Episode 44 – All about the Plan 3 TAP Annuity
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. And this episode is especially for all of our Plan 3 members. So, we know that one of the challenges of saving for retirement can be trying to figure out how much you can spend from your investment account once you retire. And to help with this, some people choose to purchase an annuity.
And for those who don’t know, an annuity kind of works like a reverse life insurance policy. You pay a lump sum, say $25,000, and that guarantees you monthly income for your lifetime. And the more money you pay upfront, the larger your monthly payment will be. And there’s all sorts of options out there for annuities from private companies and DRS.
But Plan 3 members have access to a TAP Annuity that has a lot of great benefits that other annuities don’t. So today we have Malia from our team here to help us learn more about the TAP Annuity. Welcome, Malia.
Malia
Thank you.
Seth
So, Malia, sometimes when people hear the word annuity, it provides like an immediate negative reaction. Can you tell us just kind of at a high level, why a Plan 3 member might want to be aware of this feature within their plan?
Malia
Yeah, that’s such a great question because I know for a lot of customers that’s their initial reaction is they’re used to hearing about annuities in a private sector space or through insurance companies, which typically have a lot of hidden tricks and bells and whistles or costs that they may not be aware of. And so it definitely has that jarring reaction for them.
The first and foremost thing that I want to say about the TAP Annuity is that it is guaranteed through the state of Washington. So, the same people who are paying you your defined benefit, so that pension that you’re getting from working, that you contribute, or that your employer contributed to and you earned service credit on — the same funding for that is what pays you your TAP Annuity.
So, I think that’s something that is really great for people to hear about that they are not aware of. I think that a lot of people tend to think that these are being offered by our record keepers, or maybe we have a contract with a private insurance company, but it is through the state of Washington. And so that’s one thing that I think is really important for people to understand that this is basically giving you the option to take that money that you’ve put in that’s been invested and be able to turn it into essentially a second pension that you’re getting from us for the rest of your lifetime.
Jenny
That’s great. So, you know, I mentioned in the opening that, we know that the TAP Annuity has a lot of great benefits. Can you tell us a little bit about what makes the TAP Annuity unique, and maybe why it’s a little bit better option than others?
Malia
Sure. So again, like I said, it’s administered by the state of Washington, which means that it basically follows all the same features as your regular pension benefit. So that includes things like your ability to name a survivor, which is basically where you pick someone, whether it’s a spouse or not. And you will get an actuarial reduction based on your difference in age, but they can receive a lifetime benefit for the rest of their life after you die.
There’s also the balance refund upon death. So, if you put $500,000 into the annuity and you pass away after only 200,000 has been paid out to you, that remaining 300,000 would be paid out to your beneficiary if you elected no survivor, for instance. So, you said, I just want to get the maximum amount for my lifetime. You know that what you’re going to put in is guaranteed to be paid out to someone that you name or yourself, depending on how long you live.
And I think the most attractive feature of our TAP Annuity is that you get a guaranteed 3% cost of living adjustment every year for the rest of your lifetime. And if you pick a survivor, like I mentioned earlier, they get that guaranteed 3% increase for the rest of their lifetime as well. And that is incredibly unique. Even our pensions, actually, the cost of living adjustment is based off of consumer price index, inflation, all kinds of factors. Versus the TAP Annuity, we say, “you’re just going to get that 3% increase every year for the rest of the lifetime of the annuity.”
Jenny
That’s awesome. And you’d mentioned that other annuities don’t offer this cost of living adjustment.
Malia
Some do, some don’t. It’s not a typical feature that you see. A lot of times you’re either paying for that increase, so you’re actually taking a smaller monthly benefit to get it later down the line. Or it’s all based off of inflation, but this one is the only one that I’ve seen where it’s just guaranteed 3%, this is what you get for the rest of the lifetime of the annuity.
Seth
So, Malia, at DRS we have a number of different ways people can increase their pension amount. And as you mentioned, using your investment account as a Plan 3 member and converting it to a TAP Annuity is one way to increase your pension amount. But we have some other options where people can purchase additional service credit, or they can purchase an additional annuity when they retire.
And those features are open to both Plan 2 and 3 members. But could you tell us a little bit about what the differences are between the TAP Annuity and some of those other like purchase service credit that a Plan 2 or 3 member could do?
Malia
Sure. So first and foremost, we’ll just get it out of the way: funding source. And what that means with the TAP Annuity is, you can only use the money that’s in your investment account to purchase this TAP Annuity. Now, some people may not have enough in there. Or maybe they have, money that they’ve invested outside in an IRA or something like that.
Those are the kinds of funds that can be used for a purchase service credit, or potentially a purchase additional annuity. Second, the biggest thing is that the TAP Annuity is a separate check from your monthly benefit, and you actually don’t need to be eligible for a monthly benefit to get a TAP Annuity. So you could decide to leave working when you’re 40 years old, clearly not eligible to retire, but you have enough money.
The minimum is 25,000 for a TAP Annuity in your Plan 3 account, and you could start drawing a lifetime monthly benefit at that time. Versus purchase service credit or purchase additional annuity. Because that tacks on to your retirement benefit, you have to be eligible to draw that lifetime monthly benefit through the pension side. So those are only at the time that you retire and they get added to that benefit.
It is not a separate check. So those are kind of the key differences. In addition to what I had alluded to earlier about the cost of living adjustment, purchasers credit purchase additional annuity because it’s part of your monthly benefit. Cost of living adjustments are based on inflation, and it’s not that guaranteed 3% like you get with the TAP Annuity.
And the one thing that I also think is one of the most attractive features as well, is with your retirement benefit, when you start drawing it, if you go back to work, it may stop depending on how many hours you work or what you’re doing. There’s all kinds of rules around that which you can find on the DRS website, but for the TAP Annuity, it will continue if you go back to work. So that’s something that’s kind of nice for people to know about. Is that once you start getting it, it’s yours for life.
Jenny
Yeah. And one of the other features I’ve heard as well is that you can also purchase this TAP Annuity at any age. Do you want to talk a little bit about that.
Malia
Yes, exactly. So, like I said you don’t have to be eligible for the pension to be able to get your TAP Annuity. You can do it at any age. The one trick is you only get to do it once in your lifetime, so you don’t get to stop working when you’re 40 and say, “hey, I’m going to go ahead and purchase this annuity, but I’m not going to do my whole account balance because I want to purchase one later.”
Unfortunately, it doesn’t work like that. You only get one in your lifetime, so it is something that you need to think about. Like if you want to do your full account balance or maybe just part of it, but it’s really, really great for our Plan 3 members in particular, because sometimes a lot of times they want to stop working before 65 or whatever age they’re eligible based on their service credit, and they want to take advantage of something that’s called indexing, which there’s lots of information out on the DRS website about that, where basically they get a more favorable benefit if they delay drawing it.
But sometimes you need income between when those two events occur and the TAP Annuity you can start at that time. It’s completely independent from your pension. So that’s something that’s really nice. And also I’ll just throw out there as well. If you are a Plan 2 member, but you received Plan 3 funds as a beneficiary. Maybe you had a spouse or a parent or someone that passed away and you have a Plan 3 account from them, you can purchase this TAP Annuity through that as well. So that’s just something that is kind of a fun little fact about the TAP Annuities.
Seth
One of the things, Jenny, I think you and I have talked on a previous episode about doing kind of a financial check in, like a personal financial check in every six months or every quarter, every year.
One of the things I actually do is, I’m a Plan 3 member, I look at my Plan 3 account balance every six months, and I calculate: how much would a TAP Annuity be if I bought it right now with the balance I have?
So, just kind of to see: How much income could I replace today with this Plan 3 balance that I have? Because as Malia said, it’s one of the huge advantages of the TAP Annuity is I could start it at 45, or 55, or 72 or it’s any different age. And so it gives you some more flexible on thinking about income replacement, and making sure that you kind of have all your bills paid.
That’s the other thing. I think sometimes people look at with the TAP Annuity is: “I need to have $1,500 more of monthly income to cover my set fixed expenses.” So then I can go purchase a TAP Annuity for that amount and then have my additional funds available to me, because I want to go buy a boat or motorhome or something.
Jenny
It’s a great segue way to say that on the DRS website, on our calculators page, we have a Plan 3 TAP Annuity Calculator.
Malia
That’s exactly right, what you’re saying, Seth. I think when people make their plan choice or maybe the choice was made for them, depending on what plan they’re in and who they are, we talk about how Plan 3, one of the hugest benefits of it is flexibility. And I think this is one of the most misunderstood features of just how much flexibility you get by being a Plan 3 member.
A lot of times I’ve seen Plan 3 members who actually end up getting more because of a TAP annuity and their investments doing so well than if they had been in Plan 2. But you get that option, just like you said, where if you have $500,000 in your account, you don’t have to buy it for all 500,000. You can say, “I need guaranteed income of $2000 or whatever amount, just like you said, and I’m going to keep that other $300,000 for if I have a medical emergency.
Or maybe I just want to go on a month long vacation to Tahiti or whatever it may be. You get that flexibility, you get that control, and this option is one of the reasons why it’s so important to be engaged with your retirement from an earlier age, especially as Plan 3, just like Seth said, paying attention to that balance because that is half your retirement and you get the choices to decide what you’re going to do with that.
Seth
It’s really key when people are thinking about purchasing an annuity. This is really the point that people are trying to figure out is, “would I rather have the guarantee the stability of the guaranteed income, or would I rather have the flexibility of this lump sum of money that is in my investment account?” And that’s a really personal decision.
It depends on what other guaranteed income you have from a pension or Social Security. It depends on what other investment accounts you have and that that flexibility for more liquid kind of lump sums, amount of money. So there’s really no right answer for people. You have to look at your total overall financial picture when you’re making these decisions.
But it is a really beneficial feature to have in Plan 3 that, as Malia said, many people overlook or forget about or don’t realize. And it’s one of the reasons we wanted to have this episode.
Malia
Yeah, especially, you know, just a shout out. I’m sure most people listening to this are people who are nearing retirement, but if anybody is listening who is making their plan choices or thinking about it, you know, really think about how this can be such a benefit for you to help supplement that income. Because our lifestyles have changed so much over the last so many years.
We have people who now no longer own their own homes. By the time they’re retired or they have children in college, and you need that guaranteed monthly income to make sure your needs are met. And so those are important things to take into consideration as well as you’re making these decisions.
Jenny
That’s great. So yeah, we’ve talked about how this is obviously a really good option. And it almost sounds too good to be true. Can you talk a little bit about how the state can offer this?
Malia
That’s a great question, Jenny. and you’re not the only one who has had this question, for us before, because it does almost feel like if you sign today, you’re going to get this awesome thing. And so, the best way that I like to explain it is it’s a win-win situation. So, you as the customer are going to get that option of being able to say, “I want this guaranteed income for life. I want to be able to get the 3% increase that’s going to increase for the rest of my lifetime and any survivors.” The state gets to keep the money that you used to purchase and continue to invest it.
And the thing that’s important to remember is we have people who are starting in the pension system who are 18 years old, so we will be able to invest this for the next 50, 100, 150 years, however long it is, and get the gains and losses on that.
So again, it’s a win-win. We have the time to ride out the waves of the market as the state that you may not have the time to do when you’re making these crucial decisions in your retirement years, and maybe you need that more stable income where you don’t have as much risk tolerance. So again, it’s kind of a win-win. You get that lifetime income. We get to continue to invest that money well beyond when you would have been able to.
Seth
Malia, where would somebody want to go…so they listened to this episode, they want to go do some more research. They want to think about what other resources are available for people to learn more about the TAP Annuity, where should they go or where should they ask questions?
Malia
So first and foremost, I would say definitely check out on the DRS website, so, drs.wa.gov. If you go into the plan section and you pick your plan, there’s a really great FAQ about the TAP Annuity, where it’s going to tell you all the details that we probably didn’t mention about this option that’s available to you and what you can do.
There’s also a video out there for you to be able to watch to get more information about the TAP Annuity, as well as that all important annuity calculator, where if you log in to your online account, and you can just click on your Plan 3, get your balance and be able to plug that balance in or run different scenarios for yourself.
So, the DRS website is such a great place for articles and videos, as well as accessing that calculator. If you have kind of more direct questions about it, you can always call DRS to find out how it might work in addition to your monthly benefit. Maybe you need that information as well.
But when it comes time to actually purchase it, you say, “Hey, I’m ready, this is what I want to do.” Then you will work with our record keeper, which is Voya Financial, and you can call them, or you can go online to their site to be able to do the TAP Annuity purchase.
Jenny
That’s fantastic. So, one question that I had was about taxes. So obviously if I have my money in the stock market and I’m taking that out, I’m paying taxes on that money, do I have to pay taxes on my income from a TAP Annuity?
Malia
Yes. So, your TAP Annuity again it’s basically turning it into like a second pension. It’ll work exactly like your pension does where you pay taxes on it in a form of income. So, what that means is whatever amount you decide for your TAP Annuity. So, if that’s $2,000 a month or whatever it comes out to be based off of your purchase, that’s just reported as income to the IRS and based on your individual tax bracket, you will owe taxes just like you would with a paycheck.
Basically. So that is one thing that’s really nice when you take something out as a lump sum and you say, “I’m going to take $50,000 out to buy… whatever…. a new car with” you are paying taxes on that $50,000 all at one time. So that is one benefit of the TAP Annuity as well as you’re spreading these payments out for a lifetime, which can help lower that tax burden that you might get, as opposed to, taking it as a lump sum.
But again, really the best place to find out what kind of taxes you would owe and all of that, is to talk to a tax advisor.
Jenny
Sure.
Seth
I just really appreciate the point that you made earlier Malia, that Plan 3 does have more flexibility and sometimes that flexibility and complexity can feel overwhelming to people. But in a lot of ways, the best thing you can do is learn more about your plan, learn about what the options are, and learn about the way it works and figure out how to make it work the best for you.
And for some people, the TAP Annuity is going to be a really wonderful option. For other people, it might not make as much sense, but we really want to make sure people understand and know that they have this benefit within their plan.
Malia
Exactly. And because, you know, I just want to point out too, there’s people who may have retirements from other places, whether they worked in the private sector or maybe they worked for another state or, you know, the city of Seattle or Tacoma or something. And those plans don’t have this TAP Annuity option, but they may have something like with deferred compensation accounts or something like that, different annuities that are available.
And so that’s why it’s important to find out more about what features are there. Sometimes with those types of annuities, they don’t truly pay for your lifetime, versus ours will. So, if you live to be 120 years old, you will get that monthly benefit all the way until you’re 120 years old. And it doesn’t ever stop. So again, it’s just something to think about that our annuity has a very unique and special feature.
And just because you’ve heard the term annuity kind of thrown around in the retirement space before, do your research, look into it. And really only you can decide what is the best choice for you. We can’t guide you on that because we don’t know your life circumstances, but definitely do your research on it. And this is a really great product for a lot of people out there.
Jenny
That’s fantastic. Well, thank you so much, Malia. That’s very insightful today.
Seth
All right. Thank you.
Malia
Thank you.
[music outro]
Disclaimer
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