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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.
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
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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. 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 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 got a call last week from a client. She's 53, a PERS 2 member with 28 years in, sitting on about $650,000 between her DCP and personal savings. Planning to retire at 58 in just under five years. "Seth, I'm nervous," she said. "The market keeps going up. It feels like we're due for a crash. Should I move everything to bonds?" I get this question alot right now. When stocks have been strong for a while, it's natural to assume something has to give. That the rally can't continue. That one bad downturn could wipe out decades of careful saving. Recently, Morningstar published their quarterly Market Observer report with a fascinating chart mapping nearly 100 years of US stock market history.¹ When you zoom out and look at that full century of data, several widely accepted beliefs about market crashes start to look far less certain. This matters enormously for Washington State public employees planning retirement. Because the decisions you make today about your DCP, your pension option, and your investment strategy will determine whether you can actually retire in your late 50s and maintain your lifestyle for 30+ years. The Chart The Morningstar chart tracks US stock market performance from 1926 through 2025, color-coding three distinct phases: expansions (when markets climb to new highs), downturns (drops of 20% or more), and recoveries (the climb back to previous peaks).¹  What jumps out immediately is how much time the market spends recovering and expanding versus declining. Over the past century, the market spent about 142 months in bear market (down) territory. It spent another 349 months working its way back to prior highs.¹ Add those together and roughly 40% of market history has been falling from or climbing back to previous peaks. And yet, despite all those setbacks, the market has compounded wealth for long-term investors over and over again. Three Myths That Could Derail Your Retirement Plan Let me walk through the three common beliefs the Morningstar data actually challenges. Myth 1: This Rally Has Been Too Strong Since the market bottomed in September 2022, we've seen solid returns. Strong enough that many people assume this can't continue. But here's what the data shows. Since 1926, there have been 11 total market expansions. The average expansion lasted just under six years. The market more than tripled in value on average during these expansions, delivering roughly 21% annual returns.¹ The current expansion? As of late 2025, it was only in its 25th month. Less than half the historical average. And the annual return during this stretch has been right around 21%, essentially in line with what we've seen in past expansions.¹  This rally is not the unprecedented outlier many think it is. It's actually tracking right along with historical norms. Now, does that guarantee a catastrophic drawdown isn't around the corner? Of course not. But the strength of this rally alone is not a reason to panic or make drastic changes to your retirement investment strategy. Myth 2: This Bull Market Is Getting Old It's been over three years since the market bottomed in September 2022. People hear that and think we must be due for a downturn. But historically, the average recovery period (the time it takes for the market to climb back to a prior high after a downturn) has lasted almost exactly three years.¹  When you combine the average recovery time with the average expansion, you're looking at roughly nine years on average from a market low to the next high.¹ By that historical measure, this bull (up) market is far from long in the tooth. I'm not saying stocks will simply keep going up. What I am saying is that making investment decisions based on a gut feeling that "it's been going up too long" isn't a sound strategy. History shows bull markets can and often do last much longer than people expect. Myth 3: One Bad Bear Market Will Ruin Everything This is the fear that keeps many up at night. The idea that one nasty crash could wipe out years of progress and destroy your retirement plan. Bear markets are real and they're painful. The 2008 financial crisis is proof of that. But here's what that century of data shows: despite spending roughly 40% of market history either falling from or climbing back to previous peaks, the market has consistently compounded wealth for disciplined, long-term investors.¹  As Morningstar wisely put it, “the US stock market's long-term success has never been a story of uninterrupted progress. It's been a story of resilience amid setbacks.”¹
Why This Matters for Washington State Public Employees If you're planning to retire at 58 with a PERS, TRS, SRS, or LEOFF pension, you're looking at potentially 35+ years in retirement. That's a long, time horizon. Your DCP account and personal savings need to bridge the gap until your pension starts, cover the years between retirement and Social Security, and provide supplemental income throughout retirement. The question isn't whether the market will experience another downturn. We all know it will. The question is whether your plan is built to withstand it. The Real Risk (And It's Not a Crash) I need to acknowledge something important here, especially for those of you within five years of retirement. While the long-term data is reassuring, the timing of a downturn relative to when you start taking withdrawals from your portfolio matters enormously. This is called sequence of returns risk. Two retirees can own the same portfolio with the same long-term average return, yet the one who suffers a major downturn early in retirement can end up in a dramatically worse position. Why? Because they're forced to sell more investments at lower prices to fund withdrawals. This is precisely why I advocate for having the right asset allocation in the three to five years before retirement. It's why I recommend maintaining what I call a "war chest" of five years' worth of withdrawals in high-quality short-duration bonds. It's why your pension is so valuable as a foundation. It allows you to take strategic equity exposure with your DCP and personal savings without being forced to sell stocks at the worst possible moment. You need a plan that ensures you don't have to liquidate investments during a downturn to pay for basic living expenses, cover a tax bill, or fund that Alaska cruise you've been planning for years. What Actually Ruins Retirements If 100 years of market data tells us a crash alone won't ruin your retirement, what will? In short, it's not a bear market. It's what you do when one shows up. It's halting your DCP contributions because headlines are scary. It's moving everything to cash and waiting for things to settle down. It's trying to time your way back in and missing the recovery. It's buying expensive products that promise downside protection while quietly eating away at your long-term returns. And maybe the most overlooked: it's being so afraid of the next downturn that you never actually enjoy the money you worked so hard to save. I've seen this countless times. The greatest risk in retirement isn't overspending. It's underspending. The fear that this rally is too strong or that a crash is right around the corner causes retirees to sit on their savings and never give themselves permission to spend. They skip the trip. They put off the kitchen renovation. They say no to experiences with grandkids. Not because the math says they can't afford it, but because they're terrified the next downturn could take it all away. The market's long-term track record is not one of fragility. It's one of resilience. If your plan is properly built with the right guardrails in place, you should feel confident spending the money you've worked decades to save. What This Means for Your Plan A properly structured retirement plan for early retirement means: Having a diversified portfolio across multiple asset classes that complement each other. Maintaining that war chest high-quality short-term bonds to cover expenses for the next 3-5 years so you're not forced to sell stocks in a down market. Having an investment policy statement that documents your strategy and your response plan for when markets get ugly, so you don't get caught up in emotions and make irrational changes. Coordinating your pension, Social Security, DCP withdrawals, and personal savings to minimize taxes and maximize spending flexibility. As Morningstar highlights, there's nothing wrong with preparing for periodic adversity. In fact, you need to prepare for it. But the argument that stocks are just one nasty downturn away from complete failure doesn't hold up based on market history.¹ The Bottom Line Morningstar's historical research won't accurately tell any of us what the market will do over the next year, five years, or even ten years. Nobody can. What historical data like this does is provide context. And that context helps us make more informed, less emotional decisions about our retirement plans. The biggest risk for most retirement savers isn't the next bear market. It's abandoning a perfectly good plan simply because short-term noise got too loud. Because you didn't work 30 years to spend retirement worrying about market crashes that historical data suggests your plan can handle. Sources
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 sitting in a meeting with a client last month when she pulled out a colorful brochure. "My brother-in-law says I need one of these," she said. "For guaranteed income." It was an annuity proposal. Variable annuity with riders and guarantees. Promises that her retirement would be "protected." She'd been planning to retire at 62 with about $750,000 saved. Now she was second-guessing everything. I looked at the proposal. Then I looked at her situation. The Fear That's Real Here's what I see happening. People are living longer. A 65-year-old today has an average life expectancy of 84, according to Social Security.¹ But that's just average. If you're healthy with longevity in your family, you might need to plan for 30 years in retirement. That's a long time to make money last. And inflation doesn't take a break. Since 1925, it's averaged about 3% per year.² At that rate, someone who needs $50,000 today would need nearly $120,000 in 30 years just to buy the same stuff. So the fear is real. Running out of money. Watching your purchasing power shrink. Market crashes at exactly the wrong time. Annuity salespeople know this. They know exactly which buttons to push. And the promise of guaranteed lifetime income? It sounds perfect. But here's what I want to walk you through. How these guarantees actually work. What they cost. And what you're giving up. Two Types You'll Hear About At the basic level, there are two kinds. Deferred annuities are like a traditional IRA wrapped in an insurance product. You put money in. It grows tax-deferred. Later, you convert it to income payments. Immediate annuities work differently. You hand the insurance company a lump sum (say $100,000). They immediately start sending you monthly checks. For a set number of years, or for life. Annuities purchased through the Washington State Department of Retirement Systems are immediate annuities. But here's the thing. When you buy one, you're handing over control. That money's gone. You can't change your mind. You can't leave it to your kids if you die early. Instead of keeping the money invested and managing it yourself, you're betting the insurance company's guarantee is worth more than the flexibility. What Is a Variable Annuity?Most of what I'm seeing pitched are variable annuities. Think of it like this: mutual funds + tax deferral + insurance contract. The mutual funds look like what you'd see in your 457(b) or 401(k). Stock funds, bond funds. Your account goes up and down based on what those funds do. The insurance contract is where it gets complicated. But first, here's something critical. If you're funding a variable annuity with IRA money or DCP money, you're putting tax-deferred dollars into a tax-deferred product. You already have the tax benefit. You're paying extra fees for something you don't need.³ There are cases where someone really wants the insurance features. Income guarantees. Death benefits. That might justify it. But you need to know you're paying for those features on top of the tax deferral you already had. The Guarantee That Isn't What It Sounds Like Here's where people get tripped up. Variable annuities have guarantees. The salesperson will tell you things like "your account is guaranteed to grow 7% per year no matter what" or "once your account hits a new high, that's locked in forever." Those statements aren't lies. But they don't mean what you think they mean. The guarantees apply to something called the "income benefit base." It's an accounting number. A calculation the insurance company uses to figure out how much income they'll pay you later. It's not actual money you can touch. Your real account value (the money you'd get if you cashed out) still goes up and down with the market. Let me show you what this looks like. You invest $100,000. The market drops. Your investments are now worth $80,000. You decide you want out. You get $80,000 minus surrender charges. If you're in year one with a 7% surrender charge, that's another $5,600 gone. You walk away with $74,400. The "guaranteed 7% growth" doesn't protect you from that. The actual insurance kicks in later. If you keep the contract and start taking income, and poor markets eventually drive your account to zero, the insurance company keeps paying you. That's real. That's the benefit. But it's not a guarantee on money you can access today. It's a promise about income payments maybe 10 or 15 years from now. When you're deciding if this is worth it, ask this: If I cancel this contract in one year, three years, five years, how much do I actually get back after fees and taxes? What You're Really Paying For Variable annuities are insurance. Insurance costs money. Every guarantee you see costs something. Downside protection. Inflation riders. Income for life. Nobody's giving that away. Here is an example of how the fees are stacked on top of each other: Mortality and expense: 1.00% to 1.50% per year. Admin fees: 0.10% to 0.20%. Annual contract fee: $25 to $50. Mutual fund expenses inside: 0.50% to 1.50%. Surrender charges if you leave early. Rider fees: another 0.40% to 1.50% each. According to FINRA's analysis of over 48,000 annuity policies, total fees can hit 3.88% per year.⁴ Let me put that in real numbers. I met with someone recently who had $1 million in a variable annuity. The fees were running about 3% per year. That's $30,000 annually. The Lock-In You Don't See Coming Even when someone realizes the annuity doesn't fit, getting out isn't simple. Enter: Surrender charges. Typical schedule: 7% of your premium in year one, declining 1% each year over seven to ten years. On $1 million, a 7% surrender charge is $70,000. Just to access your own money. In year four? Still $40,000 (assuming it drops to 4%). These aren't just fees. They lock you into the contract's original assumptions. The income structure. The investment options. Everything. Then the surrender period stretches across years when things change. The economy improves. Your health changes. Tax laws change. Your goals shift. But you're stuck. The contract doesn't change. And the cost to leave is too high. Inflation Eats Fixed Payments Variable annuities are invested in stocks and bonds. But the income guarantees? Usually fixed in nominal dollars. If you fall back on the guarantee, you're locked into a flat payment. Inflation slowly destroys it. Let's say you start taking $30,000 per year. In ten years, you're still getting $30,000. But at 3% inflation, you'd need $40,300 to buy the same stuff. The annuity company will sell you an inflation rider. But it costs extra. So you choose: locked-in payments that lose value every year, or higher fees. Not great options. Trading Growth for the Illusion of Safety Here's the biggest issue. You're trading decades of growth for short-term comfort. Fixed indexed annuities are the perfect example. They sound great. Principal "protected" from losses. You "participate" in market gains. But when the market goes up 15%, you might get 7% to 10%. Because of caps. Spreads. Participation limits.⁵ So yes, when the market drops 30%, you don't lose anything that year. Feels good. But since 1928? S&P 500 returns are positive about 67% of the time. And since 1970 they are positive about 75% of the time (custom analysis with data from Macro Trends). Every one of those positive years, you're getting a fraction of the actual return. But to clarify, as long as you can avoid selling investments at a loss, you’re not actually losing money. So over a long enough period of time the “protection” you are buying from the insurance company is very likely not necessary. That's not protection. That's opportunity cost dressed up as safety. What To Do Instead So if these have high fees, kill flexibility, create inflation risk, and trade away growth, what's the alternative? Build your own. A globally diversified portfolio of stocks and bonds. A flexible withdrawal strategy. Cash and bonds for volatility protection. Here's how it works. Keep roughly five years of withdrawals in high-quality, short-term bonds and cash. Not junk bonds. If you need $50,000 per year from your portfolio, maintain about $250,000 in that stability bucket. The rest stays in stocks for growth. When markets drop 20% or 30%, you're not selling stocks. You're pulling from bonds and cash. The stocks recover. You're not paying 3% or 4% in fees for this. You're just diversified properly. And if you hire an advisor to help, you're still paying a fraction of what annuities cost. Plus you get actual planning. Tax strategy. Estate planning. Real advice. The Tax Trap Here's what nobody talks about. Variable annuities destroy your tax flexibility. When you take money out, all the growth is taxed as ordinary income. Not capital gains rates. Not qualified dividend rates. Ordinary income.³ For most people, that's the highest rate they'll pay. Could be 22%. Could be 24%. Could be 32% or higher. Compare that to a regular brokerage account. Long-term capital gains? 0% to 20% depending on income. Most retirees pay 15%. Qualified dividends get the same treatment. You control what you sell. When you sell it. You can harvest losses to offset gains. Manage your tax bill year by year. With an annuity? Once money goes in, every dollar of growth comes out as ordinary income. And if you're under 59½, the IRS adds a 10% penalty. If you funded it with IRA money, it's even simpler. Every dollar out is ordinary income. The annuity didn't improve your taxes at all. You just added expensive insurance features to dollars that were already going to be fully taxed. Questions to Ask If someone's pitching you an annuity, here's what you need clear answers to: What type is it? Variable? Fixed? Indexed? Immediate? What does it cost each year? Every fee. All of them. What are the surrender charges? Exact schedule. Are there caps on returns? Participation rates? What growth am I giving up? Is income adjusted for inflation? How much does that cost? How is guaranteed income calculated? Actual account value or internal benefit base? What planning services am I getting? Or just insurance? How does this affect my tax flexibility? If you can't get specific answers, don't sign. What That Client Decided We walked through all of this. The fees. The opportunity cost. The flexibility she'd lose. The surrender charges. The inflation problem. She didn't need more guaranteed income at the cost of fees, growth, and flexibility. She needed a comprehensive plan. One that coordinated her accounts, Social Security timing, taxes. One that gave her confidence without locking everything away. No annuity. No surrender charges. No 3.5% annual fees. No locked-in payments losing value to inflation. No sacrificed growth. No destroyed tax flexibility. Just a clear plan. Confidence without giving up control. She still has that brochure somewhere. But she's not using it - well maybe as a coaster for her morning coffee. Sources 1. Social Security Administration. "Period Life Table." https://www.ssa.gov/oact/STATS/table4c6.html 2. Bureau of Labor Statistics. "Consumer Price Index." https://www.bls.gov/cpi/ 3. Internal Revenue Service. "Annuities - A Brief Description." https://www.irs.gov/retirement-plans/annuities-a-brief-description 4. Financial Industry Regulatory Authority. "Variable Annuities: What You Should Know." https://www.finra.org/rules-guidance/key-topics/variable-annuities 5. Fidelity Investments. "What is a fixed indexed annuity?" https://www.fidelity.com/learning-center/personal-finance/retirement/fixed-indexed-annuity 6. Guyton, Jonathan T., and William J. Klinger. "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?" Journal of Financial Planning, October 2006. -Seth DealThis is What a Real $750,000 Retirement Portfolio Looks Like for a Washington Police Officer2/12/2026 Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.
I met with a prospective client recently who had a question that stopped me cold. "Is this enough?" He was 53, a police officer with 25 years of service. He'd saved diligently. Followed all the right advice. And now he was staring at his retirement accounts wondering if the numbers actually worked. The balances looked impressive on paper. But he couldn't tell if impressive on paper meant secure in retirement. I pulled up his accounts. DCP - 457(b) showed just over $450,000. A taxable brokerage account at $200,000. And a Roth IRA he'd been contributing to for years sitting at $100,000. $750,000 total. Plus his LEOFF 2 pension. The question wasn't whether the numbers looked good. It was whether they could actually support 30+ years of retirement starting at age 55. The Reality of a LEOFF 2 Retirement at 53 LEOFF 2 members can retire at age 53 with full benefits. No reduction. No penalty1. With 25 years of service and a final average salary of about $12,000 per month, his unreduced pension would be around $6,600 monthly. But then comes the decision that keeps people up at night. Single Life or Joint Survivor? Or something else? The Survivor Benefit Decision Nobody Wants to Make Single Life pays the full $6,600. 100% Survivor pays about $5,676 to him. If he dies first, his wife (same age) receives the exact same amount.2 That's a $924 per month difference. $11,088 per year. Every year. For as long as he lives. But if he takes Single Life and dies first, his wife gets nothing from the pension. This is where the $750,000 in other accounts becomes critical. We ran the numbers assuming he chose 100% survivor. The reduced pension protected his wife, but they needed the portfolio to bridge gaps and provide flexibility. How the Three Income Sources Actually Work Together Most people think of retirement income as pension plus portfolio withdrawals. But LEOFF 2 retirees and many other Washington public employees have three distinct income sources that need coordination: The LEOFF 2 Pension: Starting at 55, he'd receive about $5,676 per month with Joint Survivor. Guaranteed. Adjusted annually for cost of living up to 3%.1 Social Security: He could start as early as 62, but the longer he waits, the higher the benefit. At his full retirement age (67 for someone born after 1960), his estimated benefit is around $3,500 monthly.3 Portfolio Withdrawals: The $750,000 across three accounts provides flexibility but requires careful sequencing to manage taxes. The coordination matters because each income source has different tax treatment. His LEOFF 2 pension is fully taxable. Social Security might be partially taxable depending on other income. His Roth IRA comes out tax-free. The Real Withdrawal Strategy Here's what we built for him: Ages 55-62: Live primarily on the pension ($5,676/month) plus strategic withdrawals from the taxable account. This bridges the gap until his full Social Security retirement age. The taxable account has a mix of gains and basis, so we can manage tax impact carefully. This keeps his tax bracket manageable before Social Security starts. We are also evaluating strategic Roth conversions during this time. Ages 62-67: Continue the pension, add Social Security at the full retirement age (around $3,500/month at 67), and reduce portfolio withdrawals. Roth conversions continued to be evaluated each year during this time. Age 67+: Full Social Security benefit ($3,500/month) plus pension ($5,676) gives him $9,176 in guaranteed income. Portfolio withdrawals become supplemental for discretionary spending, large expenses, and maintaining purchasing power. The DCP ($450,000) is the workhorse. It's penalty-free after separating from service, even before age 59½.4 We can tap it strategically in those early years without IRS penalties that would hit a traditional IRA. The Roth IRA ($100,000) sits untouched as long as possible. No required minimum distributions. No taxes on withdrawal. It's the tax-free reserve for later years when other income might push him into higher brackets. Why Multiple Accounts Require a Coordinated Strategy The real complexity isn't having $750,000. It's knowing which account to pull from when. And how much. And how that affects taxes this year and ten years from now. Take a simple question: Should he withdraw $30,000 this year? From the taxable account? He'll pay capital gains on the appreciated portion. From the DCP? Fully taxable as ordinary income. But it reduces future RMDs. From the Roth? Tax-free, but he's depleting his only tax-free reserve. There's no universal "right answer." It depends on his tax bracket that year, expected income next year, Roth conversion opportunities, and long-term distribution planning. This is why having three distinct accounts with different tax treatment requires more than just a withdrawal rate. It requires a withdrawal sequence. A tax strategy. A multi-year plan that adjusts as circumstances change. What This Actually Means This client's $750,000 isn't impressive because of the number. It's impressive because of what it enables when coordinated with his pension and Social Security. The LEOFF 2 pension provides the foundation. Guaranteed income he can't outlive. Social Security adds a layer of inflation-protected income in his mid-60s. The portfolio gives him flexibility, tax planning opportunities, and protection against the unexpected. None of these pieces work in isolation. But together, they create a retirement that's both sustainable and flexible. That's what a real retirement portfolio looks like for a Washington police officer. Not just big numbers in separate accounts, but a coordinated strategy that turns savings into decades of income. Sources
Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees. There's a question I hear some version of almost every month. A public employee in their late 50s, usually with 25-30 years of service, tells me they want to retire early. Then they pause and add, "But I still owe $40,000 on my mortgage. Should I just keep working until it's paid off?" The specifics change. Sometimes it's a teacher. Sometimes it's a firefighter. The loan balance might be $30,000 or $80,000. But the core question is always the same. And the person asking always looks exhausted. Here's what strikes me about these conversations. These folks typically have saved very well between their DCP accounts and personal investments. Their pensions will cover most of their basic expenses. But that remaining debt feels like an anchor keeping them from the retirement they've been planning for decades. I see this pattern constantly with Washington State public employees in their final working years. The debt question becomes this massive psychological barrier, even when the numbers tell a different story. The Real Cost of Staying Longer Let's talk about what "just working a few more years" actually means. Those aren't abstract years. They're specific mornings, actual weekends, real family moments. They're the years when your body still wants to be active. When your parents might still be around. When retirement doesn't just mean resting, it means living. But here's the thing I've learned working with public employees. The debt conversation is almost never really about the math. It's about safety. It's about not wanting to mess up after decades of doing everything right. What the Numbers Actually Show Your DRS pension has a specific structure¹. Your benefit is based on your average compensation and years of service. Working extra years to pay off debt might increase your pension slightly, but you need to run the actual calculation. Oftentimes, the math isn’t the problem. The feeling of carrying debt into retirement is the problem. When Debt Actually Matters I'm not going to tell you that debt never matters. That would be ridiculous. Here's what I look at when a client brings up debt in their final working years. The interest rate matters more than the balance. A $30,000 car loan at 7% interest is very different than a $200,000 mortgage at 3.5%. One is actively draining your resources. The other is barely keeping pace with inflation. The payment matters more than the total. Can your projected retirement income (pension plus Social Security plus portfolio withdrawals) comfortably cover your monthly obligations? That's the question. Not whether you could theoretically pay everything off before you retire. The Strategy Here's what I've seen work for Washington State employees who want to retire early but have debt. Compare the guaranteed return. Paying off a 7% car loan is like earning a guaranteed 7% return on that money. That's actually pretty good. Paying off a 3.5% mortgage when your investment accounts might earn 7-8% annually? The math favors keeping the mortgage. But here's where it gets personal. Some people sleep better with no mortgage payment, even if it's not the optimal financial move. That's a legitimate consideration. Consider the PEBB healthcare bridge. If you retire before 65, you can continue PEBB coverage2. But you'll be paying the full premium out of pocket. That's another monthly obligation to factor in alongside your debt payments. Don't forget to include it in your retirement budget. Think about Social Security timing. Most Washington public employees can claim Social Security benefits in addition to their pension. If you retire at 58 but wait until 67 to claim Social Security, you have a nine-year gap to plan for. The Question You Should Actually Be Asking Not "Should I pay off my debt before I retire?" The better question is "Can I afford my debt payments in retirement?" If the answer is yes, and if keeping that debt allows you to retire years earlier than you would otherwise, then the debt isn't your enemy. It's just a monthly expense like any other. If the answer is no, then you need a different plan. Maybe that's working longer. Maybe that's refinancing. Maybe that's downsizing to a smaller house. But at least you're solving the actual problem instead of just feeling anxious about debt in the abstract. I think about the public employees I've worked with who've faced this question. The ones who ran their numbers, made a plan, and decided to retire with manageable debt often tell me later how relieved they are that they didn't wait. They talk about finally having time for the things they'd been putting off. Backpacking trips they'd been planning for years. More time with aging parents. Volunteering for causes they care about. That's what this is really about. The debt is just numbers on paper. Your life is the thing that's actually happening. Sources 1. Washington State Department of Retirement Systems. "PERS Plan 2 Member Handbook." https://www.drs.wa.gov/plan/pers2/ 2. Washington State Health Care Authority. "PEBB Continuation Coverage." https://www.hca.wa.gov/employee-retiree-benefits/retirees -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 think about this question a lot when I'm working with clients on their retirement plans. We spend hours running numbers. Pension options. Tax projections. Healthcare costs. Investment allocation. And then, usually near the end of our meetings, someone will say something like: "I guess I'll finally have time to relax." And I wonder: is that really what they want to do for the next 30 years? Because from what I've seen, the people who retire early and are genuinely happy six months later, a year later, five years later... they're not the ones who are just relaxing. They're the ones who figured out what they were retiring TO, not just what they were retiring FROM. The Question Nobody Asks During Retirement Planning Everyone focuses on the money part. Can I afford to retire? What pension option should I take? How do I bridge healthcare to Medicare? When should I claim Social Security? Those are important questions. I spend most of my time helping people answer them. But there's another question that matters just as much, and almost nobody asks it during the planning phase. What am I actually going to DO? Not in the first month. Not during that honeymoon period where you're catching up on house projects and taking that trip you've been putting off. I mean three years in. Five years in. What fills your days when you're 62 and healthy and have potentially 30 more years ahead of you? The Reality of 10,000 Empty Days Let's do some math. If you retire at 58 and live to 88, that's 30 years. 30 years times 365 days equals 10,950 days. Before you retired, your job filled about 2,000 hours per year. Work days, meetings, projects, deadlines, colleague interactions. Now you have 2,000 hours to fill. Every single year. For potentially three decades. That's a lot of golf. I'm being a little flippant, but the point is serious. The transition from a structured work life to completely unstructured time is harder than most people expect. And the financial planning industry doesn't talk about it much because we're focused on making sure you don't run out of money. What Actually Works (Based on What I've Seen) Here's what I've noticed from clients who are thriving in retirement versus those who are struggling. The ones who are happy didn't just plan their finances. They planned their time. They started before they retired. I've seen people who spent their last years before retirement gradually building up volunteer work. One example: someone who started with a literacy program while still working full-time. By the time they left their job, they had a ready-made structure waiting. Three mornings a week. Relationships already established. A place where they felt needed. It wasn't about filling time. It was about creating purpose on their own terms. They have multiple things, not one big thing. The people who struggle are often the ones who put all their identity eggs in one basket. "I'm going to travel full time." (Gets expensive and exhausting.) "I'm going to start a business." (Sounds great until you realize you just gave yourself another job.) "I'm going to finally relax." (Turns out humans aren't wired for endless relaxation.) The ones who are content have a portfolio of activities. Volunteer work two days a week. Hiking group on Thursdays. Grandkids on Tuesdays. Book club once a month. Part-time consulting gig that brings in a little money and keeps their brain engaged. None of it is overwhelming. All of it adds up to a life. They kept some structure. This surprised me at first, but it makes sense. After spending 30 years with structure, going completely unstructured feels untethered for a lot of people. The happiest retirees I know have routines. Not rigid schedules, but patterns. Coffee and reading in the morning. Walk after lunch. Volunteer work on specific days. Dinner with friends every other Friday. Structure by choice feels different than structure by obligation. They found ways to still contribute. This one's big. Humans need to feel useful. We're wired for it. The DRS pension provides financial security. But it doesn't provide the feeling of being needed that work often gave you (even when you didn't always love your job). One LEOFF 2 member I worked with retired from the fire department at 53. Thought he'd love having nothing to do. Hated it. Started teaching fire science classes at the community college two days a week. Not for the money (though it doesn't hurt). For the feeling of passing on what he knows. Now he's actually happy. The Part-Time Work Consideration Speaking of contributing, let's talk about working after retirement. A lot of early retirees end up going back to some kind of work. Not because they need the money, but because they miss parts of work they didn't expect to miss. If you're a WA public employee with a pension, you can work up to 867 hours per year in a DRS-covered position (about 17 hours per week) without affecting your pension. That's enough for meaningful part-time work. There are no hour limitations on private sector work or other non-DRS-covered jobs. Some people do consulting in their former field. Some get completely different jobs they always wanted to try. Some volunteer in ways that feel like work but without the paycheck. The key is that it's optional. You're working because you want to, not because you have to. That changes everything. What This Means for Your Planning I think about retirement planning in two phases now. Phase one: Make sure you can afford it. Pension strategy, investment management, tax planning, healthcare bridge to Medicare. All the financial stuff. Phase two: Make sure you'll actually enjoy it. Most people spend 90% of their energy on phase one and barely think about phase two until they're already retired. That's backwards. The financial part is important. But what's the point of being financially secure if you're going to be miserable? Some Questions Worth Asking Now If you're planning to retire in the next few years, try asking yourself these: What did I actually like about my job? (Not the paycheck. The actual work.) What have I always wanted to try but didn't have time for? Who do I want to spend more time with? What makes me feel useful? What would a good Tuesday look like if I didn't have to work? These aren't easy questions. But they're worth thinking about before you turn in your retirement paperwork. Here's What I'd Suggest Start experimenting now. You don't have to wait until you retire to figure out what you want your retirement to look like. Take some vacation days and live like you're retired. Not a special trip. A regular week at home with nothing scheduled. See what you do. See how it feels. Join something now that you could continue after retirement. A volunteer organization, a hiking group, a community college class. Test drive the life before you commit to it permanently. And think hard about what you're retiring TO, not just what you're retiring FROM. The financial planning will make sure you can afford retirement. But only you can make sure retirement is actually worth having. 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 public employees.
I get this question all the time from clients approaching retirement. They're in their mid-to-late 50s. The pension numbers work. They're financially ready. But they're not sure they want to stop working completely. Maybe they love what they do and just want to dial it back. Maybe they want to stay connected to their profession. Maybe they're worried about losing structure and purpose. So they ask: Can I retire and then go back to work part-time? The answer isn't just "yes" or "no." It's more complicated than that. And the wrong move could cost thousands of dollars in pension benefits. The 867-Hour Rule You Need to Know Here's what most Washington public employees don't realize about working after retirement. If you retire from a DRS pension and then return to work for any DRS-covered employer (schools, state agencies, cities, counties), there's a strict limit. You can only work 867 hours per calendar year without affecting your pension.¹ That's roughly 16 hours per week for a full year. Go over that limit by even one hour, and your entire pension stops. Not reduced. Stopped.¹ It doesn't restart until you either separate from that employer or January 1 of the next year, whichever comes first.¹ The rule gets more complicated depending on your specific situation. Some retirees can work up to 1,040 hours under temporary legislation that runs through January 1, 2030.¹ For school districts, qualifying PERS, SERS, and TRS retirees can work in non-administrative positions.¹ The term non-administrative means positions that do not require an administrative certification (like Principal, Vice Principal, Program Administrator, Superintendent) and do not evaluate staff.¹ And there's another requirement that catches people off guard. You must wait at least 30 consecutive days after your retirement date before returning to work for any DRS employer.² You also cannot have any pre-arranged agreement (written or verbal) to return to work before you retire.² When Part-Time Work Makes Sense From what I've seen working with Washington public employees, part-time work after retirement makes sense in a few specific situations. First, when you want to stay engaged but need more flexibility. Teaching two classes instead of five. Working school hours instead of administrative hours. Doing the parts of your job you love without the parts that drain you. Second, when you have specialized knowledge that's hard to replace. School districts especially struggle to fill certain positions. If you have expertise they need, working part-time can be mutually beneficial. Third, when you're testing retirement before fully committing. Some people retire, try it for a few months, and realize they miss the structure and social connection. Working part-time can ease that transition. But here's what I always ask clients to consider: Is the financial benefit worth the restrictions? Because once you're subject to that 867-hour limit, you have to track every single hour carefully. Paid holidays count. Compensatory time counts. Sick leave and annual leave taken in place of normal work hours count.¹ Miss the mark and you lose months of pension payments. The Private Sector Alternative Now if you work for a non-DRS employer after retirement, none of these restrictions apply. Your pension continues. No hour limits. No waiting periods.¹ The coffee shop down the street? That's not a DRS employer. Your pension keeps coming. A private consulting firm? Not a DRS employer. Your pension keeps coming. Even working for a different state's government or federal government? Not a DRS employer in Washington's system. Your pension keeps coming. This is the path many retirees take when they want to work but don't want to deal with DRS restrictions. I've worked with clients who retired from state agencies and then started consulting for private firms. They make more per hour than they did as state employees, work on projects they choose, and their pension never stops. What About Social Security? This is where it gets even more interesting. Because if you're collecting Social Security before your full retirement age and you work, there's a completely different set of rules. For 2026, if you're under full retirement age for the entire year and earn more than $24,480, Social Security reduces your benefit by $1 for every $2 you earn above that limit.³ In the year you reach full retirement age, the limit jumps to $65,160, and the reduction is only $1 for every $3 you earn above the limit.³ This only applies to earnings before the month you reach full retirement age.³ Once you reach full retirement age, you can earn as much as you want with no reduction to your Social Security benefit.³ So if you're planning to work part-time and you're collecting both a DRS pension and Social Security before full retirement age, you need to think about both sets of rules. The Tax Consideration Here's something else to think about. When you combine a pension, Social Security, and part-time work income, you might push yourself into a higher tax bracket. Let's say your PERS 2 pension is $3,500 per month. That's $42,000 per year. Add Social Security of $2,000 per month. That's another $24,000. You're already at $66,000 of taxable income. Now add part-time earnings of $20,000 from working under the 867-hour limit. You're at $86,000. And depending on your filing status and other factors, that could mean a higher marginal tax rate than you expected in retirement. I'm not saying don't do it. I'm saying run the numbers first. Because sometimes the after-tax benefit of that part-time income is less attractive than it appears on paper. What This Means for You If you're thinking about working part-time after retirement, start by asking yourself why. Is it purely financial? Is it about staying engaged? Is it because you're not sure you're ready to fully retire? The answer to that question changes everything. If it's financial, run the numbers carefully. Factor in taxes, lost leisure time, and the hassle of tracking hours if you're going back to a DRS employer. If it's about staying engaged, consider whether private sector work or consulting might give you more flexibility without the restrictions. If you're not ready to fully retire, be honest with yourself about that. There's no shame in working longer before pulling the retirement trigger. The worst move you can make is to retire, go back to a DRS employer without fully understanding the rules, exceed 867 hours, and lose months of pension payments you were counting on. That happens more often than you'd think. 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. This article provides general information about estate planning documents and is not legal advice. For specific guidance on your situation, consult with a qualified estate planning attorney.
Picture this scenario. A husband suffers a massive stroke. He's a PERS 2 member with 28 years of service at the city. Not retired yet. Still working. Now he's in intensive care, unable to speak or make decisions. And his wife has a problem. She needs to access their retirement accounts to pay medical bills. But she can't. No power of attorney. No joint ownership on the DCP account. Nothing. She could eventually apply for disability retirement on his behalf through DRS¹. But first she'd likely need to petition the court for guardianship to get the legal authority. In the meantime, she's stuck. This is what happens to your money if you become incapacitated without the right documents in place. Your DRS Pension Requires Legal Authority DRS has a disability retirement process². But someone must apply on your behalf with legal authority to act for you. Typically, your spouse would need either a power of attorney you set up beforehand, or court-appointed guardianship³. The court process can take weeks or months with legal fees, court costs, and medical evaluations. Your DCP Account Is Frozen Without a Power of Attorney Your DCP account is in your name only⁴. If you haven't granted your spouse authority over retirement accounts in a durable power of attorney, they cannot access it. Not to withdraw. Not to change investments. Not even to check the balance. The account sits there. Your Bank Accounts Might Not Be Accessible Either Joint accounts usually remain accessible⁵, but banks may freeze them once aware of incapacity. Individual accounts, old 401(k)s, IRAs, brokerage accounts? All frozen without a power of attorney. The Documents That Actually Matter Two documents can prevent this. First, a durable power of attorney for financial matters⁶. This document names someone to manage your financial affairs if you become incapacitated. It typically covers bank accounts, retirement accounts, real estate, bills, taxes, and other financial matters. "Durable" means it stays in effect during incapacity. There are two common types: an immediate durable power of attorney (effective when signed) or a springing power of attorney (effective only when a doctor certifies incapacity)⁶. Many estate planning attorneys recommend immediate durable because springing powers can create delays. Second, a healthcare power of attorney⁷. This document names someone to make medical decisions for you. It's separate from the financial power of attorney because healthcare and financial decisions are governed by different laws. Most comprehensive estate plans include both documents. What Actually Happens Without These Documents Without powers of attorney, your spouse typically can't access your accounts. The bank, DRS, and your DCP provider will likely say the same thing: "We need legal authority." The solution? Petition the court for guardianship⁸. The process takes weeks to months with hearings, medical evaluations, and legal fees. Much of that process could be avoided with proper estate planning documents. The Power of Attorney You Actually Need From what I've seen working with clients, a durable power of attorney typically needs to explicitly grant authority to handle retirement accounts (DRS, DCP, IRAs, 401(k)s), access bank accounts, make tax decisions, manage real estate, and handle insurance policies⁹. Some powers of attorney are too vague, and financial institutions may want to see explicit language granting authority over retirement accounts. An estate planning attorney who understands Washington State law can help ensure your documents will be accepted by financial institutions. What to Do Next You're in your 50s. You're healthy. This isn't fun to think about. But in my experience, the people who end up in crisis are often the ones who assumed they had more time. The people who have peace of mind are typically those who addressed these issues when they didn't need to. If you don't have these documents, consider talking to an estate planning attorney in Washington State. Once you're incapacitated, it's too late to set these up. If you have documents older than five years, it may be worth reviewing them with an attorney. Laws change. Your situation changes. Your DRS pension and DCP account represent decades of work. Proper estate planning can help ensure they're accessible when needed. Sources
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LifeFocus Financial Advisors, LLC
420 Wellington Ave, Suite 101
Walla Walla, WA 99362
509-526-4521
[email protected]
420 Wellington Ave, Suite 101
Walla Walla, WA 99362
509-526-4521
[email protected]