Why Market Timing Matters Less When You Have a Washington State Pension

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.

The moment right before someone pulls the trigger

By the time a client is ready to retire, most of the hard work is already done.
The pension option is chosen. The savings are in place. We have mapped out the income, the taxes, the healthcare bridge to Medicare.

And then, right before retirement, the same thing happens almost every time.

They pause.

Then comes the question, usually some version of the same one.

What if I do this, and the market drops the week after?

Take Cheryl. She is a hypothetical county employee in her late 50s with about 30 years in PERS 2. She has done everything right. Saved steadily. Lived within her means.

She is not scared of running out of money someday. She is scared of starting at the wrong moment.

What the history actually says about timing

So let me tell you what the research shows.
Peter Lynch, who ran Fidelity's Magellan fund for years, once looked at what would happen to an investor with almost comically bad luck.

Imagine you invested money every year for 30 years, from 1965 to 1995, but you always bought on the single worst day of the year. The very top, every time.

You would have earned about 10.6 percent a year.1

Now imagine the opposite. Perfect timing, buying at the lowest point every single year. Your return would have been about 11.7 percent a year.

Thirty years of the worst luck imaginable trailed thirty years of flawless timing by roughly one percentage point.
The thing people lose the most sleep over turned out to matter far less than simply staying in the market.

Why retirement changes the math

Here is where I have to be honest, though.

That study is about someone still working and adding money for decades. Time was on their side.

When you are retired and pulling income out, you do not have 15 years to wait for a bad market to recover. The order your returns show up in starts to matter. A steep drop in your first few years, while you are selling to pay bills, can do lasting damage.

So the goal is not to time the market perfectly. Nobody can.

The goal is to never be forced to sell at the bottom.

And that is exactly where being a Washington public employee gives you an advantage most people never have.

What your pension really does

Cheryl's PERS 2 pension pays her a guaranteed monthly benefit for the rest of her life. It is not tied to how the stock market performs.2

Read that again, because it is the whole point.

Her paycheck in retirement does not care what the market did last week. It shows up the same in a boom and in a crash.

When your core bills, the mortgage, the groceries, the utilities, are covered by a check that arrives no matter what, a falling market becomes something you can watch and wait out instead of react to. You are not a forced seller.

That is a very different position than a private-sector saver whose entire retirement income depends on their portfolio. When the market drops 30 percent, they may have to sell investments at a loss just to cover the month. You do not have to sell anything.

The war chest that fills the gap

Of course, the pension rarely covers every dollar, especially in the early years before Social Security starts.

That gap is what actually worries people. And it is fixable.

For the money Cheryl will spend over the next several years, we do not leave it exposed to stocks. We hold it in what I call a war chest, roughly five years of planned withdrawals kept in high-quality, short-term bonds.

When stocks fall, she spends from the war chest and leaves her stock investments alone to recover. When markets settle, we refill the bucket.

There is a quiet bonus here too. Holding both stocks and bonds means that when stocks drop, we can rebalance, trimming the bonds that held up and buying stocks while they are cheap. It feels backward in the moment. It is one of the most powerful things a disciplined investor can do.

The pension is the floor. The war chest is the buffer. Together they are why Cheryl can leave her stocks alone long enough for time to do its work.

A few measured next steps

So the fear that keeps people up at night, the fear of one bad day, is mostly the wrong thing to worry about.

The better question is not “what if I pick the wrong moment?”

It is “what am I forced to sell when the market drops?” For a Washington public employee who plans ahead, the honest answer can be nothing.

If you are somewhere near where Cheryl is, start here.

Map your expenses into two buckets: what your pension will cover, and what your portfolio needs to handle.

Then make sure the money you will spend in the next several years is not sitting in the stock market.

And remember this is one piece of a larger plan. When you claim Social Security, how you sequence withdrawals, and how you handle taxes all work alongside the pension. But it starts with knowing your floor.

Get that right, and the next market drop becomes something you read about, not something you fear.

​Sources
1. PBS Frontline. "Betting on the Market: Interview with Peter Lynch." https://www.pbs.org/wgbh/pages/frontline/shows/betting/pros/lynch.html
2. Washington State Department of Retirement Systems. "Choosing Plan 2 or Plan 3." https://www.drs.wa.gov/choice/

-Seth Deal