Author Topic: WA State PERS Plan - How to Compare Plan 2 vs Plan 3  (Read 467 times)

kenmoremmm

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WA State PERS Plan - How to Compare Plan 2 vs Plan 3
« on: September 28, 2018, 12:14:06 AM »
My wife has taken a position with the school district. She will be able to enroll in SERS (like PERS, but slightly lower required contribution for Plan 2). I put together a spreadsheet so I could try and analyze which is better for us (or for anyone). It's crude, but I would appreciate if anyone experienced with these plans would take a look-see and let me know what they think.

Key info:
- Full retirement age = 65
- Early retirement age = 35 for PERS3 and 55 for PERS2 --- significant prorating of 'defined benefits' (aka pension) plans
- 5 years required for PERS2 to be claimed at age 65. 20 years required if early retiring, so that would be 2038 for her (age 59)
- 10 years required for PERS3 to be claimed at age 65. 10 years required if early retiring, so that would be 2028 for her (age 49)
- You can claim full pension benefits if you wait to age 65 to withdraw (example: quit working at age 45, withdraw at 65)
- Pension portion based on number of years worked * average salary for 5 highest continuous years * 1% or 2% (PERS3 vs PERS2)

I have added in variables such as salary increases, expected market returns for the PERS3 self-directed funds (basically index funds), and amount contributed to self-directed funds (can vary from 5-15%, but you cannot change it, ever, after initial selection, unless you completely change jobs).

One key 'result' I would appreciate feedback on is how to treat the funds in the self-directed PERS3 account. It's basically a pre-tax account with no matching. For withdrawal purposes to compare to the PERS2 plan, should I use a SWR of 4%, or should it be something else? If you retire early, say early 50s, then 4% seems to make sense. If comparing to the option where we don't tap the PERS2 plan until age 65, then it seems the comparative number to use would be higher than 4% since we'd very likely have <30 years remaining to spend it.

My overall takeaway from playing around with this is that PERS2 always comes out ahead at age 55 (the logical 'early retirement' age) unless you have crazy returns assumed in the market (like around 11%). I personally believe we're heading for 5-6% returns for a decade or so (you know the top is in, right?), so I just don't see where PERS3 wins unless you work <5 service years and want to withdraw money ASAP upon leaving. We are viewing this money as a nice-to-have, but not something that we're really banking on, so making it to age 65 to then start withdrawing from the 'fully vested' PERS2 makes sense to us right now. Otherwise, the earliest we could pull from the plans are 49 and 59 (PERS3/2 respectively) and that just doesn't seem to justify the huge prorated hit on the payout.

Thanks for any thoughts.

px4shooter

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Re: WA State PERS Plan - How to Compare Plan 2 vs Plan 3
« Reply #1 on: September 28, 2018, 06:27:03 AM »
Age of your spouse is the.important part. Need the baseline to determine if age or service years will take priority.

You are debating a defined benefit versus a retirement account, right?

Their plan definitely isn't a great one for defined benefit. But I can't find their employee contribution requirements. For my employer, we contribute zero as our contributions and their changes is done during base pay negotiations. This allows us to dump cash into a deferred comp plan instead

kenmoremmm

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Re: WA State PERS Plan - How to Compare Plan 2 vs Plan 3
« Reply #2 on: September 28, 2018, 10:42:45 AM »
my wife will be 39 in a few weeks.

ETA: i uploaded the spreadsheet to my OP if you want to take a look at that.

fixie

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Re: WA State PERS Plan - How to Compare Plan 2 vs Plan 3
« Reply #3 on: September 28, 2018, 11:42:40 PM »
I think I would stick with Pers two based upon what I know of the two plans ,what you've written and your wife's age. I've had pers 3 for 15 years.  I won't go into It but I defaulted in for 5 % at all ages... of course that's a mistake if you can save 15% and I just let the state do the investing on that one. Unfortunately it's not a whole lot of money . I plan on leaving the pension portion alone until 60 or 65.  I figure if I have to use it at some point before for benefits then I can do so. But I'm still going to try and retire early with my other accounts.  I am enrolled with a 403B and a 457 plan through the state which I self direct. 
Just in case you didn't notice it yet, there is a DRS website and if it estimator you can plug numbers into that will help you. I believe you need to be logged in because it uses information like salary and number of years of service etc.
Fixie

kenmoremmm

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Re: WA State PERS Plan - How to Compare Plan 2 vs Plan 3
« Reply #4 on: October 03, 2018, 09:21:06 PM »
One interesting thing that's come to my attention is that the contribution rate to the pension side of the PERS plans can change. For example, in 2015, the rate was about 6%. Now, it's 7.5%. So, my concern is that the plan will start to require more and more of a % of your paycheck for a predetermined withdrawal rate. Does anyone have historical data points for the contribution rates?

Dusty Dog Ranch

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Re: WA State PERS Plan - How to Compare Plan 2 vs Plan 3
« Reply #5 on: October 03, 2018, 11:14:48 PM »
My (very basic) understanding is that rates have been increasing to keep up with all the baby boomers retiring while the overall state workforce has been shrinking. I haven't looked on the DRS site for this specific info, but it might be there. Or you could call and ask; I've always found them to be pleasant and helpful when I've had questions.

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