This is my wife's TSP-like retirement plan - Advice?

[Aitrus]

Hey guys, your advice would be appreciated on this one.

My wife is a teacher in Washington State. They have 2 retirement plans: the first is a straight 2% x years of service plan, employer and member contribute a set amount.

The other one is what I'm interested in. She has asked me to figure out the best way to invest her retirement dollars if she chooses this second plan.

The plan works by using two components: a pension and a TSP-like program called DCP (Deferred Compensation Plan). Here's a link to the details: https://washington.gwrs.com/preLoginContentLink.do?accu=WashingtonWR&contentUrl=preLogin.about.publications&specificBundle=preLogin

The pension is 1% x years of service, employer pays all contributions to the pension on a defined scale. The DCP is funded solely by my wife's contributions, no employer match. Admin fees for the DCP are 0.129% annually.

The main funds are as follows (with their TSP equivilants and notes in parentheses):

- Savings Pool (G Fund, 0.91% for 2013)
- Washington State Bond Fund (F Fund, follows Barclay's Capital Intermediate Bond Index, 0.58% for 2013)
- Socially Responsible Balanced Fund (Mix of non-oil, non-mining, non-logging companies, lots of tech and green companies, 12.76% for 2013)
- US Large Cap Equity (C Fund, follows S&P, 21.89% for 2013)
- US Small Cap Value Equity (S Fund, follows Russel 2,000, 22.9% for 2013)
- Global Equity (I Fund, 50% US stocks, rest is Europe or Japan, follows MSCI ACWI Index, 17.63% for 2013)
- Emerging Market Equity (Mostly Asia and some Europe/S. America, follows MSCI Emerging Markets Index, -1.15% for 2013)

There are also a batch of "Retirement Strategy" funds that are run like the L-funds, and made up of the above individual funds.

Paycheck allocations: Once-a-year open season in January to change allocations. Allocation percentages range from 5 - 17%.

IFT timing: If made before 1PM Pacific Time, then effective COB that day. If after 1PM Pacific, then effective at COB next day. 1PM Pacific is the end of the trading day in New York.

IFT limits: Unlimited transfers if $1,000 or less. $1,000 or more then you must wait at least 30 days to move anything back into the fund that you pulled the money from - this includes the Savings Pool.

Given these limitations, I'm thinking that the one-move-a-month restriction with no Cash option reliably available really puts a damper the flexibility for this account. I'm thinking a seasonal strategy is in order because the ones I know of for the TSP use one move a month or less. What do you guys think?

[crondanet5]

Have you talked with Human Resources about how many teachers chose either option? Try to understand what convinced them to choose their option. See if you can talk with teachers who have been in the program 10 and 15 years to see how well they are doing, do they wish they could change their option. A while back PBS had a show about problems with teacher retirement in-- I believe it was-- West Virginia. The state tried some programs, the men spent their cash pension on new red trucks, and ran out of money. Then the union went to the state and they changed the program back to a defined pension program. So much for my new truck, but I will have a pension.

[skiehawk11]

Aitrus,

A few questions before I start an analysis:

1. How far away is your wife from retirement?

2. Which plan is your wife under currently?

3. What is your single/combined federal/state/local tax burden?

[nomny2020]

Forget about funds, last year’s returns, transfer limits and all that. Listen to Cron and ask/research what other teachers think of the two plans. More info is needed before any sound advice can be given but you can start by answering skiehawk’s questions.

I don’t know anything about the two plans but, to me, this comes pretty close to a choice that some Feds had to make a couple years ago: CSRS or FERS. How many would have chosen FERS?

[Aitrus]

Will do, Cron. I think that the results from my inquiring will be telling.

Nommny, I wasn't in when the CSRS vs FERS choice was made. But the main difference here is that the CSRS vs FERS choice is backed by the Federal Government, while the one we're looking at is backed by Washington State. It's pretty liberal here when it comes to economic policies, very pro welfare programs, handouts and wealth distribution. There's no saying that the state won't go through cutbacks in state worker pensions if they stay in the red because they can't manage their checkbook. With the second option, at least half of her retirement fund is in our hands instead of the politician's hands.

Skie,

1 - She's 34 (and looks 28, lucky me! ). Same age as me, and we're both very healthy.
2 - This kinda ties into Question 1: she's currently unemployed, having just finished her Master's for teaching last year. She wasn't able to land a job last year, but the odds look good this year, hence the research on my part. Get our ducks in a row before we decide on which one is better for her.
3 - My taxable income came out to around $47,000, and Married Filing Joint put us in the 15% bracket. Her starting salary will be about $43,000.

We have always lived below our means, and have all of our plans and bills set up so that we can live permanently under only one income if necessary. After she gets hired her income will go toward paying down any debt we currently have, making it possible for us to max out the annual limit for both of our retirement accounts, padding our emergency fund, and paying for vacations / better quality of life niceties with whatever is left over.

[crondanet5]

So here are some more things to think about. For planning purposes expect your wife to live to age 86. Use this when calculating how much her pension would yield/provide from the year she retires to her last year of life expectancy. Then you can compare that against her expected investment program to see which option would give her the most money in retirement. I feel you are leaning toward the investment option. But 17% of $43,000 is not that much. I projected her working to age 64 (30 years) and multiplied that 17% sum by 22 years remaining life expectancy (sorry to sound morbid here) and came out with $160,820. Add that to the 1% of $43,000 times 30 years = $283,800 yields $444,620. I did not compound-- leave that for the engineers and such. I then calculated that 2% times 30 years teaching = 60% of $43,000 = $25,800 pension per year. Taking this a step further, 86 - 64 = 22 years remaining life expectancy times $25,800 = $567,600 in pension money received not considering salary increases. Again, not compounded. This is rough, but may give you better insight into what the options offer.

The investment option's one trade per month for amounts greater than $1,000 is a killer. It mirrors our 2 IFT limit in that you cannot take advantage of 2, 3, or 4 market direction fluctuations in a month. And it may restrict you from getting out of an active fund when the market starts to drop. Don't know that: your action. This type of restriction in any mutual fund or retirement program means to me the program is a sham. You can't make money-- real money-- in the program except by your biweekly contributions. (And that's why I am not invested in Vanguard). If, after your research, the investment option still looks good you might try developing a fantasy investment program using 10 years of market history to see what you could gain using your wife's contributions and your IFTs to determine how well your savvy investing style increased the bottom line figure. In the meantime keep playing your own Fantasy Game and try to achieve at least a 2% gain per year to hone your skill.

So you guys are healthy. In my observation of the Obamacare program (not looking at cost-- looking at the program) I find doctors are getting more interested in improving your health as opposed to pushing prescriptions. One way they have done that with this old body is blood work. Oh the markers they have found. And how my life has improved. Now you guys, being 5 years younger than me, can apply my observation to push your doctor(s) to order any and all tests that might reveal things that would reduce your life expectancy over time. I may be wrong about this. I may have found a doctor who cares about their patients and uses available tests to improve their life. If yes, find a good doctor. Press them to improve your health. Make your life better. I'm off my speaker box, already back 3 rows in the crowd. Hope this long winded post helps.

[skiehawk11]

Aitrus,

The simplest comparison is to determine the balance you would need to make up for the different between the 2% and 1% matching. A more detailed analysis is forthcoming, but consider the following:

Check out the comparison here:
http://www.drs.wa.gov/member/systems/trs/

Assumptions:

1. 1.5% salary increase a year
2. 7% return on DCP
4. Retire at 65
5. Assumes a withdrawal rate of 4.5% (It's high, I know)

First, calculate the average salary your wife could have at retirement. I did some research and found that they take an average of the highest 60 months for the pension calculation. I'm going to assume that the last 5 years of her working will be the highest. Based on that assumption and the salary increase rate above, the calculation is as follows:

TRS 2 yearly pension = 65,255 * .02 * 35 = 46,364 dollars

TRS 3 yearly pension = 65,255 * .01 * 35 = 22,839 dollars

We want to solve for the end of retirement balance of the TRS contribution plan in order to make up the pension difference. This doesn't take Social Security, taxes, etc into account.

Required TRS 3 Plan Balance:

Step 1: Pension Difference = 46,364 - 22,839 = 23,524 dollars

Step 2: TRS 3 Plan Balance = 23,524 / .045 = 522,765 dollars

Step 3: Average yearly contribution needed for balance = 3,621 dollars

Step 4: Average yearly contribution as a percentage of starting salary = 3,621 / 43,000 = 8.4%


This should help get you started. My recommendation initially is to go with the 2% and live a little more judiciously and open a Roth IRA outside. The TRS 3 plan looks like you can contribute part of your salary, but I did not see whether the state provides a percentage of that.

[Aitrus]

Thanks for the assessments, guys. Due to the restrictive nature of the program, I'm starting to lean toward the 2% plan as well, but I'm still largly undecided.

Skie, no the state doesn't match on any investment payments. They just pay 100% of the costs for the 1% pension. In the 2% version both the member and state pay into the fund.

Basically, the choice comes down to whether we want to use our money to fund a guaranteed pension outcome, or to fund an investment account that has limits on trading.

Lots to think about.

Cron,

We have a great doctor through Blue Cross/Blue Shield on my Self-and-Family plan. Good blood workups annually.

[crondanet5]

Aitrus, I love the fact whatever doctor you are consulting can go back years and search for changes in your blood markers, and that even your blood type is available to the ER without having to draw blood to determine what type you are. And the ability to discuss your case with away specialists. We are just scratching the surface. This could be the way to improve our life expectancies. I just heard about an electronic stethoscope (nothing new to the medtechs on this site) so your heartbeat can be recorded in your medical records for future comparisons. How long will it be before we lie on a Star Trek Next Generation hospital gurney? So cool.

[Aitrus]

Think that's cool? Get this: Due to the quality of care in our field emergency rooms, any of our military combatants that are wounded have a 90% chance of survival if they make it to a field ER so long as they have one factor in their favor - they have a heartbeat. As a result, our field First Aid programs have been re-tooled to emphasize the retention of as much blood as possible in the body, a clear airway, and a heart that's pumping. Everything else is secondary to those three.

That's one reason why our number of casualties (both dead and injured) remains roughly the same as any war in the past (excepting the Civil War and WWII), but the number of deceased is staggeringly low, especially for the duration of the conflicts.

That number is from 2005, the actual number has gone up since then, but I'm too lazy right now to find a source. Source for 90% number: http://www.military.com/forums/0%2C15240%2C80183%2C00.html

[skiehawk11]

This is totally off subject to the thread title, but still fascinating considering the applications:

Foam injection to limit/stop internal bleeding:
http://www.arsenalmedical.com/technolog ... chnologies

Injectible sponges to reduce bleeding:
http://www.revmedx.com/#!xstat-dressing/c2500

[nomny2020]

Aitrus;

This is a big decision that the two of you have to make and I still think talking to other teachers should be high on the list of things to do. Other factors include how long she plans to stay working for the State (will she stay long enough to become vested?), and, as you pointed out, will the pension be there in 30 years? But this is the way I would look at it:

I break it down like this; she is guaranteed to get a 1% pension. If she opts for Plan 2, she has to contribute about 5%, but that doubles her pension. With Plan 3, she has to contribute at least 5% into the 457 (which she could do anyway, maybe not 457 but other investment vehicles). Who here wouldn’t contribute 5% more in order to DOUBLE their pension? Regardless of Plan, can she still contribute to the 457 or a 403b/401k? The standard advice is to put 15% into your retirement, so to me that would break down to – 5% towards pension (Plan 2), 10% towards 457/403b (if the school offers it) or Roth IRA. A pension offers something a 401k can’t; longevity. We all try to figure out “our number” and pull out a calculator to see if our nest egg will last long enough, but a COLA adjusted pension is with us for life. To me, this also adds some diversity to her investments: 5% towards pension (risk free other than the State going bankrupt/changing the rules), 10% towards Roth IRA (invest in whatever you want). Best of both worlds!

Good luck and keep us updated.

[nomny2020]

And for what its worth :

http://www.governing.com/gov-data/state ... -data.html

Looks like WA is 2nd only to Wisconsin as far as funding goes. Nothing is certain but that is good news if you ask me.