Protecting Your Nest Egg: A Washington State Public Employee's Guide to Weathering Market Storms6/12/2025 As a Washington State public employee, you've worked hard to build your retirement savings through your DRS pension, Deferred Compensation Program (DCP), and Social Security. But retirement brings a fundamental shift from accumulating wealth to preserving and spending it wisely. This transition from your working years to retirement years requires a completely different approach to managing market volatility and protecting your nest egg. Core Principles of Market Protection in Retirement Understanding these fundamental principles will help you make smarter decisions about protecting your retirement savings:
Step 1: Understand the Transition from Working Years to Retirement During your working years, market volatility was actually your friend. When markets dropped, your regular DCP contributions bought more shares at lower prices. Dollar-cost averaging worked in your favor over decades of saving. Retirement flips this equation completely. Now you're taking money out of your investments regularly to cover living expenses. If you're forced to sell investments during a market downturn, you lock in losses that can never be recovered. This is called sequence of returns risk, and it's one of the biggest threats to retirement security. Consider two retirees who experience identical average returns over 20 years, but in different orders. The one who faces poor returns early in retirement may run out of money, while the one who experiences good returns early may preserve wealth for decades. This is why your investment strategy must change as you transition from accumulation to withdrawal mode. Step 2: Build Your "War Chest" of Safe Money Create a buffer of cash and conservative investments equal to approximately 5 years of your maximum anticipated withdrawal needs. This war chest serves as your protection against being forced to sell growth investments during market downturns. Here's how to structure your war chest:
Maria, a retired state employee, maintains her war chest in a combination of savings accounts and the DCP Stable Value Fund. When markets dropped in early 2022, she drew from her war chest instead of selling her stock investments, allowing them to recover. Step 3: Implement a Guardrails Spending Strategy Guardrails provide a systematic framework for adjusting your withdrawal rate based on your portfolio's performance. Instead of withdrawing the same amount every year regardless of market conditions, guardrails help you spend more when your portfolio is doing well and less when it's struggling. Here's how guardrails work for spending:
Step 4: Coordinate All Your Income Sources Your retirement income likely comes from multiple sources, and each has different characteristics that affect your overall strategy: DRS Pension: This guaranteed monthly income provides your foundation and reduces the pressure on your investment portfolio. The larger your pension relative to your expenses, the more risk you can potentially take with your DCP investments. Social Security: Another guaranteed income source that adjusts for inflation, providing additional security. DCP Account: Your variable income source that requires careful management to last throughout retirement. Tom, a highway engineer, receives $3,200 monthly from his DRS pension and $1,800 from Social Security, covering about 70% of his living expenses. This strong foundation allows him to take a more growth-oriented approach with his DCP investments while maintaining his 5-year war chest. Step 5: Monitor and Adjust Based on Performance Review your guardrails and war chest annually, making adjustments based on:
Three Approaches to Retirement Portfolio Protection Conservative Approach: Maintain a larger war chest (6-7 years of expenses) with tighter spending guardrails. Best for retirees with smaller pensions who rely heavily on their DCP accounts or those who prefer maximum security. Balanced Approach: Use the standard 5-year war chest with moderate guardrails that allow for spending adjustments of 10-20% based on portfolio performance. Suitable for most Washington State retirees with solid pension foundations. Growth-Focused Approach: Maintain the 5-year war chest but use wider guardrails that allow for more aggressive growth investing. Best for retirees with substantial pension income who can handle more volatility in their discretionary spending. Case Study - Linda's Complete Strategy: Linda, a 65-year-old retired teacher, receives $2,800 monthly from TRS and $1,700 from Social Security. Her basic expenses are $4,200 monthly, leaving her needing only $300 monthly from her $450,000 DCP account. She built a $150,000 war chest (covering 5 years of maximum anticipated withdrawals) using savings accounts and the Stable Value Fund. Her guardrails allow her to withdraw between $15,000-$25,000 annually from her DCP based on portfolio performance, with the remainder invested for growth. When markets performed well in 2021, she increased her withdrawal to $22,000. During the 2022 downturn, she reduced to $17,000 and used her war chest to maintain her lifestyle. Your Action Plan
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-Seth Deal
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AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
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