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Are you a Washington state or local government employee dreaming of retirement, but not quite ready to make a clean break from your career? You're not alone. Many public servants are discovering the appeal of phased retirement – a flexible approach that allows you to gradually transition from full-time work to full retirement. Understanding Phased Retirement Phased retirement is like dipping your toes in the retirement pool before taking the full plunge. It typically involves reducing your work hours while beginning to tap into your retirement benefits. This approach can offer the best of both worlds: continued income and purpose from work, coupled with more free time to enjoy life. The Washington State Landscape Before we dive into specific options, let's consider the unique aspects of phased retirement for Washington state employees:
Option 1: Reduce Your Hours One straightforward approach to phased retirement is simply reducing your work hours. Here's how it might work: Pros:
Option 2: Enter the Return to Work Program Washington state offers a Return to Work program that allows you to retire and then return to state service on a part-time basis [4]. How it Works:
Option 3: Deferred Compensation Program (DCP) Distributions While not technically a phased retirement option, strategically using your DCP can create a phased retirement-like experience. How it Works:
Option 4: Phased Retirement Program (for Higher Education Employees) If you work in Washington's higher education system, you might be eligible for a formal phased retirement program [5]. How it Works:
Creating Your Phased Retirement Plan Now that we've explored the options, how do you create a phased retirement plan that works for you? Here's a step-by-step guide: 1. Assess Your Financial Readiness Before considering phased retirement, ensure you're financially prepared. Action Steps:
What do you want to achieve with phased retirement? Questions to Consider:
Each phased retirement option has specific rules and potential impacts on your benefits. Must-Do: Schedule a meeting with a DRS retirement specialist to understand how different options affect your pension [8]. 4. Communicate with Your Employer Your agency's support is crucial for a successful phased retirement. Discussion Points:
Phased retirement isn't just about money – it's a lifestyle change. Reflect On:
Map out your journey from full-time work to full retirement. Example Timeline:
Flexibility is key in phased retirement. What-If Scenarios:
As you embark on your phased retirement journey, keep these tips in mind:
Ready to explore phased retirement? Here's your action plan:
Sources:
-Seth Deal
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Freedom from Your Mortgage: Is Early Payoff Right for Your Retirement as a WA Public Servant?12/19/2024 As you approach retirement, you might ask yourself, "Should I pay off my mortgage before I retire?" It's a question that many Washington state public employees grapple with. While the idea of entering retirement debt-free is appealing, the decision isn't always straightforward. The Washington State Context Before we delve into the pros and cons, let's consider some factors specific to Washington state public employees:
The Pros: Why Paying Off Your Mortgage Could Be a Smart Move 1. Reduced Monthly Expenses Entering retirement without a mortgage payment can significantly lower your monthly expenses. Number Crunch: If your mortgage payment is $1,500 per month, that's $18,000 per year you won't need to withdraw from your retirement accounts. 2. Emotional Security There's a peace of mind that comes with owning your home outright. Psychological Benefit: Reduced financial stress can contribute to a more enjoyable retirement [4]. 3. Simplified Finances One less bill to manage can simplify your financial life in retirement. Time Saver: Less time spent on financial management means more time for retirement activities. 4. Potential for Reverse Mortgage A paid-off home provides the option for a reverse mortgage later in retirement if needed. Flexibility: This can serve as a financial safety net in your later years [5]. The Cons: Why Keeping Your Mortgage Might Make Sense 1. Opportunity Cost Money used to pay off the mortgage could potentially earn higher returns if invested. If you have a low-interest rate mortgage currently, this may be especially true. If your mortgage rate is 3% for example and you make 8% on your investments, by keeping the mortgage you earn the 5% difference over the life of the mortgage. Historical Perspective: The S&P 500 has historically returned about 10% annually over the long term [6]. 2. Reduced Liquidity Paying off your mortgage ties up a significant portion of your wealth in a non-liquid asset. Emergency Fund: Ensure you maintain adequate liquid savings for unexpected expenses. 3. Loss of Tax Deduction Mortgage interest is tax-deductible, which can be valuable even in retirement. Tax Consideration: However, with the higher standard deduction introduced in 2017, fewer retirees itemize deductions [7]. 4. Inflation Benefit Fixed-rate mortgages become cheaper over time in real terms due to inflation. Inflation Effect: Your mortgage payment stays the same while the dollar's value decreases. 5. Diversification Keeping a mortgage and investing instead can provide better portfolio diversification. Risk Management: This can help spread your financial risk across different types of assets. Special Considerations for Washington Public Employees 1. Pension Security With a stable pension income, you might be better positioned to manage mortgage payments in retirement. Action Step: Review your projected pension income and compare it to your expected expenses, including your mortgage payment. 2. Deferred Compensation Program (DCP) The DCP offers a way to save extra for retirement on a tax-deferred basis [8]. Strategy: Consider whether increasing DCP contributions might be more beneficial than paying extra on your mortgage. 3. Housing Market Dynamics Washington's housing market has seen significant appreciation in many areas [3]. Consideration: Factor in potential continued appreciation when deciding whether to prioritize mortgage payoff. 4. No State Income Tax Advantage Washington's lack of state income tax means you won't lose the mortgage interest deduction at the state level. Tax Planning: This might reduce the tax incentive to keep a mortgage in retirement. Crunching the Numbers: A Washington-Specific Example Let's look at a hypothetical example for a Washington state employee:
Decision-Making Framework To help you decide, consider these questions:
Regardless of which path you choose, consider these strategies: If You Decide to Pay Off the Mortgage:
Ready to tackle the mortgage payoff decision? Here's your action plan:
Sources:
-Seth DealYou've spent your career serving the public and diligently saving for retirement. Now, as you approach or enter retirement, you're faced with a new challenge: how to withdraw your hard-earned savings in the most tax-efficient manner. As a Washington state public employee, you have unique considerations. Let's explore strategies to help you keep more of your money and less in Uncle Sam's pocket. Understanding Your Retirement Income Sources Before diving into withdrawal strategies, let's review the typical income sources for Washington public employees in retirement:
The Washington Advantage: No State Income Tax As a Washington resident, you have a significant tax advantage: Washington does not have a state income tax [5]. This means your retirement income is only subject to federal income tax, potentially leaving more money in your pocket. If you're considering relocating in retirement, factor in state taxes. Moving to a state with income tax could significantly impact your retirement finances. General Tax-Smart Withdrawal Strategies Let's start with some overarching strategies that can help minimize your tax burden in retirement: 1. Understand Your Tax Bracket Your tax bracket in retirement may be lower than during your working years. Understanding your bracket can help you make informed decisions about withdrawals. Estimate your retirement income and use the IRS tax brackets to determine your likely tax rate [6]. 2. Diversify Your Retirement Accounts Having a mix of taxable, tax-deferred, and tax-free accounts gives you more flexibility in managing your tax liability. If most of your savings are in tax-deferred accounts like the DCP, consider contributing to a Roth IRA or taxable account to diversify your tax exposure. 3. Make the Most of Your Standard Deduction In 2024, the standard deduction for married couples filing jointly is $29,200 [7]. Try to manage your taxable income to take full advantage of this deduction. 4. Be Strategic with Required Minimum Distributions (RMDs) RMDs from tax-deferred accounts like the DCP and traditional IRAs start at age 73 [8]. Plan ahead to manage the tax impact of these mandatory withdrawals. Consider Roth conversions in lower-income years before RMDs begin to reduce future mandatory withdrawals. Specific Strategies for Washington Public Employees Now, let's look at some strategies tailored to your situation as a Washington public employee: 1. Coordinate Pension and DCP Withdrawals Your pension provides a stable, taxable income stream. Use this to your advantage when planning DCP withdrawals. If your pension doesn't push you into a higher tax bracket, consider filling up your current bracket with DCP withdrawals. This can help reduce future RMDs and potentially lower your lifetime tax bill. If you are not going to use all of these withdrawals, you can always re-invest in a taxable brokerage account. 2. Leverage the DCP's Flexibility The DCP offers flexibility in withdrawal options, including lump sum, periodic, or annuity payments [9]. Use this to your tax advantage. If you retire before age 59½, you can take penalty-free withdrawals from your DCP, unlike an IRA which may incur a 10% early withdrawal penalty [10]. 3. Consider Roth Conversions in Low-Income Years If you have years with lower income (perhaps early in retirement before Social Security and RMDs kick in), consider converting some of your traditional accounts to Roth accounts. While you'll pay taxes on the conversion, future withdrawals from the Roth accounts will be tax-free, potentially lowering your tax bill in later years [11]. 4. Manage Your Social Security Taxation Up to 85% of your Social Security benefits may be taxable, depending on your overall income [12]. By managing your other income sources, you might reduce the tax on your Social Security. Consider delaying Social Security and taking larger withdrawals from tax-deferred accounts earlier in retirement. This could reduce RMDs and the taxation of Social Security later. 5. Use Your Health Savings Account (HSA) Wisely If you have an HSA, remember that withdrawals for qualified medical expenses are tax-free at any age [13]. Pay for medical expenses out of pocket while working and save HSA receipts. In retirement, you can withdraw from your HSA tax-free to reimburse yourself for those past expenses, effectively creating a tax-free income source. 6. Qualified Charitable Distributions (QCDs) Once you reach age 70½, you can make charitable donations directly from your IRA. These QCDs can satisfy your RMD requirement without increasing your taxable income [14]. This can help lower your Adjusted Gross Income (AGI), which may reduce the taxation of your Social Security benefits and potentially lower your Medicare premiums. Creating Your Tax-Efficient Withdrawal Strategy Now that we've covered various strategies, here's how to put them into action:
Ready to optimize your retirement withdrawals? Here's your action plan:
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-Seth DealBalancing Act: Managing Market Volatility in Your Washington DCP and Personal Retirement Accounts12/5/2024 As a Washington state public employee, you're building a secure financial future through your pension, the Deferred Compensation Program (DCP), and personal retirement accounts. But with the constant ebb and flow of the stock market, you might be wondering: How can I protect my retirement savings from market volatility? Let's dive into strategies to help you navigate these choppy waters and keep your retirement plans on course. Understanding Market Volatility: The Retirement Rollercoaster Market volatility is like a rollercoaster - it has its ups and downs, twists and turns. While it can be unsettling, it's a normal part of investing. Here's what you need to know:
The Washington State Deferred Compensation Program (DCP) is a voluntary supplemental retirement savings plan designed to help you build added retirement security [1]. Here's how it can help you manage market volatility: 1. Diversification Options The DCP offers a range of investment options, allowing you to spread your risk across different asset classes [2]. This diversification can help cushion your portfolio against market swings. The target date funds are also diversified. 2. Dollar-Cost Averaging By contributing to your DCP through regular payroll deductions, you're using a strategy called dollar-cost averaging [3]. This means you're buying more shares when prices are low and fewer when prices are high, potentially lowering your average cost per share over time. 3. Professional Management Options DRS offers professionally managed funds, including target date funds, which automatically adjust their asset allocation as you approach retirement [4]. This can help manage volatility without requiring constant attention from you. Personal Retirement Accounts: Your Custom Volatility Shield In addition to your DCP, you might have personal retirement accounts like IRAs or a taxable investment (brokerage) account. Here's how to manage these effectively in volatile markets: 1. Asset Allocation: Your Personal Shock Absorber Your asset allocation - the mix of stocks, bonds, and other investments - is crucial in managing volatility. Generally, the closer you are to retirement, the more conservative your allocation should be [5]. Review your asset allocation semi-annually. Rebalance to maintain your target mix. 2. Diversification: Don't Put All Your Eggs in One Basket Spread your investments across different:
3. Cash Reserves: Your Financial Cushion Having a cash reserve can prevent you from selling investments at inopportune times to meet short-term needs. Aim for 3-6 months of living expenses in easily accessible cash [7]. If you’re planning on using investment funds within the next 5-10 years consider calculating how much you will be using and move these funds into high quality, short duration bonds. Whether you're managing your DCP, IRA, or both, these strategies can help you weather market volatility: 1. Stay Invested: Time in the Market Beats Timing the Market Historically, staying invested through market cycles has been more effective than trying to time the market [8]. From 2000 to 2019, missing just the 10 best days in the market would have cut your overall return in half [9]. 2. Rebalance Regularly: Maintaining Your Risk Profile Market movements can throw your asset allocation out of balance compared to your original allocation. Regular rebalancing helps keep your desired risk level. Best Practice: Rebalance at least semi-annually or when your allocation drifts more than 25% from your target [10]. 3. Use Tax-Loss Harvesting (for Taxable Accounts) In taxable accounts, selling investments at a loss can offset capital gains and reduce your tax bill. This strategy, known as tax-loss harvesting, can turn market downturns into tax-saving opportunities [12]. The wash-sale rule prohibits claiming a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale [13]. 4. Use Tax-Gain Harvesting (for Taxable Accounts) In taxable accounts, selling investments at a gain will increase your tax basis (cost) and reduce future capital gains. Be aware, if your current tax rates will be lower in the future or the same, this strategy may not make sense for you. Emotional Strategies: Keeping Your Cool in Volatile Markets Managing your emotions is just as important as managing your portfolio. Here's how to stay level-headed: 1. Avoid Constant Monitoring Checking your accounts too often can lead to emotional decision-making. Limit yourself to reviewing your accounts quarterly or semi-annually. 2. Focus on Your Goals, Not Short-Term Performance Remember why you're investing in the first place - for a secure retirement, not to outperform the market. Instead of focusing on account balances, consider whether you're on track to meet your long-term goals. 3. Understand Your Risk Tolerance Your ability to stick with your investment strategy during market turbulence depends on your risk tolerance. Think about how you felt during recent market downturns. Were you worried, the market was going to zero? Or where you not concerned. Your risk tolerance can drastically shift as you get closer to retirement so be sure to re-evaluate your risk tolerance as you get closer to retirement. Special Considerations for Near-Retirees If you're within 5-10 years of retirement, market volatility can be particularly concerning. Here are some strategies to consider: 1. Gradual Shift to More Conservative Allocation Start shifting to a more conservative asset mix, but don't abandon growth investments entirely. You may need your money to last 20-30 years in retirement and inflation will be an issue during that time frame. 2. Build a Bond Ladder Consider creating a bond ladder to provide predictable income in the early years of retirement, reducing your reliance on selling stocks in a down market [15]. 3. Consider a Bucket Strategy Divide your portfolio into near-term, medium-term, and long-term buckets, each with appropriate investments for its time horizon [16]. Your Action Plan: Mastering Market Volatility Ready to take control of your retirement savings in the face of market volatility? Here's your action plan:
Sources:
-Seth Deal |
AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
January 2025
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