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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. Most retirement conversations start the same way. When should I take Social Security? How much can I withdraw each year? Should I do Roth conversions? Those are all real questions worth answering. But there's a conversation that almost never comes up until it's too late. Where are you going to live when you're in your 80s? And who's going to take care of you if your health changes? I've started thinking about this more carefully lately, not because it's an exciting topic, but because I've seen what happens when people don't think about it at all. "We'll Just Stay in the House" Take a hypothetical couple I'll call Karen and Tom. Karen is a PERS 2 member with the county, 27 years of service, planning to retire at 58. Tom is a few years older and already retired. They've done everything right. Good pension. Solid DCP balance. Low debt. Their plan for later life? "We'll just stay in the house." That's not a plan. That's an assumption. The house doesn't adapt when Karen can't manage the stairs. It doesn't provide memory care if Tom's cognition declines. It doesn't coordinate doctor visits or medication management. And when something goes wrong, it typically falls on one spouse, then adult children, to scramble for answers under pressure. This is one of the most common patterns I observe working with public employees in retirement. The financial side is often well thought out. The housing and care side is often not thought out at all. The Four Main Options Most people don't realize how many choices actually exist. When you start looking at later-life housing, four main paths emerge. The first is aging in place, staying in your current home with modifications and outside support as needed. This works well for some people, but it requires a lot of coordination and can become costly as care needs grow. The second is moving in with family. For some, this is meaningful and works beautifully. For others, it places a significant burden on adult children and carries real risks if the family situation changes. The third is moving to an assisted living facility or a standalone memory care community when needs arise. The challenge here is that these moves often happen reactively, in a moment of crisis, which limits your options and your control. The fourth, and the one most people haven't fully considered, is a Continuing Care Retirement Community, or CCRC. These are also called Life Plan Communities. There are roughly 1,900 of them across the country, including several here in Washington State.¹ What Makes a CCRC Different The basic idea is that you move in while you're still healthy and independent. The community then provides care across a continuum, from independent living to assisted living to skilled nursing to memory care, all on the same campus. You don't have to move every time your needs change. That's the defining advantage.¹ CCRCs typically require an entrance fee and a monthly fee. The fees vary significantly by community, contract type, and location. This is one of the more complex financial decisions in retirement planning, which is why starting the research early matters. Some of the better communities have waiting lists measured in years.³ The Four Risks You're Actually Managing When I think about later-life housing, I think about four categories of risk. The first is care risk. If your health changes, will you have access to the care you need, when you need it? The second is financial risk. Long-term care is expensive. Around 70% of people who reach age 65 will need some form of it during their lifetime.⁴ The costs have been rising steadily across all care settings.⁴ The third is coordination risk. When someone moves into a crisis, managing care across multiple providers, facilities, and family members is enormously hard. Communities that handle care transitions internally reduce this burden significantly. The fourth is emotional risk. Decisions made in a hospital hallway at 2 a.m. are rarely the decisions you would have made with time and clarity. Planning now gives you and your family that clarity. The Tax Angle Most People Miss If you move into a CCRC, a portion of both the entrance fee and the ongoing monthly fees may be deductible as a medical expense on your federal income tax return. The IRS has addressed this in several rulings going back decades.⁵ The basic principle is that if the CCRC can demonstrate what portion of your fees goes toward providing medical care, that portion qualifies as a deductible medical expense under Section 213 of the tax code. For most people, the medical expense deduction threshold is hard to clear. But CCRC fees can be large enough that it becomes relevant, especially in the year you enter. This is worth discussing with a CPA or financial advisor before you sign anything. If a refund of the entrance fee is later received, a portion of that refund may need to be reported as income.⁵ The mechanics matter, and they're not always explained clearly by the community's sales team. When to Start Thinking About This Most financial planners treat this as a problem for your late 70s. I'd push back on that. The research, waitlists, and financial planning associated with a CCRC can take years.³ And your health status at the time of application will matter. The sooner you start learning, the more options you'll have. For Washington State public employees nearing retirement, this isn't an immediate action item. But it belongs in the retirement planning conversation now, not as an afterthought a decade later. The pension provides a reliable income floor, which is actually a meaningful advantage when it comes to CCRC financial planning. Many communities conduct a financial review as part of the admission process. Having a predictable monthly income alongside portfolio assets is exactly the kind of stability they're looking for. A Few Starting Points If this is a conversation you want to have, here's where I'd suggest beginning. Start by discussing it with your spouse or partner, separately from any financial pressure. What does each of you actually want? What are you afraid of? Write it down. Then do some general research. Resources like myLifeSite³ offer educational tools specifically for people navigating CCRC decisions. Newsweek also publishes an annual ranking of top communities.² And if you're a PERS, TRS, or LEOFF member working through retirement income planning, bring this topic into those conversations. Your pension, DCP balance, and portfolio together tell the full picture of what's financially realistic. Because "we'll stay in the house" deserves more than a passing nod. It deserves an actual plan. Sources
-Seth Deal
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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.
One of the things I ask clients about is their account security. How they protect their online logins. Whether they use unique passwords. What kind of verification they have set up on their financial accounts. The answer is almost always the same. Same password across most accounts. Verification codes sent by text message. Maybe a vague sense that they should probably do more, but it hasn’t felt urgent enough to act on. These are people who have done everything right when it comes to saving. They’ve been contributing to their DCP for years. They’ve maxed out Roth IRAs. They’re sitting on solid PERS, LEOFF, or TRS pensions. And yet this one area, the security around their accounts, almost never gets any attention. I get it. It doesn’t feel like financial planning. But after looking at the latest data on cybercrime, I think it might be one of the most important financial planning conversations we’re not having. It’s not your investments that keep me up at night I spend a lot of time helping clients think about pension options, Roth conversions, tax-efficient withdrawal strategies, and building a proper war chest for early retirement. Those are the big, tangible planning decisions. But here’s what I’ve started telling people more often: a gap in your cybersecurity can do just as much damage to your retirement as picking a bad investment. If not more. According to the FBI’s 2025 Internet Crime Report, Americans lost nearly $20.9 billion to cyber-enabled fraud last year.1 That was a 26% increase from the year before. And investment-related fraud was the single largest category, accounting for more than $8.6 billion of those losses.1 The people losing money aren’t careless. They’re retirement savers. People who spent decades building a nest egg. How a six-digit code can unlock your entire retirement Here’s what I think most people don’t realize. When you log into a financial account, you assume there are three separate things protecting you: your username, your password, and that multi-factor authentication code that gets texted to your phone. Three layers sounds pretty safe. But think about what happens when you forget your password. Most financial institutions ask you to verify a few pieces of personal information, like your name, date of birth, the last four digits of your Social Security number, and your zip code. Then they send you a verification code to reset everything. After years of large-scale data breaches, that personal information may already be out there for a lot of Americans. Which means that six-digit verification code might be one of the last real barriers protecting your retirement savings. Account takeover fraud, where someone gains access to your financial accounts through social engineering, resulted in roughly $360 million in reported losses across approximately 4,700 incidents last year.1 And since that only reflects what was actually reported, the real number is almost certainly higher. The pattern to watch for What I’ve learned from studying these situations is that the scam almost always follows the same pattern. Someone contacts you, claims to be from your bank or brokerage, and says there’s suspicious activity on your account. They create a sense of urgency. Then they ask you to verify your identity by reading back a code that was just sent to your phone. And that’s it. That one code can give a thief full access. The FBI actually has a term for people who show up at the exact moment you feel most vulnerable. They call them "rescue merchants." They present themselves as the helpful professional rushing in to save you. It works because when someone tells you your money is at risk, your instinct is to act, not to pause. Why this matters for Washington public employees specifically If you’re a Washington public employee approaching retirement, you likely have money spread across multiple accounts: your DRS pension, a DCP 457(b) plan, maybe a Roth IRA or traditional IRA, and possibly a taxable brokerage account. Each of those accounts is a potential target. And the more accounts you have, the more entry points exist. Washington residents filed over 25,600 cybercrime complaints in 2025, with total losses exceeding $458 million.1 For Washingtonians over 60, the numbers were especially concerning: more than 5,300 complaints and nearly $180 million in losses.1 Your pension itself is protected by the state retirement system. Nobody is draining that. But your DCP account, your IRAs, your brokerage accounts? Those are held at financial custodians, and they’re only as safe as your login credentials and the security practices you put around them. What you can do about it Never share a verification code with anyone who contacts you. If your bank or brokerage calls, don’t give them anything. Hang up, then call the number on the back of your card or type the institution’s website directly into your browser. If there truly was suspicious activity, they’ll know about it when you call them. Switch to an authenticator app. If your financial institution offers one, use it. Authenticator apps generate codes directly on your device, which makes them much harder to intercept than codes sent via text message. Add a verbal password to your accounts. Some institutions allow you to set up an extra PIN or verbal password before any changes can be made over the phone. It’s a simple step, but one more hurdle for anyone trying to access your money. Freeze your credit. This won’t stop every scam, but it prevents someone from opening new accounts in your name. You can freeze and unfreeze your credit for free at each of the three major bureaus. Consider a password manager. Using the same password across accounts is one of the most common vulnerabilities I see. A password manager generates unique, complex passwords for each account so you don’t have to remember them all. The bigger picture I think there’s a reason most people focus on their investments and not their security. Investment decisions feel tangible. They feel like you’re doing something productive. Figuring out how to freeze your credit or set up an authenticator app feels like a chore. But here’s the thing. You could have the perfect pension option selected, a beautifully diversified portfolio, and a tax-efficient withdrawal strategy, and a single text message and a six-digit code could put a meaningful chunk of that progress at risk. It’s one of those areas where a small amount of effort up front can save you from a devastating outcome later. And if you’re within a few years of retirement, the stakes are even higher, because you may not have the time or the earning years to recover from a significant loss. So take an hour this weekend. Update your passwords. Turn on an authenticator app. Freeze your credit if you haven’t already. These aren’t exciting steps. But they’re the kind of thing that protects everything else you’ve worked so hard to build. Sources 1. Federal Bureau of Investigation. “2025 Internet Crime Report.” Internet Crime Complaint Center (IC3). 2025. https://www.ic3.gov/AnnualReport/Reports/2025_IC3Report.pdf 2. Securities Investor Protection Corporation. “What is SIPC?” https://www.sipc.org/for-investors/what-sipc-protects 3. Fidelity Investments. “What is SIPC coverage?” April 23, 2025. https://www.fidelity.com/learning-center/smart-money/sipc 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 client's DCP statement recently when she pointed at her bond fund and said, "This one is clearly the winner." She wasn't wrong, exactly. On paper, the bond fund had delivered the best return for the amount of risk taken. The smoothest ride of anything in her portfolio. But that number was telling her something incomplete. And it was pointing her toward a decision that could actually hurt her in retirement. The smoothest ride isn't always the best ride There's a common way to evaluate investments that basically asks: how much return did I get for the amount of volatility I had to endure? Financial professionals use it all the time. It’s called the Sharpe Ratio. And on the surface, it makes sense. Who doesn't want a smooth ride? But consider three hypothetical investments over the past 25 years. By that "smoothness" measure, a bond fund came out on top. A large cap stock fund came in second. And a small cap stock fund came in last.¹ Now look at what actually happened to a hypothetical $10,000 invested in each. The bond fund grew to roughly $29,000. The large cap stock fund grew to about $74,000. And the small cap fund, the "worst" performer by the smoothness measure, grew to nearly $97,000.¹ The smoothest ride left the most money on the table. I think about this a lot when I'm working with Washington State public employees who are retired or nearing retirement. They have a pension coming. They have years of contributions in their DCP 457(b). And they're trying to figure out how to position everything for a retirement that could last 30 or 35 years. A smoothness score doesn't know any of that. It just rewards low volatility. It doesn't care about your goals. Why I evaluate investments as a team, not as individuals Here's what I think matters more. How do your investments work together? Take someone like hypothetical Lisa. She's 53, a parks department supervisor with 24 years in PERS Plan 2. She has about $350,000 in her DCP account and another $180,000 in a Roth IRA she's been building. Lisa's PERS pension is going to provide a stable, predictable income floor for the rest of her life. That changes everything about how we should think about the rest of her portfolio. When you already have a pension, you don't need your bond allocation to generate income. You need it to do something different. You need it to protect your portfolio during the worst moments in the stock market, so you never have to sell stocks at a loss to pay your bills. This is where the type of bonds you own starts to matter more than most people realize. The bond choice most people don't think about Research from the Financial Planning Association examined how U.S. government bonds and corporate bonds each performed inside a diversified portfolio alongside stocks.² The findings were striking. When you look at corporate bonds and government bonds by themselves, corporate bonds have historically earned slightly higher returns. That makes sense. They carry more risk, so they should pay you more. But when you put them inside a portfolio with stocks, the picture flips. Government bonds have historically moved differently than stocks.² When stocks fall hard, government bonds tend to hold their value or even go up. Corporate bonds tend to fall right alongside stocks during the worst downturns.² The credit risk and liquidity risk in corporate bonds show up at exactly the wrong time. One analysis found that once you account for the higher trading costs, fund expenses, and taxes on corporate bond interest (Treasury interest is exempt from state and local taxes), the slim return advantage of corporate bonds essentially disappears.² Another study of 60/40 portfolios over more than 90 years found nearly identical returns whether you used corporate or government bonds, but the portfolio with Treasuries had a meaningfully smaller maximum drawdown.³ That last point is the one I keep coming back to. In retirement, the size of the drop matters just as much as the size of the gain. What this means for your retirement portfolio For someone like Lisa with a PERS pension as her income foundation, the role of bonds in her portfolio isn't to generate the highest possible return. It's to be the part of the portfolio she can draw from when stocks are down, without locking in losses. This is what I call the war chest approach. I typically suggest keeping roughly five years of portfolio withdrawals in high-quality, short-duration government bonds. Not because bonds are exciting. Not because they score well on any single metric. Because they do their job when you need them most. If you want higher returns in your portfolio, the research suggests it's more effective to adjust your stock allocation, rather than reaching for yield with riskier bonds.³ The pension does the heavy lifting on stability. The bonds protect you during bad markets. And the stocks drive long-term growth. Each piece has a role. And evaluating any one piece in isolation misses the whole point. What to think about from here If you're a Washington State public employee approaching retirement, take a look at what's actually inside your DCP bond funds. Are they holding mostly government bonds, or a mix that includes significant corporate bond exposure? Think about how your full picture fits together. Your PERS or TRS or LEOFF pension, your DCP, your IRAs, and Social Security. Each piece should complement the others. And be cautious about chasing the investment that looks best on any single measure. The best portfolio isn't the one with the smoothest individual pieces. It's the one you can stick with for 30 years because it's built to weather the storms that are guaranteed to come. Sources
-Seth DealThe 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 running into the same conversation. Someone sits down across from me. They’ve got a PERS 2 pension, a healthy DCP balance, maybe some savings in a Roth IRA. On paper, they’re in great shape. But when I ask what they’re looking forward to in retirement, there’s this long pause. And then they start talking about what they’re afraid of. Running out of money. Spending too much. What happens if the market drops right after they retire. They’ve spent 25 or 30 years accumulating. And now the idea of actually using that money feels almost impossible. I think about this a lot. Because there’s a growing body of research suggesting that the hardest part of retirement isn’t saving enough. It’s giving yourself permission to spend. What the research actually says about money and happiness You’ve probably heard some version of the idea that money only buys happiness up to about $75,000 a year. That number comes from a well-known 2010 study by Daniel Kahneman and Angus Deaton, who analyzed over 450,000 survey responses and found that day-to-day emotional well-being stopped improving beyond that income level¹. The finding went everywhere. And most people took it to mean that once your basic needs are covered, more money doesn’t matter. But that’s not quite right. A 2023 follow-up study, published in the same journal, told a more nuanced story. Researchers Killingsworth, Kahneman, and Mellers found that the original flattening pattern only applied to the least happy 15 to 20 percent of the population. For everyone else, happiness continued to rise steadily with income well beyond that threshold². For the happiest 30 percent of people, it actually accelerated past $100,000. So what does this mean for someone approaching retirement with a pension and a portfolio? It means the question isn’t just “do I have enough?” It means the question is also “am I going to use it in a way that actually makes my life better?” The spending problem nobody talks about Here’s what I’ve observed working with Washington State public employees. Most people approaching retirement have been in saving mode their entire careers. Paycheck deductions into DCP. Steady pension contribution. Maybe some extra going into a Roth or a taxable account. That discipline is what got them here. But it also created a deeply ingrained habit that’s really hard to reverse. Consider a hypothetical couple. Let’s call them David and Karen. David is 57, retiring from a county job with 28 years of PERS 2 service. Karen still works part-time. Between his pension, their DCP savings, and Social Security down the road, they have more than enough income to maintain their lifestyle. But David can’t bring himself to book the trip to Portugal they’ve been talking about for years. He keeps looking at their account balances and thinking, “Maybe next year.” The truth is, David’s pension already does something incredibly powerful. It takes the worst-case scenario off the table. Why your pension changes everything Behavioral finance research points to a concept called “taking the worst case off the table.” The idea is simple. When people feel like their basic needs are permanently secured, they’re far more willing to spend on the things that actually bring them joy. For most retirees, this means building a safety bucket of cash or conservative investments. A cushion they can point to and say, “No matter what happens, I’m okay.” But Washington State public employees start with something most private-sector retirees don’t have. A guaranteed monthly pension check for life. That pension is your foundation. It covers your baseline. And when you combine it with a war chest of 3 to 5 years of portfolio withdrawals held in high-quality short-duration bonds, you’ve created a level of security that should genuinely free you up. Not to be reckless. But to be intentional. What actually makes retirement fulfilling The research on well-being in retirement consistently points to a few key areas where spending money makes a meaningful difference¹. Deepening relationships. Trips with family. Dinners with friends. Visiting grandkids. The research is clear that spending on shared experiences with people you love has a lasting impact on happiness. Buying back your time. Hiring someone to do the things you don’t enjoy. Yard work. House cleaning. Tax prep (though I might be biased on that one). Eliminating tasks you dislike is one of the most effective ways to use money in retirement. Giving it away. Charitable giving, especially when paired with volunteering, is one of the strongest predictors of well-being in retirement. This doesn’t have to be a large dollar amount. It just has to be meaningful to you. Staying engaged. One of the biggest risks in retirement isn’t financial. It’s losing your sense of purpose. People who retire without a plan for how they’ll stay challenged, connected, and growing tend to struggle. Research on human flourishing identifies engagement, relationships, meaning, and personal growth as essential, not just leisure. The common thread is that none of these things happen by accident. They require you to actually deploy the resources you’ve built. Giving yourself permission From a tax perspective, this is where planning really matters. If David and Karen want to take that Portugal trip, we can look at the most tax-efficient way to fund it. Maybe we pull from DCP in a year when their income is lower. Maybe we use Roth funds that come out tax-free. Maybe we harvest some capital gains in the 0% bracket. The point is that smart spending isn’t the opposite of smart planning. It’s part of it. I think about something I’ve heard attributed to people reflecting on their lives near the end. They rarely wish they had worked more hours or saved a little more aggressively. They wish they had spent more time with the people they loved. And worried a little less about things that, looking back, didn’t matter as much as they thought. Your pension, your DCP, your Social Security. These aren’t just numbers on a statement. They’re tools. And the best use of a tool is to build something that matters to you. If you’ve done the hard work of saving, the next step isn’t to keep saving. It’s to figure out what kind of life you actually want to live. And then go live it. Sources 1. Kahneman, D. and Deaton, A. “High income improves evaluation of life but not emotional well-being.” Proceedings of the National Academy of Sciences. September 21, 2010. https://www.pnas.org/doi/full/10.1073/pnas.1011492107 2. Killingsworth, M.A., Kahneman, D., and Mellers, B. “Income and emotional well-being: A conflict resolved.” Proceedings of the National Academy of Sciences. March 1, 2023. https://www.pnas.org/doi/10.1073/pnas.2208661120 -Seth DealNote: 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
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 -Seth DealThe 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
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
-Seth DealNote: 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
-Seth Deal |
Content is for informational purposes only and does not constitute personalized financial or investment advice. Consult with a qualified financial advisor to discuss your individual circumstances before making any financial decisions.
AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
July 2026
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