I’ve been having conversations with lots of public sector employees lately. One of the biggest concerns that I have been hearing is they are not sure if their pension will be enough for the retirement they’ve envisioned. If this resonates with you, you’re not alone. According to the National Institute on Retirement Security, 55% of Americans are concerned about their ability to achieve a secure retirement [1]. As a former city employee who now helps state and local government employees plan for retirement, I am on a mission to help Washington State public employees become aware of what the gaps are and how to fill them. Understanding the Gap Your pension provides a solid foundation for retirement, however, many are surprised that it’s not enough to fully meet your retirement needs. Based on my experience, if you worked a full career in public service, your pension will only replace 50-60% of pre-retirement income. Let me share a hypothetical story….Sarah, a PERS 2 member, assumed her 25 years of service credit would provide a comfortable retirement. After getting her DRS benefit estimate, she was shocked to discover her pension would only provide about $4,250 a month – ½ of her current income. This gap is what I call the “pension comfort disconnect,” and it’s more common than you might think. This gap becomes particularly significant when considering factors unique to Washington State. Consider the cost differences between living in Spokane and Seattle. The cost of living in Seattle is over 30% higher in Seattle than in Spokane [2]. Common Misconceptions There are a number of additional misconceptions that I’ve encountered that can lead to inadequate retirement preparation. 1.“Healthcare costs are fully covered in retirement” While some agencies offer retiree healthcare benefits, many don’t, and Medicare doesn’t begin until age 65. You will need to purchase a policy through PEBB, SEBB, or the healthcare marketplace. Even if your organization does offer some sort of health care benefit it will be more expense in retirement than during your working years. The Fidelity Retiree Health Care Cost Estimate shows that a 65-year-old retiring in 2024 will spend on average $165,000 in healthcare and medical expenses in retirement [3]. Long-term care costs in Olympia average $171,550 for a private room in a nursing home [4]. These health care numbers are staggering, and you need to be prepared for any situation. 2.“I can’t save additional money for retirement while contributing to my pension” You should consider and can use other supplemental retirement savings vehicles. Here’s a list of some common options available:
The PERS 2 employee contribution rate is 6.36%. The LEOFF 2 employee contribution rate is 8.53%. In my experience, the most successful and prepared retirees are saving at least an additional 15% beyond their pension savings. Bridging the Gap: Action Steps Here are concrete steps that you can take to strengthen your retirement planning: 1.Maximize Your Deferred Compensation Contributions You can contribute both pre-tax and post-tax (Roth) contributions to DCP. Once you separate from your employer, you can withdraw these funds penalty free before 59.5. There are very few other qualified retirement plans that have this flexibility. If you contributed on a pre-tax basis, your withdrawals will still be subject to ordinary income tax. Some agencies offer matching contributions, so be sure to take full advantage of employer matches. Consider increasing your contributions by 1% each year and if you're contributing on a percentage basis already, each time you get a pay increase, your contributions will increase. 2.Understand Your Pension Formula DRS has a benefit estimator through your online account that can be used to estimate your pension benefit. For PERS 2 members, your benefit calculation is 2% x service credit years x average final compensation [5]. Be sure to check the specific calculation for your plan. As you approach retirement, consider how overtime or additional duties to increase your final compensation calculation. Plan for the survivor benefit option that best fits your family’s needs. 3.Build Multiple Income Streams Contributing to a Roth IRA and a taxable brokerage account gives you different buckets of money to pull from in retirement. Think about part-time work or consulting opportunities in retirement. 4.Create a Healthcare Strategy As you approach retirement, research health care bridge options if you’re retiring before Medicare eligibility. Long-term care costs are skyrocketing and you need to be prepared for them through either long-term care insurance or through specific savings. Consider utilizing a HSA if you’re eligible. 5.Plan for Tax Efficiency Your pension is taxed at ordinary income rates. As you’re saving for retirement, consider strategically locating investments across accounts with different tax treatments. Local Context Matters Washington State's diverse geography creates unique retirement planning considerations. Housing costs, tax implications, and lifestyle expectations can vary dramatically based on where you live. A retirement income that might be comfortable in Spokane could feel tight in Seattle. Recent data from the Washington State Office of Financial Management highlights these regional differences [6]:
These variations can significantly impact your retirement planning strategy. The Impact of Career Choices Your career path within public service can significantly affect your retirement outcomes. Based on my experience working with various municipalities, here are some considerations:
Planning a secure retirement demands careful planning and the right strategy. Whether you’re just starting your public service career or nearing retirement, now is the time to assess your retirement strategy and identify any gaps that need attention. Sources [1] https://www.prnewswire.com/news-releases/83-percent-of-americans-believe-all-workers-should-have-a-pension-new-national-institute-on-retirement-security-report-finds-302070695.html [2] https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=United+States&city1=Spokane%2C+WA&country2=United+States&city2=Seattle%2C+WA [3] https://newsroom.fidelity.com/pressreleases/fidelity-investments--releases-2024-retiree-health-care-cost-estimate-as-americans-seek-clarity-arou/s/7322cc17-0b90-46c4-ba49-38d6e91c3961 [4] https://www.genworth.com/aging-and-you/finances/cost-of-care [5] https://www.drs.wa.gov/plan/pers2/ [6] https://ofm.wa.gov/washington-data-research/statewide-data/washington-trends/economic-trends/median-home-price -Seth Deal
0 Comments
Leave a Reply. |
AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
January 2025
Categories |