Episode 30 – How fewer deductions in retirement can help
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. Now, a common question that we get at DRS is members wanting to know, “is my pension benefit taxed?” And the short answer is: “yes, it is taxed,” but there are a lot fewer deductions taken out once you retire. And so, we have Tevin here today, who works at DRS to talk about what those deductions can be and how your retirement income could maybe even be a little bit more than what you would typically receive when you’re working because there are fewer deductions taken out. Welcome to Tevin.
Tevin
I mean, it seems like a fairly common topic that people bring up because when we pull estimates, when we give our members their numbers, sometimes people are shocked to find out, you know, this is maybe $2,000 less than maybe what I’m used to receiving as a source of….let’s call it gross wages. So, this topic really came about when I spoke to… well, it started out with one member and then it turned into just multiple people who I’ve talked to over several months now at this point and felt like it was a good thing that to maybe bring up.
So, the member who I talked to initially, they had 10% Teachers’ Retirement Plan 3 contribution, and then they also paid into DCP, which was like $200 or $300 a month. So, looking at their pension plus what other investments they might consider like a TAP annuity or something like that, the things that they were actually paying into was probably about $800 to $1000 and then realizing you’re not going to be paying into these things during retirement, you know, these things are going to be paying you.
So that’s kind of where this came about. And just kind of thinking and doing a mental exercise. What are the things that maybe we pay into when we’re working that we’re not going to pay into when we’re retired? And this has worked to put a lot of people, who are moving into retirement, to put their concerns at ease.
Because when you’re looking at a difference between, say, a $6,000 check and a $4,000 check, you could really be, you know, maybe sweating a little bit like, “Am I going to be able to make this work financially?” And then just being able to put the retirees’ mind at ease in terms of their total income, you know, without making a drastic life change.
Seth
Yeah, I know, Jenny, we’ve talked on earlier episode about looking at your pay stub and a lot of people don’t do that because you get direct deposit and you’re not thinking about what’s coming out of your check. And I think Tevin, the example you gave of a teacher or somebody who’s in Plan 3 and they have a contribution rate of 10% coming out of their check, that just lowers their income right off the top.
And it’s same with Social Security contributions and Medicare contributions and paid family medical leave as new in the state and the long-term disability. And there are all these things that come out of your check while you’re actively working. I really like the way you said that Tevin, that you’re not paying into them when you’re retired. Oftentimes they’re paying you or they’re taking care of you.
Are there ways that you start that conversation with the customer who’s a little bit nervous about the difference between what they’re currently making and what they’re seeing…You know, maybe they’re using their online account and they’re running a benefit estimate for themselves and they’re thinking, “Oh my gosh, I’m never going to be able to retire.”
Tevin
Yeah. And this kind of turns into one of those, you know, read the conversation kind of topics. But most of the time, it’s like when you present somebody with an estimate, maybe they’re looking at it, you know, for a couple of months, 66 years old or something, working past 65, they just don’t feel like they could do it.
Or you could sense that they’re a little nervous about it because they know what they bring home every day. And a lot of times as a state employee, we look at our check and we go, “Well, the gross wage says it’s this, but this is what I actually get.” You know, but we’re paying into Social Security. And then what are your additional sources of income as well?
You know, your most people receive this pension in addition to Social Security and then maybe even prior 401k from another employer. You know, in retirement, you’re most likely going to have multiple sources of income as opposed to just getting your job. But your job right now while you’re working the take home pay could be pretty similar if your gross wages are lower, then your generally in a lower tax bracket as well.
Seth
I know we’ve talked, Jenny, also about when people are actively working and they’re thinking about trying to increase their income. And we’ve talked about side hustles or multiple income streams and I think for a lot of us as public employees, that’s not something that’s really on our radar because, Tevin as you said, we have our job, we have our source of income that we rely upon.
And in retirement, you’re really thinking about piecing all of those sources together. It’s not really an intuitive leap for people to make when they just think, “I’ve got my pension check and it’s not…Tevin is telling me on the phone it’s not going to be as big as the check I’m currently receiving.” And I wonder how that makes people feel, how they need to piece all those different parts together.
Tevin
Yeah, and obviously at DRS, we’re not experts in Social Security by no means, but we can definitely bring up the website and see news articles and stuff. And I think that the average Social Security income somewhere between like $900 – $1500 dollars. So, you know, depending on kind of where you land on that and your income and so on and so forth, you know, we see pension checks that are say $2,000, $3,000 less than what they receive.
But their take home pay after taxes, after deductions, everything else actually your take home pay could be higher or you might be looking at maybe $300 less a month or something like that, which yeah, it’s not great, but it’s definitely not $2,000.
Seth
Yeah. You’re in a similar ballpark at least.
Tevin
Right. Plus, you know, you’ve got other options, maybe manipulating your income right now while you’re working so that when you’re retired, the difference between that isn’t so substantial either.
Seth
Tell me more about what you’re thinking there.
Tevin
So, you can contribute to DCP right now if you want to, so you can increase maybe your deductions and lower your take home pay right now so that when you retire say the difference is only $300 or something, for example, at that point. Because now you’ve got your DCP in addition to your pension, in addition to Social Security, maybe it’s another thing that you’re paying into, but it’s an investment just like your retirement.
Seth
Yeah, I’ve never thought about marketing DCP this way, but I really like what you’re saying is like, “get used to living on less.” Maybe that’s not a really, like strong marketing campaign for DCP, but on some level, I think it does make sense. We all as humans adjust to whatever money is coming into our bank accounts.
We make decisions based on what money we see is available. And part of what you’re saying is that for a person who’s approaching retirement, it helps you think about what your current income is, but then it can also add to your future income by putting money into your DCP now and you’re going to have additional funds available later.
Tevin
Yeah, it could balance the scale or it could really flip it in your favor depending on how much you put in DCP. Because all of the retirements that I’ve seen where people are getting paid, let’s say way more than what they’re receiving in their working career, these are people who have, you know, they’ve done everything that they can financially to contribute to DCP. DCP has always been a good solution for people who want to make, let’s say, more in retirement than what they’re receiving as a working profession and other investments, you know, that we don’t know about, obviously. But the ones that I’ve seen specifically, these are the ones who they’ve done what they can while they were working.
Seth
I was also thinking about our Plan 3 folks who might have chosen when they started work to contribute more than the minimum of 5% who might be contributing 10% or 15% of their salary into their retirement accounts. Kind of in a similar way to DCP, their current income as an active employee is just 85% of their gross of their total income.
But their pension is going to be based on what their gross income is. So that’s another way you’re kind of lowering what your current lifestyle is or, what currently is available to you, but you’re having more available in the future. And as you were saying, the folks who contribute a lot to DCP oftentimes will end up with more in retirement.
I feel like I’ve seen similar things for Plan 3 members who are contributing 15% for 30 or 40 years. That really adds up over time with that money in an investment account, and then they have a lot of additional options. They can retire early, they could purchase an annuity, but there are lots of options for people to think about. Compare what their current income is to what their retirement income is going to be, or projected to be, I guess.
Tevin
Right. And those annuity options, they’re fantastic for increasing your pension benefit. Obviously, a retirement specialist can assist you in helping you figure out about how much that’s going to be. But those annuities, not only do they increase your pension, but the cost-of-living adjustments are percentage based. So, the higher your pension, the higher your COLA is.
And so, if we’re concerned about maybe the difference of our income, sometimes the COLA factors play a big role. So, using DCP to increase your COLAs… it’s not a linear graph, but it’s you know, there’s a growth curve there because it’s percentage based as well.
Seth
That’s a really good thing, I think to talk about or consider. I think for a lot of folks who’ve had a long public career, they might have experienced time periods where they never got a raise, you know, for multiple years in a row or you get step increases based on longevity. But there are times where you might be maxed out and there’s no general increase across the board for everybody.
Whereas in retirement you have additional COLA options with Social Security, with your annuities, with your pensions, which are all inflation based. If you’re worried about that, you have some additional backstops or resources in retirement.
Tevin
I like the idea of recommending that you do look at your paycheck, looking at all of the deductions that you pay into, especially if you’ve just received a DRS estimate that says this is approximately what your pension is going to be. There’s a DRS page, it’s called Deductions in Retirement. And it does show some common deductions such as Medicare, Social Security, maybe some medical premiums.
So, those will change in retirement. You need to consider maybe what tax bracket you’ll be put in when you’re in retirement. Because if you’re in that, you know, let’s say 22% tax bracket, you might move down to 12. It depends on your gross income, between all sources.
But [your paystub] does show common things. You can look at your check, you can go, “okay, I pay X amount of dollars into my let’s say Teachers’ Retirement System. I pay X amount of dollars into Social Security. Pay X amount of dollars into Medicare, I pay X amount…” You know, you add all these things up and that might be the defining factor in whether or not you’re going to be able to do this.
Jenny
So, Tevin, when you get a call from a member who’s concerned about retiring and how much they’re going to be receiving in retirement, what’s your main takeaway for them?
Tevin
Well, I never want to provide somebody with a false representation of what they’re going to receive because they’re really relying on us to be honest with them, you know? And so it’s not about looking at them and saying, “yeah, you could do this, absolutely.” We’re not here to get you, you know. So, if you’re really thinking about, “can I do this?” if you’re not ready, then that’s a real consideration.
We can’t do the math for you because we can’t see what all of your deductions are. But if you have a real conversation with somebody and say this is some other things to consider, then we can shed some light on some topics that aren’t generally discussed. And in a lot of ways that’s helping the person out because you want to be real with them.
You want to tell them like it is because you don’t want to be caught without a backup plan or anything like that if you’re unprepared.
Seth
Yeah, I feel like what I’ve really heard you say throughout the conversation is that it comes down to a math equation in a lot of ways, and you have to actually do the math and run the numbers and look at what you’re currently taking home and what you need to replace. What are the different things within my budget that I need to make sure I’m paying and how can I make adjustments now that’ll help me for that in the future.
But understanding what my current salary is and what my current take home pay is, and which of those things I’m not going to have to pay in the future. It’s encouraging to know what you’re not going to have to pay when you’re retired.
Tevin
Right, yeah. Versus looking at your check and going, “oh my gosh, look at all these taxes.”
Seth
Yeah, yeah, exactly. Yeah. Always got to pay that.
Jenny
But at least there are less deductions when you’re in retirement.
Seth
All right. Thanks, Tevin.
Jenny
Yeah, Thank you very much.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
