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From Full-Time to Freedom: Exploring Phased Retirement Options for Washington State and Local Government Employees

12/26/2024

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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:
  1. Stable Pension Systems: Washington offers robust pension plans through the Department of Retirement Systems (DRS) [1].
  2. Deferred Compensation Program (DCP): This voluntary savings plan can provide additional flexibility in retirement planning [2].
  3. No State Income Tax: Washington's lack of state income tax can affect retirement income calculations [3].
With these factors in mind, let's explore your phased retirement options.
Option 1: Reduce Your Hours
One straightforward approach to phased retirement is simply reducing your work hours. Here's how it might work:
Pros:
  • Maintain your current position and responsibilities
  • Continue accruing pension benefits – for PERS 2 employees you will receive 1 service credit for each month that you work 90 hours or more. If you work 70-90 hours you will receive ½ of a service credit and ¼ of a service credit if you work less than 70 hours [1].
  • Ease into retirement lifestyle gradually
Cons:
  • May affect your final average salary for pension calculations
  • Potential reduction in other benefits (e.g., health insurance)
Check with your HR department about policies on part-time work and benefit eligibility.
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:
  1. You officially retire and start receiving your pension.
  2. After a required break in service, you can return to work for up to 867 hours per calendar year. Be sure to check your specific plan details. The number of hours can vary depending on what pension system you are in.
Pros:
  • Receive both pension payments and a paycheck
  • Continue contributing to the Deferred Compensation Program (DCP)
Cons:
  • Strict hour limits and other rules must be followed
  • May affect your Social Security benefits if you're under full retirement age
 The rules for the Return to Work program vary depending on your retirement plan. Always check the current regulations with DRS before making decisions [4].
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:
  1. Reduce your work hours and supplement your income with DCP distributions.
  2. You can start DCP distributions at any age after leaving employment, without penalties [2].
Pros:
  • Flexible distribution options (lump sum, periodic payments, or a combination)
  • Can help bridge the gap until you're ready for full retirement
Cons:
  • Distributions are taxable as ordinary income
  • Need careful planning to ensure your savings last
Consider using DCP distributions to delay starting your pension or Social Security, potentially increasing these benefits later.
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:
  • Gradually reduce your work hours over a set period (often 1-3 years)
  • Continue receiving a prorated salary and benefits
Pros:
  • Structured program with clear guidelines
  • Often allows for a smoother transition of job responsibilities
Cons:
  • Not available to all state employees
  • May have specific eligibility requirements
If you're in higher education, inquire with your institution's HR department about phased retirement options.
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:
  • Review your pension estimates from DRS [6]
  • Calculate your expected Social Security benefits [7]
  • Assess your DCP and other savings
2. Clarify Your Goals
What do you want to achieve with phased retirement?
Questions to Consider:
  • How many hours do you want to work?
  • What aspects of your job do you want to maintain or let go?
  • How long do you envision your transition period lasting?
3. Understand the Rules
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:
  • Express your interest in phased retirement
  • Explore what options your agency can accommodate
  • Discuss how your responsibilities might change
5. Consider the Non-Financial Aspects
Phased retirement isn't just about money – it's a lifestyle change.
Reflect On:
  • How will you spend your additional free time?
  • What social connections from work do you want to maintain?
  • Are there new skills or hobbies you want to develop?
6. Create a Transition Timeline
Map out your journey from full-time work to full retirement.
Example Timeline:
  • Year 1: Reduce to 80% time
  • Year 2: Reduce to 60% time
  • Year 3: Enter Return to Work program
  • Year 4: Full retirement
7. Develop a Backup Plan
Flexibility is key in phased retirement.
What-If Scenarios:
  • What if your reduced hours don't work out?
  • What if your financial needs change?
  • What if you decide you want to fully retire sooner?
Making It Work: Practical Tips for Phased Retirement
As you embark on your phased retirement journey, keep these tips in mind:
  1. Stay Engaged: Even with reduced hours, remain committed to your work. Your experience is valuable!
  2. Keep Learning: Use your extra time to learn new skills, potentially opening up different part-time opportunities.
  3. Mind the Gap: Ensure you have health insurance coverage, especially if you reduce hours before Medicare eligibility.
  4. Maximize Your DCP: Consider increasing your DCP contributions during your final full-time years to provide more flexibility later.
  5. Explore Volunteering: Supplement reduced work hours with meaningful volunteer activities to stay engaged and active.
  6. Network: Maintain professional connections. They could lead to interesting part-time opportunities later.
  7. Review and Adjust: Regularly review your phased retirement plan and be prepared to adjust as your needs or circumstances change.
Your Phased Retirement Action Plan
Ready to explore phased retirement? Here's your action plan:
  1. Crunch the Numbers: Use the DRS website to estimate your pension under different scenarios [6].
  2. Meet with Experts:
    • Schedule a meeting with a DRS retirement specialist [8]
    • Consider consulting a financial advisor familiar with public employee benefits
  3. Talk to HR: Discuss phased retirement options with your agency's human resources department.
  4. Explore DCP Options: Review your DCP distribution options and consider how they fit into your phased retirement plan [2].
  5. Create Your Timeline: Develop a tentative timeline for your transition to full retirement.
  6. Put It in Writing: Document your phased retirement plan, including financial projections and lifestyle goals.
  7. Stay Informed: Keep up with any changes to retirement rules or programs that might affect your plans.
Remember, phased retirement is about creating a transition that works for you. It's an opportunity to design a unique next chapter that balances work, leisure, and financial security. With careful planning and the right approach, you can create a phased retirement that offers the best of both worlds – the satisfaction of continued contribution and the freedom to enjoy life on your terms.
Sources:
  1. Washington State Department of Retirement Systems, "PERS 2" 2024.
  2. Washington State Department of Retirement Systems, "Deferred Compensation Program," 2024.
  3. Washington State Department of Revenue, "Taxes and Rates," 2024.
  4. Washington State Department of Retirement Systems, "Working After Retirement," 2024.
  5. Washington State Human Resources, "Phased Retirement," 2024.
  6. Washington State Department of Retirement Systems, "Benefit Estimator," 2024.
  7. Social Security Administration, "my Social Security," 2024.
  8. Washington State Department of Retirement Systems, "Retirement Planning Checklist," 2024.

-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

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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:
  1. Stable Pension Income: Many WA public servants have access to defined benefit pensions through PERS, LEOFF, or another plan [1].
  2. No State Income Tax: Washington doesn't have a state income tax, which can affect retirement income calculations [2].
  3. High Property Values: Many areas in Washington have seen significant property value increases, which can impact your decision [3].
Keep these factors in mind as we explore the advantages and disadvantages of paying off your mortgage before retirement.
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:
  • Current Age: 55
  • Hoping to retire ASAP
  • Home Value: $500,000
  • Mortgage Balance: $200,000
  • Mortgage Rate: 3.5%
  • Monthly Payment: $1,500
  • Annual Pension Estimate: $60,000
  • DCP Balance: $300,000
Scenario A: Pay Off Mortgage
  • Use $200,000 from DCP to pay off mortgage plus an additional amount due to income taxes on with withdrawal. 
  • Reduce annual expenses by $18,000
  • Remaining DCP Balance: $100,000
Scenario B: Keep Mortgage
  • Keep $200,000+ invested in DCP
  • Continue $1,500 monthly mortgage payments
  • Potential for higher long-term returns
The best choice depends on factors like investment returns, tax situation, and personal comfort with debt.
Decision-Making Framework
To help you decide, consider these questions:
  1. What's your mortgage interest rate? Lower rates make keeping the mortgage more attractive.
  2. How does your mortgage payment compare to your expected retirement income? If it's a small percentage, keeping the mortgage might be more manageable.
  3. How's your retirement savings health? If you're behind on savings, investing might be more critical than paying off low-interest debt.
  4. What's your risk tolerance? A paid-off mortgage provides certainty, while investing offers potential for higher returns with more risk.
  5. How long do you plan to stay in your home? If you're considering downsizing soon, paying off the mortgage might be less beneficial.
Strategies for Moving Forward
Regardless of which path you choose, consider these strategies:
If You Decide to Pay Off the Mortgage:
  1. Make Extra Payments: Increase your monthly payment or make lump-sum payments when possible.
  2. Refinance to a Shorter Term: Consider refinancing to a 15-year mortgage to pay it off faster.
  3. Use Windfalls Wisely: Apply any windfalls (bonuses, inheritances) to your mortgage principal.
If You Decide to Keep the Mortgage:
  1. Refinance to a Lower Rate: If possible, refinance to reduce your interest rate and payment.
  2. Invest the Difference: Consistently invest the money you would have used for extra mortgage payments.
  3. Review Annually: Reassess your decision each year as your financial situation and market conditions change.
Your Action Plan: Making the Right Choice for You
Ready to tackle the mortgage payoff decision? Here's your action plan:
  1. Gather Your Financial Information: Collect details on your mortgage, retirement accounts, and expected pension.
  2. Use Retirement Planning Tools: The DCP website offers retirement planning calculators. Use these to project your retirement income and expenses [9].
  3. Consult a Financial Advisor: Consider working with a financial advisor who understands the nuances of public employee benefits and can provide personalized advice.
  4. Review Your Risk Tolerance: Honestly assess your comfort level with debt and investment risk.
  5. Create a Retirement Budget: Develop a detailed budget for your retirement years to understand how a mortgage payment fits in.
  6. Consider Tax Implications: Discuss the tax consequences of your decision with a tax professional.
  7. Make a Decision and Take Action: Once you've considered all factors, make your choice and implement your plan.
  8. Stay Flexible: Be prepared to adjust your strategy as your circumstances or economic conditions change.
Remember, there's no one-size-fits-all answer to the mortgage payoff question. The right decision depends on your unique financial situation, goals, and comfort level. By carefully considering the pros and cons and using the decision-making framework provided, you can make an informed choice that supports your vision for a secure and enjoyable retirement.
Sources:
  1. Washington State Department of Retirement Systems, 2024.
  2. Washington State Department of Revenue, "Washington Tax Rates & Rankings," 2024.
  3. Zillow, "Washington Home Values," 2024.
  4. Journal of Financial Planning, "Psychological Factors in Retirement Planning," 2022.
  5. U.S. Department of Housing and Urban Development, "Home Equity Conversion Mortgages for Seniors," 2023.
  6. S&P Dow Jones Indices, "S&P 500 Returns," 2023.
  7. Internal Revenue Service, "Topic No. 501 Should I Itemize?" 2024.
  8. Washington State Department of Retirement Systems, "Deferred Compensation Program," 2024.
  9. Washington State Department of Retirement Systems, "DCP Retirement Planning Tools," 2024.

-Seth Deal

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Tax-Smart Withdrawal Strategies for Washington Public Employees in Retirement

12/12/2024

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You'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:
  1. Pension: From PERS, LEOFF, or other state retirement systems (typically taxable) [1]
  2. Social Security: If you're eligible (partially taxable) [2]
  3. Deferred Compensation Program (DCP): Voluntary savings plan (taxable upon withdrawal), Roth options are also available (not taxable upon withdrawal) [3]
  4. Personal retirement accounts: Such as Traditional IRAs (taxable) or Roth IRAs (tax-free) [4]
  5. Other savings and investments: Taxed based on the type of account or investment
The key to tax-efficient withdrawals is understanding how each of these sources is taxed and strategically coordinating your withdrawals.
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:
  1. Project Your Retirement Income and Expenses: Estimate your annual spending needs and income from all sources.
  2. Analyze Your Tax Situation: Determine your expected tax bracket and identify opportunities to minimize taxes.
  3. Prioritize Your Withdrawal Sources: Generally, a tax-efficient withdrawal order might look like this:
    • Required Minimum Distributions (RMDs)
    • Taxable accounts (using long-term capital gains)
    • Tax-deferred accounts (DCP, Traditional IRAs)
    • Tax-free accounts (Roth IRAs)
  4. Plan for Flexibility: Tax laws can change, so build flexibility into your plan.
  5. Review and Adjust Annually: Your tax situation may change from year to year. Regular reviews can help you stay tax-efficient.
Implementing Tax-Smart Withdrawal Strategies
Ready to optimize your retirement withdrawals? Here's your action plan:
  1. Gather Your Financial Information: Collect statements from your pension, DCP, IRAs, and other accounts.
  2. Use Tax-Planning Tools: The DCP website offers retirement planning tools. Utilize these to project your retirement income and tax situation [17].
  3. Consider Professional Help: Tax-efficient withdrawal strategies can be complex. Consider working with a financial advisor who understands the nuances of public employee retirement benefits and tax planning.
  4. Educate Yourself: Stay informed about changes in tax laws and retirement account rules. The IRS website and your DCP's educational resources are good starting points.
  5. Start Planning Early: The earlier you start planning your withdrawal strategy, the more opportunities you'll have to optimize your tax situation.
  6. Coordinate with Your Spouse: If you're married, consider your combined tax situation and coordinate your withdrawal strategies.
  7. Stay Flexible: Be prepared to adjust your strategy as your needs and tax situations change throughout retirement.
Remember, while minimizing taxes is important, it shouldn't be your only consideration. Your withdrawal strategy should also ensure you have the income you need to enjoy the retirement you've worked so hard to achieve.
Sources:
  1. Washington State Department of Retirement Systems, "Retirement taxes FAQ," 2024.
  2. Social Security Administration, "Income Taxes And Your Social Security Benefit," 2024.
  3. Washington State Department of Retirement Systems, "Deferred Compensation Program," 2024.
  4. Internal Revenue Service, "Retirement Plans FAQs regarding IRAs," 2024.
  5. Washington State Department of Revenue, "Income Tax," 2024.
  6. Internal Revenue Service, "IRS provides tax inflation adjustments for tax year 2024," 2024.
  7. Internal Revenue Service, "Topic No. 551 Standard Deduction," 2024.
  8. Internal Revenue Service, "Retirement Topics - Required Minimum Distributions (RMDs)," 2024.
  9. Washington State Department of Retirement Systems, "DCP Distribution Options," 2024.
  10. Internal Revenue Service, "Retirement Topics - Exceptions to Tax on Early Distributions," 2024.
  11. Internal Revenue Service, "Roth IRAs," 2024.
  12. Social Security Administration, "Income Taxes And Your Social Security Benefit," 2024.
  13. Internal Revenue Service, "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," 2024.
  14. Internal Revenue Service, "Qualified Charitable Distributions," 2024.
  15. Internal Revenue Service, "Topic No. 412 Lump-Sum Distributions," 2024.
  16. Internal Revenue Service, "Retirement Topics - Exceptions to Tax on Early Distributions," 2024.
  17. Washington State Department of Retirement Systems, "DCP Education and Planning Tools," 2024.

-Seth Deal

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Balancing Act: Managing Market Volatility in Your Washington DCP and Personal Retirement Accounts

12/5/2024

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​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:
  • Volatility doesn't mean loss: Short-term fluctuations don't necessarily translate to long-term results.
  • Time is on your side: The longer your investment horizon, the more time you have to ride out market fluctuations.
  • Emotions can be your enemy: Panic selling during downturns can lock in losses and make it harder to recover.
Your Washington DCP: A Powerful Tool in Volatile Times
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:
  • Asset classes (stocks, bonds, real estate)
  • Size (large cap, small cap)
  • Growth and Value
  • Geographic regions (U.S., international, emerging markets)
Remember: While diversification doesn't guarantee profits or protect against losses, it can help manage risk [6].
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:
  1. Review Your DCP Allocation: Log into your DCP account and review your current investment mix. Does it align with your risk tolerance and time horizon?
  2. Check Your Personal Accounts: Review the asset allocation in your IRAs and other personal retirement accounts. Rebalance if necessary.
  3. Assess Your Cash Reserves: Ensure you have adequate cash savings to avoid selling investments in a downturn.
  4. Consider Professional Advice: Consider scheduling a consultation, or work with a financial advisor who understands the unique aspects of public employee retirement planning.
  5. Educate Yourself: Take advantage of educational resources offered by the DRS. Knowledge is your best defense against panic during market turbulence.
  6. Stay the Course: Unless your personal circumstances have changed, stick to your long-term investment strategy. Remember, retirement saving is a marathon, not a sprint.
Remember, market volatility is a normal part of investing. By understanding it and having a solid strategy in place, you can navigate these choppy waters with confidence. Your future self will thank you for staying the course and building a secure retirement, come rain or shine in the markets.
Sources:
  1. Washington State Department of Retirement Systems, "Deferred Compensation Program," 2024.
  2. Washington State Department of Retirement Systems, "DCP Investment Options," 2024.
  3. U.S. Securities and Exchange Commission, "Ten Things to Consider," 2024.
  4. Washington State Department of Retirement Systems, "DCP Target Date Funds," 2024.
  5. Financial Industry Regulatory Authority, "Asset Allocation and Diversification," 2024.
  6. U.S. Securities and Exchange Commission, "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing," 2024.
  7. Consumer Financial Protection Bureau, "An essential guide to building an emergency fund," 2024.
  8. Vanguard, "Time in the market vs. timing the market," 2023.
  9. J.P. Morgan Asset Management, "Guide to the Markets," 2023.
  10. Vanguard, "Best practices for portfolio rebalancing," 2023.
  11. Internal Revenue Service, "Roth IRAs," 2024.
  12. Internal Revenue Service, "Topic No. 409 Capital Gains and Losses," 2024.
  13. Internal Revenue Service, "Wash Sales," 2024.
  14. NASDAQ, "Investment Risk Tolerance Quiz," 2024.
  15. Fidelity, "Bond ladder basics," 2024.
  16. Schwab, "Bucket Strategy," 2024.

-Seth Deal

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    Authors

    Bob Deal is a CPA with over 30 years of experience and been a financial planner for  25 years.

    Seth Deal is a CPA and financial advisor.

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