How do Washington State’s PERS pension plans 1, 2 and 3 work?

Washington State public sector employees such as those employed by the University of Washington are generally part of the DRS pension plan system. There are three PERS plans to choose from. The DRS has details on PERS as well as ALL WA state public retirement programs here.

In case you want more detail or want to check if anything I’ve written is out of date or wrong, please refer to the PERS Plan 1, 2 and 3 links from the link above, or watch a pre-recorded webinars.

DRS Plan 1 / PERS 1

Plan 1 is a ‘defined contribution’ plan, which functions similarly to a 401k or 403b plan that you might’ve had in the private sector. See my advice in PERS 3 for what investment option to choose. (Spoiler: pick a Target date fund that matches your age at 70.)

DRS Plan 2 / PERS 2

A purely ‘defined benefit program’ which is what most people think of when they hear the word ‘pension’. Your employer contributes a specific amount on your behalf, and you also contribute. Currently your contribution rate is 6.36%. Check the latest plus more rules on how PERS 2 works here.

You have to have at least 5 years of service (see ‘Service Credit’ definition below under the PERS 3 section) and must be either age 65 or 62 with 30 service credit years to get the full pension benefit. Your pension benefit is calculated like so:

2% x service credit years x Average Final Compensation = monthly benefit

Example:

Let’s say you work 23 years and the average of your highest 60 months of income (AFC) is $5,400 per month.

2% x 23 years x $5,400 = $2,484

When you retire, you’d receive $2,484 per month.

See PERS 3 info below for how AFC is calculated.

DRS Plan 3 / PERS 3

Plan 3 combines both a defined benefit plan like Plan 2, funded solely by your employer, and a defined contribution plan funded solely by you. For the employee (your) part, you must choose when you first enroll in the plan whether to contribute (pre-tax, like a 401k) based on the options from 5% – 15%. Once you make this choice, you cannot change it unless you quit and start at a completely different employer that also offers DRS Plan 3.

What investment option should I choose for my defined contributions?

I recommend choosing one of the Target date retirement funds that matches the age you turn 70. For example, if you were born in 1970, choose the 2040 fund. These funds are low-fee and fool-proof in the sense that they automatically rebalance you and adjust your asset allocation between riskier (stock) and less risky– but much lower expected growth– investments like bonds & cash.

How is my DRS Plan 3 benefit calculated?

For the defined contribution piece, your monthly lifetime benefit is based on the following formula: 1% * Service Credit Years (SCY) * avg final compensation.

Service Credit Years are calculated by summing up service credit months. You get 1 Service Credit month (SCM) for every month that you work 90+ hours in. You get 1/2 a SCM for 70 – 89 hours, and 1/4 for 1 – 69 hours. 12 SCMs = 1 Service Credit Year. For most people working at least 0.6 time, you’ll earn 1 SCY per year as you’d expect from the name.

Average Final Compensation here means “The Average Final Compensation, or AFC is the average of your 60 consecutive highest earning months in your career. This could be at the beginning, middle or end of your career. DRS uses your AFC income information to calculate your pension amount. For high income public employees, federal law limits the amount you can contribute toward retirement and limits the benefit calculation. See IRS limits.” [Italics mine.]

“Example:

Let’s say you work 23 years and the average of your highest 60 months of income (AFC) is $5,400 per month.

1% x 23 years x $5,400 = $1,242

When you retire, you’d receive $1,242 per month in pension income. Remember, your investment income [from the defined contribution part of your PERS3 plan] is calculated separately.”

When can I retire?

To avoid an ‘early retirement’ reduction in your benefit, you must wait until age 65. You also must have either 10 years of service credit OR 5 years + 1 of those years earned after age 44 OR 5 years earned in PERS 2 before 6/1/2003 to qualify for ANY pension benefit, regardless of if you wait until 65 or take it early. Scroll down to ‘Early Retirement’ to read those details in the link just below:

From WA state:

You are eligible for a pension retirement when […] you have achieved one of the following:

• 10 service credit years
• Five years of service credit with at least 12 months earned after age 44
• Five service credit years earned in PERS Plan 2 before June 1, 2003

Full retirement

Full retirement is the earliest age you can retire without any reduction to your retirement benefit. PERS Plan 3 members are eligible to retire at age 65 if they are vested.

Early retirement

You can withdraw from your investment account at any time after separating employment. For your employer-funded pension plan, specific rules apply for when you can retire. You can retire as early as age 55 with a reduced benefit if you have at least 10 service credit years.”

[…]

If you retire [early, before age 65] with between 10 and 30 years of service credit, your monthly benefit is reduced by a factor that is based on your average life expectancy. The reduction is greater than if you retire with at least 30 service credit years.

See this link on the ‘factor’ reduction in your PERS 2 or 3 pension by early retirement age. For example, if your full retirement monthly benefit was supposed to be $1,000 and if at early retirement age 60 your factor is 0.6190, then that means you’ll only receive $619 per month instead of getting the full $1,000 if you wait until age 65 to start taking your pension.