low-cost investments for client portfolios. The reason comes back to tail risk, but actually the positive side of it.

In any given year, market returns are not evenly distributed. Morgan Housel’s colleague at Collaborative Fund documented this pattern clearly: in 2017, a handful of companies accounted for half of the S&P 500’s total return. Apple alone contributed more to the index than the bottom 321 companies combined.2 Recent data confirms the pattern continues: in 2023 and 2024, only about 27–28% of S&P 500 stocks outperformed the index itself, the narrowest market concentration in nearly three decades.3

If you’re picking individual stocks, you have to be right about which companies will be the outliers. Almost nobody is consistently right.

If you own the whole market, you automatically own the outperformers without having to predict them. Broad diversification is how ordinary investors capture extraordinary results over time, including the tail events with positive outcomes.

Don’t try to hedge your way out of it.

Every few years, a new financial product gets marketed as a way to have all the upside of the market with protection from the downside. Usually it involves options strategies or complex insurance-wrapped products.

I’ll be direct: the research on these tail-hedging strategies is not encouraging.

AQR Capital Management published a paper on this topic that makes the point plainly: the long-term cost of explicit tail-risk insurance strategies tends to exceed the payouts.4 You pay premiums continuously for protection that pays off rarely. Most of the time, an investor purchasing put options to hedge against tail events ends up with options that simply expire worthless, representing a total loss on that investment. Even when they’re rolled over time, they become a constant drag on portfolio performance.7

The expected return for perpetual insurance buyers is negative. The sellers of that insurance are counting on it.4

The better path is owning the right portfolio structure in the first place: broad diversification, a war chest, and the discipline to leave it alone when things get scary.

Have a written plan for the bad scenario.

One insight from the research is this: the investors who get hurt the worst aren’t the ones who experience the crash. It’s the ones who experience the crash without a plan, panic at the bottom, sell everything, and then miss the recovery.4

Before you retire, write down what you will do if your portfolio drops 30% in the first year. Not what you might do. What you will do. Having a predetermined response to a crisis is the difference between riding it out and making a permanent mistake.

The question to sit with

Most retirement planning conversations focus on the average outcome. Will you have enough? At what rate can you withdraw? What’s the right pension option?

Those questions matter. But they’re not the only ones.

The question that often goes unasked is: what happens in the worst case? Have you accounted for a tail event hitting in your first year of retirement? Is there a plan that holds together even then?

As Housel wrote, tail-end events are all that matter. Once you experience one, you’ll never think otherwise.1

If you’re a Washington State public employee within five years of retirement, now is the time to think through these scenarios carefully. Not because disaster is likely. But because the consequences of being unprepared for it are permanent.

​Sources

1. Housel, Morgan. “The Three Sides of Risk.” Collaborative Fund Blog. August 8, 2020. https://collabfund.com/blog/the-three-sides-of-risk/
2. Housel, Morgan. “Tails, You Win.” Collaborative Fund Blog. July 26, 2022. https://collabfund.com/blog/tails-you-win/
3. First Trust Advisors. “Three on Thursday: The S&P 500 Index in 2024: A Market Driven Once Again by the Mag 7.” January 8, 2025.
4. Nielsen, Lars, Daniel Villalon, and Adam Berger. “Chasing Your Own Tail (Risk).” AQR Capital Management. Summer 2011.
5. U.S. Department of Health and Human Services. “Medicare Eligibility and Enrollment.” Medicare.gov. https://www.medicare.gov/basics/get-started-with-medicare
6. Washington State Department of Retirement Systems. “PERS Plan 2 Member Handbook.” https://www.drs.wa.gov/plan/pers2/
7. Ordonez, Jose. “Tail Hedging Is Not As Easy As You Think.” Alpha Architect. April 3, 2024. https://alphaarchitect.com/tail-hedging-is-not-as-easy-as-you-think/

 

​Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I got a call last week from a client.

She's 53, a PERS 2 member with 28 years in, sitting on about $650,000 between her DCP and personal savings. Planning to retire at 58 in just under five years.

"Seth, I'm nervous," she said. "The market keeps going up. It feels like we're due for a crash. Should I move everything to bonds?"

I get this question alot right now.

When stocks have been strong for a while, it's natural to assume something has to give. That the rally can't continue. That one bad downturn could wipe out decades of careful saving.

Recently, Morningstar published their quarterly Market Observer report with a fascinating chart mapping nearly 100 years of US stock market history.¹ When you zoom out and look at that full century of data, several widely accepted beliefs about market crashes start to look far less certain.

This matters enormously for Washington State public employees planning retirement.

Because the decisions you make today about your DCP, your pension option, and your investment strategy will determine whether you can actually retire in your late 50s and maintain your lifestyle for 30+ years.

The Chart

​The Morningstar chart tracks US stock market performance from 1926 through 2025, color-coding three distinct phases: expansions (when markets climb to new highs), downturns (drops of 20% or more), and recoveries (the climb back to previous peaks).¹

What jumps out immediately is how much time the market spends recovering and expanding versus declining.

Over the past century, the market spent about 142 months in bear market (down) territory. It spent another 349 months working its way back to prior highs.¹ Add those together and roughly 40% of market history has been falling from or climbing back to previous peaks.

And yet, despite all those setbacks, the market has compounded wealth for long-term investors over and over again.

Three Myths That Could Derail Your Retirement Plan

Let me walk through the three common beliefs the Morningstar data actually challenges.

Myth 1: This Rally Has Been Too Strong

Since the market bottomed in September 2022, we've seen solid returns. Strong enough that many people assume this can't continue.

But here's what the data shows.

Since 1926, there have been 11 total market expansions. The average expansion lasted just under six years. The market more than tripled in value on average during these expansions, delivering roughly 21% annual returns.¹

The current expansion? As of late 2025, it was only in its 25th month. Less than half the historical average. And the annual return during this stretch has been right around 21%, essentially in line with what we've seen in past expansions.¹

This rally is not the unprecedented outlier many think it is.

It's actually tracking right along with historical norms.

Now, does that guarantee a catastrophic drawdown isn't around the corner? Of course not. But the strength of this rally alone is not a reason to panic or make drastic changes to your retirement investment strategy.

Myth 2: This Bull Market Is Getting Old

It's been over three years since the market bottomed in September 2022. People hear that and think we must be due for a downturn.

​But historically, the average recovery period (the time it takes for the market to climb back to a prior high after a downturn) has lasted almost exactly three years.¹

When you combine the average recovery time with the average expansion, you're looking at roughly nine years on average from a market low to the next high.¹

By that historical measure, this bull (up) market is far from long in the tooth.

I'm not saying stocks will simply keep going up. What I am saying is that making investment decisions based on a gut feeling that "it's been going up too long" isn't a sound strategy.

History shows bull markets can and often do last much longer than people expect.

Myth 3: One Bad Bear Market Will Ruin Everything

This is the fear that keeps many up at night.

The idea that one nasty crash could wipe out years of progress and destroy your retirement plan.

Bear markets are real and they're painful. The 2008 financial crisis is proof of that.

​But here's what that century of data shows: despite spending roughly 40% of market history either falling from or climbing back to previous peaks, the market has consistently compounded wealth for disciplined, long-term investors.¹

As Morningstar wisely put it, “the US stock market's long-term success has never been a story of uninterrupted progress. It's been a story of resilience amid setbacks.”¹

Why This Matters for Washington State Public Employees

If you're planning to retire at 58 with a PERS, TRS, SRS, or LEOFF pension, you're looking at potentially 35+ years in retirement.

That's a long, time horizon.

Your DCP account and personal savings need to bridge the gap until your pension starts, cover the years between retirement and Social Security, and provide supplemental income throughout retirement.

The question isn't whether the market will experience another downturn. We all know it will.

The question is whether your plan is built to withstand it.

The Real Risk (And It's Not a Crash)

I need to acknowledge something important here, especially for those of you within five years of retirement.

While the long-term data is reassuring, the timing of a downturn relative to when you start taking withdrawals from your portfolio matters enormously.

This is called sequence of returns risk.

Two retirees can own the same portfolio with the same long-term average return, yet the one who suffers a major downturn early in retirement can end up in a dramatically worse position. Why? Because they're forced to sell more investments at lower prices to fund withdrawals.

This is precisely why I advocate for having the right asset allocation in the three to five years before retirement.

It's why I recommend maintaining what I call a "war chest" of five years' worth of withdrawals in high-quality short-duration bonds.

It's why your pension is so valuable as a foundation. It allows you to take strategic equity exposure with your DCP and personal savings without being forced to sell stocks at the worst possible moment.

You need a plan that ensures you don't have to liquidate investments during a downturn to pay for basic living expenses, cover a tax bill, or fund that Alaska cruise you've been planning for years.

What Actually Ruins Retirements

If 100 years of market data tells us a crash alone won't ruin your retirement, what will?

In short, it's not a bear market. It's what you do when one shows up.

It's halting your DCP contributions because headlines are scary.

It's moving everything to cash and waiting for things to settle down.

It's trying to time your way back in and missing the recovery.

It's buying expensive products that promise downside protection while quietly eating away at your long-term returns.

And maybe the most overlooked: it's being so afraid of the next downturn that you never actually enjoy the money you worked so hard to save.

I've seen this countless times. The greatest risk in retirement isn't overspending. It's underspending.

The fear that this rally is too strong or that a crash is right around the corner causes retirees to sit on their savings and never give themselves permission to spend.

They skip the trip. They put off the kitchen renovation. They say no to experiences with grandkids.

Not because the math says they can't afford it, but because they're terrified the next downturn could take it all away.

The market's long-term track record is not one of fragility. It's one of resilience.

If your plan is properly built with the right guardrails in place, you should feel confident spending the money you've worked decades to save.

What This Means for Your Plan

A properly structured retirement plan for early retirement means:

Having a diversified portfolio across multiple asset classes that complement each other.

Maintaining that war chest high-quality short-term bonds to cover expenses for the next 3-5 years so you're not forced to sell stocks in a down market.

Having an investment policy statement that documents your strategy and your response plan for when markets get ugly, so you don't get caught up in emotions and make irrational changes.

Coordinating your pension, Social Security, DCP withdrawals, and personal savings to minimize taxes and maximize spending flexibility.

As Morningstar highlights, there's nothing wrong with preparing for periodic adversity. In fact, you need to prepare for it. But the argument that stocks are just one nasty downturn away from complete failure doesn't hold up based on market history.¹

The Bottom Line

Morningstar's historical research won't accurately tell any of us what the market will do over the next year, five years, or even ten years. Nobody can.

What historical data like this does is provide context.

And that context helps us make more informed, less emotional decisions about our retirement plans.

The biggest risk for most retirement savers isn't the next bear market. It's abandoning a perfectly good plan simply because short-term noise got too loud.

Because you didn't work 30 years to spend retirement worrying about market crashes that historical data suggests your plan can handle.

​Sources

1. Morningstar. "The Beautiful Chart That Busts 3 Stock Market Myths." February 9, 2026. https://www.morningstar.com/stocks/beautiful-chart-that-busts-3-stock-market-myths

​Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

I met with a prospective client recently who had a question that stopped me cold.

"Is this enough?"

He was 53, a police officer with 25 years of service. He'd saved diligently. Followed all the right advice. And now he was staring at his retirement accounts wondering if the numbers actually worked.

The balances looked impressive on paper. But he couldn't tell if impressive on paper meant secure in retirement.

I pulled up his accounts. DCP - 457(b) showed just over $450,000. A taxable brokerage account at $200,000. And a Roth IRA he'd been contributing to for years sitting at $100,000.

$750,000 total. Plus his LEOFF 2 pension.

The question wasn't whether the numbers looked good. It was whether they could actually support 30+ years of retirement starting at age 55.

The Reality of a LEOFF 2 Retirement at 53

LEOFF 2 members can retire at age 53 with full benefits. No reduction. No penalty1.

With 25 years of service and a final average salary of about $12,000 per month, his unreduced pension would be around $6,600 monthly.

But then comes the decision that keeps people up at night.

Single Life or Joint Survivor? Or something else?

The Survivor Benefit Decision Nobody Wants to Make

Single Life pays the full $6,600.

100% Survivor pays about $5,676 to him. If he dies first, his wife (same age) receives the exact same amount.2

That's a $924 per month difference. $11,088 per year. Every year. For as long as he lives.

But if he takes Single Life and dies first, his wife gets nothing from the pension.

This is where the $750,000 in other accounts becomes critical.

We ran the numbers assuming he chose 100% survivor. The reduced pension protected his wife, but they needed the portfolio to bridge gaps and provide flexibility.

How the Three Income Sources Actually Work Together

Most people think of retirement income as pension plus portfolio withdrawals.

But LEOFF 2 retirees and many other Washington public employees have three distinct income sources that need coordination:

The LEOFF 2 Pension: Starting at 55, he'd receive about $5,676 per month with Joint Survivor. Guaranteed. Adjusted annually for cost of living up to 3%.1

Social Security: He could start as early as 62, but the longer he waits, the higher the benefit. At his full retirement age (67 for someone born after 1960), his estimated benefit is around $3,500 monthly.3

Portfolio Withdrawals: The $750,000 across three accounts provides flexibility but requires careful sequencing to manage taxes.

The coordination matters because each income source has different tax treatment.

His LEOFF 2 pension is fully taxable. Social Security might be partially taxable depending on other income. His Roth IRA comes out tax-free.

The Real Withdrawal Strategy

Here's what we built for him:

Ages 55-62: Live primarily on the pension ($5,676/month) plus strategic withdrawals from the taxable account. This bridges the gap until his full Social Security retirement age. The taxable account has a mix of gains and basis, so we can manage tax impact carefully. This keeps his tax bracket manageable before Social Security starts. We are also evaluating strategic Roth conversions during this time.

Ages 62-67: Continue the pension, add Social Security at the full retirement age (around $3,500/month at 67), and reduce portfolio withdrawals.  Roth conversions continued to be evaluated each year during this time.

Age 67+: Full Social Security benefit ($3,500/month) plus pension ($5,676) gives him $9,176 in guaranteed income. Portfolio withdrawals become supplemental for discretionary spending, large expenses, and maintaining purchasing power.

The DCP ($450,000) is the workhorse. It's penalty-free after separating from service, even before age 59½.4  We can tap it strategically in those early years without IRS penalties that would hit a traditional IRA.

The Roth IRA ($100,000) sits untouched as long as possible. No required minimum distributions. No taxes on withdrawal. It's the tax-free reserve for later years when other income might push him into higher brackets.

Why Multiple Accounts Require a Coordinated Strategy

The real complexity isn't having $750,000.

It's knowing which account to pull from when. And how much. And how that affects taxes this year and ten years from now.

Take a simple question: Should he withdraw $30,000 this year?

From the taxable account? He'll pay capital gains on the appreciated portion.

From the DCP? Fully taxable as ordinary income. But it reduces future RMDs.

From the Roth? Tax-free, but he's depleting his only tax-free reserve.

There's no universal "right answer." It depends on his tax bracket that year, expected income next year, Roth conversion opportunities, and long-term distribution planning.

This is why having three distinct accounts with different tax treatment requires more than just a withdrawal rate.

It requires a withdrawal sequence. A tax strategy. A multi-year plan that adjusts as circumstances change.

What This Actually Means

This client's $750,000 isn't impressive because of the number.

It's impressive because of what it enables when coordinated with his pension and Social Security.

The LEOFF 2 pension provides the foundation. Guaranteed income he can't outlive.

Social Security adds a layer of inflation-protected income in his mid-60s.

The portfolio gives him flexibility, tax planning opportunities, and protection against the unexpected.

None of these pieces work in isolation. But together, they create a retirement that's both sustainable and flexible.

That's what a real retirement portfolio looks like for a Washington police officer. Not just big numbers in separate accounts, but a coordinated strategy that turns savings into decades of income.

​Sources

1. Washington State Department of Retirement Systems. "LEOFF Plan 2." https://www.drs.wa.gov/plan/leoff2/
2. Washington State Department of Retirement Systems. "Beneficiary information." https://www.drs.wa.gov/beneficiary/
3. Social Security Administration. "Retirement Benefits." https://www.ssa.gov/benefits/retirement/
4. Internal Revenue Service. "IRC 457(b) Deferred Compensation Plans." https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans

 

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

There's a question I hear some version of almost every month.

A public employee in their late 50s, usually with 25-30 years of service, tells me they want to retire early. Then they pause and add, "But I still owe $40,000 on my mortgage. Should I just keep working until it's paid off?"

The specifics change. Sometimes it's a teacher. Sometimes it's a firefighter. The loan balance might be $30,000 or $80,000. But the core question is always the same.

And the person asking always looks exhausted.

Here's what strikes me about these conversations. These folks typically have saved very well between their DCP accounts and personal investments. Their pensions will cover most of their basic expenses. But that remaining debt feels like an anchor keeping them from the retirement they've been planning for decades.

I see this pattern constantly with Washington State public employees in their final working years. The debt question
becomes this massive psychological barrier, even when the numbers tell a different story.

The Real Cost of Staying Longer

Let's talk about what "just working a few more years" actually means.

Those aren't abstract years. They're specific mornings, actual weekends, real family moments. They're the years when your body still wants to be active. When your parents might still be around. When retirement doesn't just mean resting, it means living.

But here's the thing I've learned working with public employees. The debt conversation is almost never really about the math.

It's about safety. It's about not wanting to mess up after decades of doing everything right.

What the Numbers Actually Show

Your DRS pension has a specific structure¹. Your benefit is based on your average compensation and years of service. Working extra years to pay off debt might increase your pension slightly, but you need to run the actual calculation.

Oftentimes, the math isn’t the problem. The feeling of carrying debt into retirement is the problem.

When Debt Actually Matters

I'm not going to tell you that debt never matters. That would be ridiculous.

Here's what I look at when a client brings up debt in their final working years.

The interest rate matters more than the balance. A $30,000 car loan at 7% interest is  very different than a $200,000 mortgage at 3.5%. One is actively draining your resources. The other is barely keeping pace with inflation.

The payment matters more than the total. Can your projected retirement income (pension plus Social Security plus portfolio withdrawals) comfortably cover your monthly obligations? That's the question. Not whether you could theoretically pay everything off before you retire.

The Strategy
Here's what I've seen work for Washington State employees who want to retire early but have debt.

Compare the guaranteed return. Paying off a 7% car loan is like earning a guaranteed 7% return on that money. That's actually pretty good. Paying off a 3.5% mortgage when your investment accounts might earn 7-8% annually? The math favors keeping the mortgage.

But here's where it gets personal. Some people sleep better with no mortgage payment, even if it's not the optimal financial move. That's a legitimate consideration.

Consider the PEBB healthcare bridge. If you retire before 65, you can continue PEBB coverage2. But you'll be paying the full premium out of pocket. That's another monthly obligation to factor in alongside your debt payments. Don't forget to include it in your retirement budget.

Think about Social Security timing. Most Washington public employees can claim Social Security benefits in addition to their pension. If you retire at 58 but wait until 67 to claim Social Security, you have a nine-year gap to plan for.

The Question You Should Actually Be Asking

Not "Should I pay off my debt before I retire?"

The better question is "Can I afford my debt payments in retirement?"

If the answer is yes, and if keeping that debt allows you to retire years earlier than you would otherwise, then the debt isn't your enemy. It's just a monthly expense like any other.

If the answer is no, then you need a different plan. Maybe that's working longer. Maybe that's refinancing. Maybe that's downsizing to a smaller house. But at least you're solving the actual problem instead of just feeling anxious about debt in the abstract.

I think about the public employees I've worked with who've faced this question. The ones who ran their numbers, made a plan, and decided to retire with manageable debt often tell me later how relieved they are that they didn't wait.

They talk about finally having time for the things they'd been putting off. Backpacking trips they'd been planning for years. More time with aging parents. Volunteering for causes they care about.

That's what this is really about. The debt is just numbers on paper. Your life is the thing that's actually happening.

Sources
1. Washington State Department of Retirement Systems. "PERS Plan 2 Member Handbook." https://www.drs.wa.gov/plan/pers2/
​2. Washington State Health Care Authority. "PEBB Continuation Coverage." https://www.hca.wa.gov/employee-retiree-benefits/retirees