Washington Educators,
As dedicated educators of the Northwest, your focus is on nurturing the future. Sometimes it can be tough to take time to think about your own financial future, especially when it comes to the Teacher Retirement System or TRS. This blog post is designed to provide you with a deeper insight into the Washington TRS pension, ensuring you are well-prepared for your retirement journey. I will also be creating a YouTube video with important information, so visit our YOUTUBE PAGE to follow along.
Participation
To begin, let's discuss participation in the Washington TRS pension: Participation in TRS is mandatory for most full-time teachers. Part-time employees may be eligible depending on their working hours and specific circumstances.
When a teacher starts to teach, they have 90 days to choose between two available retirement plans: Plan 2 or Plan 3. Plan 1 is a legacy pension fund closed to new teachers. Plan 2 is a typical pension plan that guarantees monthly income for life, while Plan 3 combines a pension with an investment account funded by the teacher.
Contributions
Both teachers and their employers contribute a percentage of the teacher’s salary to the system.
Plan 2 participants currently add 8.05% of their paychecks to TRS in 2023.3
Plan 3 participants contribute directly into the investment account component of their plan rather than the pension. The participant chooses from a variety of investment options and the growth of this account depends on investment selection and performance.4
The State also contributes to the pension on the participants’ behalf. Recently, their contribution was estimated to be over 15% of each teacher’s salary. 1
Eligibility
Retirement eligibility depends on which Plan you select.
Teachers become vested in TRS Plan 2 and are eligible for a retirement benefit at full retirement age (65) once they have 5 years of service. Alternatively, if a teacher has at least 30 years of service credit, they can retire at any age without penalty. A teacher can also choose to retire as early as age 55, but they must have 20 years of service and there may be a reduction in benefits.
Teachers become vested in TRS Plan 3 when they have 10 years of service or 5 years as long as one of those years was after age 44. Additionally, Washington allows early retirement for Plan 3 teachers at age 55 with at least 10 years of service. However, teachers taking that option will have their benefits reduced.
Calculating Your TRS Pension
Now, let's delve into the mechanics of calculating your TRS pension retirement benefit. Your retirement benefit is based on a simple 3 factor equation:
Benefit Factor x Service Credits x Average Final Compensation = Monthly Lifetime Benefit
Service credit is earned based on the number of years and months a teacher works in the Washington state public school system while contributing to TRS. Each year of full-time employment earns one year of service credit. Part-time employment earns a proportional amount of credit based on hours worked. The more service credits you accumulate, the bigger your pension payout will be.
The Benefit Factor for Plan 2 employees is 2%, while the Benefit Factor for Plan 3 employees is 1%. 3 4 You will notice that this causes pension estimates for Plan 2 employees to be about twice as large as estimates for Plan 3 employees. For tier 3 employees, the pension is just part of their retirement plan. They also have the investment component.
Your Average Final Compensation (AFC) is calculated as the average of your highest-paid consecutive 5 years of salary.
Simply plug your numbers into the three-part equation: Benefit Factor x Service Credits x Average Final Compensation. You will get an estimate for your benefit when fully eligible for retirement. For precise estimations or to calculate estimates for an early retirement, use the TRS online calculator by logging onto your account and clicking Benefits Calculator. It’s a versatile tool allowing you to model different scenarios and retirement dates.
For Plan 3, the size of their investment account will depend on the following:
- The income percentage you choose to contribute.
- Your income and years of contribution
- Investment selection and performance. Note, all funds are managed by the Washington State Investment Board.
The investment part of Plan 3 can be useful for early retirement. Many members that retire early use the money in the investment account to help bridge the gap until you apply for the pension part of Plan 3.
Inflation Protection
The TRS provides cost-of-living adjustments to help pensions keep pace with inflation. These adjustments are determined by the state legislature. This annual adjustment helps to safeguard your purchasing power as you journey through retirement.
Survivor Benefit Options
For those retiring with loved ones, protecting your retirement income is of utmost importance. Teachers have the option to choose between different beneficiary options for their pension, including options for survivor benefits to be paid to a spouse or other designated individual in case of the teacher's passing.
For Plan 2 and Plan 3, the most common survivor benefit options are Option 1, Option 2, Option 3, and Option 4.
- Option 1: Single Life: This option pays the highest monthly amount of the four choices, but it is for your lifetime only. No one will receive an ongoing benefit after you die. If you die before the benefit you have received equals your contributions plus interest (as of the date of your retirement), the difference will be paid in a lump sum to your designated beneficiary.
- Option 2: Joint and 100% Survivor: Your monthly benefit under this option is less than the Single Life Option. But after your death, your survivor will receive the same benefit you were receiving for their lifetime.
- Option 3: Joint and 50% Survivor: This option applies a smaller reduction to your monthly benefit than Option 2. After your death, your survivor will receive half the benefit you were receiving for their lifetime.
- Option 4: Joint and 66.67% Survivor: This option applies a smaller reduction to your benefit than Option 2 and a larger reduction than Option 3. After your death, your survivor will receive 66.67% (or roughly two-thirds) of the benefit you were receiving for their lifetime.2
Other than deciding when to retire, deciding your Survivor Benefit Option is the most important decision educators face when they are retiring. Click HERE to schedule an initial consultation to review your survivor benefit options.
DCP Savings Program
The Deferred Compensation Program or DCP is a voluntary savings program you can use to increase your retirement savings. DCP uses many of the same investment options available to Plan 3 members, including investments that are managed for you. With DCP, you control your contribution amount so your savings can grow with you. 2
Other Considerations
While the Washington TRS pension is a cornerstone of your retirement, it typically will not be enough on its own. That’s where additional retirement savings programs come into play like your 403(b), Roth 403(b), 457(b), IRA, and Roth IRA. Click HERE to set up an initial consultation to review your supplemental savings options.
Unused Sick Leave: You may use up to 45 days of unused sick leave to help you qualify for retirement. Sick leave not cashed out by your employer may be converted into a maximum of two months of service credit. However, this service credit isn’t used in the calculation of your benefit. It can only be used to qualify for retirement. 3
Purchase service credit: Purchasing additional service credit increases your monthly retirement benefit for the rest of your life. You can purchase between one and 60 months of service credit in whole months. Purchasing service credit will increase your monthly benefit, but it will not increase the years of service posted on your account. The increase to your benefit is calculated using the same formula as your retirement benefit. This additional service credit is available at the time of your retirement only. Also, you cannot use the additional credit to qualify for retirement (it won’t increase your years of service).
Pension Indexing: This is a unique feature for Plan 3. If you have more than 20 years of service and haven’t started your benefit yet, your pension will increase by 3% each year you delay up to 65.
TAP Annuity: In the investment part of Plan 3, there is an annuity option as well. When you choose this option, you will start getting a lifetime monthly income with a 3% annual increase.
Typically, Washington TRS members will also contribute into Social Security during their work years, so they will be fully eligible for their Social Security Income benefit.5 Click HERE to visit the social security website where you can log in and check your progress.
Resources
For detailed information about your specific plan, benefits handbooks, and forms, refer to Washington State’s Retirement System website.
Visit our YouTube Channel for more relevant content!
Additionally, I encourage you to schedule a complimentary consultation with me. I specialize in working with educators and planning around state teacher pensions like the Washington TRS pension.
In conclusion, understanding the intricacies of the Washington TRS pension is vital for your retirement security. By grasping eligibility requirements, the pension calculation process, and the array of benefit options, I hope you can more confidently navigate the path to a financially stable retirement.
1https://www.teacherpensions.org/state/washington
2https://www.drs.wa.gov/plan/trs1/
3https://www.drs.wa.gov/plan/trs2/
4https://www.drs.wa.gov/plan/trs3/