Episode 46 – Teachers: out-of-state service credit
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. And this episode is for teachers in Washington State specifically about service credit. So, one of the questions that we get a lot at DRS is people who have worked as a public employee in other states, and they want to know if their service credit can transfer over. And generally, the answer is no.
However, teachers in Washington do have some provisions in their retirement plan that can allow them to count or purchase that credit if they’ve worked in other states. And we’ve invited back Jon from the Contact Center, who’s been with us on the podcast before, getting very comfortable here in the studio. It’s great to have you. And welcome back.
Jon
Yeah, thanks so much for having me. It is great to be back again. This one’s more personal to me as my wife has five years of service credit down teaching in Oregon. Now we’re up here in Washington. She’s teaching. And so, we are sitting in the middle of this conversation. So, it started when I first started here at the DRS, it was like, “I can apply this to me right now.” And I’ve sat on it for two years now and we’ve yet to make a decision. So, I’m happy to talk through all the ins and outs of it.
Jenny
Perfect.
Seth
That’s just funny context, because I think a lot of people expect DRS employees to have all the right answers. And I think that’s just a perfect example of like in a lot of these situations, there’s not a right answer. There’s pros and cons and you have to weigh them. And we’ve talked about that on a number of different episodes.
I don’t want to go too far afield, but that I think, is really helpful context for people to remember that there aren’t always right answers with a lot of retirement things and out of state services is definitely one of those things. So, Jon, before we started recording, you were talking to us about how you’d like to think about these out of state service in two separate buckets or two separate categories.
There’s a free version, and then there’s a paid version. And I guess you might say you…you get what you pay for as well. So that’s something we can dive into a little bit more. But could you just kind of give us, a high level overview of those two different versions of out-of-state credit?
Jon
Yeah, absolutely. Let’s start with the milestones for retirement for the teacher system. If you’re in Plan 3, then your milestones are 10 years of service credit and 30 years of service credit. If you’re in Plan 2, it’s 20 years and 30 years. The free version is primarily about getting you eligible to start collecting that pension before 65, which requires 10 or 20.
That first milestone is just being eligible to collect early. Really, the goal of the free one is just recognizing you don’t have enough time [credit] if we just look at your Washington [credit]. But if we look at Washington and New York or whatever other state or even some federal programs, then you would have the total number of years and you can start collecting early.
It doesn’t get you more money. It just allows you to collect. Whereas if you want it to get you more money and have it be as if you had taught here in Washington, you can buy up to seven years of out of state time, and it counts exactly as if you had taught here. The downside of that is you do have to buy it.
No one paid into the system for those seven years or however many you have. And so, you have to cover a lot of that cost. And so that’s kind of the two different pieces on a broad spectrum there.
Seth
So yeah, let’s unpack that a little bit. So, what we’re talking about is early retirement which starts as early as age 55.
Jon
Correct.
Seth
And is for anyone who is under age 65. So, if you’re already over age 65 and a teacher, this doesn’t apply.
Jon
It really doesn’t do any good. Yeah, the free one especially. It does you absolutely no good.
Seth
Yeah. I think that’s something to keep in mind as well. There are a lot of ways that this feature might not be beneficial for you. And so, if you’re already over 65, it might not be something that you really need to spend any more time thinking about. For people like your spouse, if you’re under 55, you might want to do this even earlier.
As you were saying, you can buy that credit and get it on the books with DRS right now, when you’re in your 30s or 40s.
Jon
Yeah, as long as you have two years of service credit, that’s the caveat to it. That in order to buy the time, you have to already have two years with us.
Seth
You have to establish yourself in this state. And that makes total sense. And I appreciate your example as well, because I think a lot of teachers who reach out to DRS about this are from Oregon or Idaho. It makes sense. You’re right across the border. You move…
Jon
It’s basically all the same.
Seth
Yeah, and maybe you’ve lived in the same house the entire time and you’ve just moved school districts, you know, sometimes 5 or 10 minutes away. And I think that’s where this can really come into play for folks.
Jon
Absolutely. [I’m going to] throw in there: This might be jumping out a little bit, but you had mentioned the earlier you do it somewhat the better off it is. If you are looking at buying the time. One of the factors is how old you are and how much time the money is going to have in the system in order to cover that.
I don’t want anyone to use these as their actual numbers. This is at the time of me looking into this. Two years ago, my wife goes if we bought it now, it was like $40,000. If we waited till she was actually going to retire at 65, it was $100,000. Yeah. Like very big difference. Very quickly. What feels like very quickly at least it’s a number of years.
But yeah, if you are dead set that you’re going to buy it, do it early. If you are planning on working until 65 and you don’t want to buy it, don’t bother spending any time on it. There’s those levels to it. We talked about this as well. You have to contact us in order to start this process.
You cannot do this on your own. And in part is that we want to advise… Advise might not be the right word, but we want to have some input on that of like, “hey, don’t waste your time” or “this really isn’t going to help you.” So, we want to protect, we want to help there as well, just so that we can weigh those options, because we don’t want anyone coming back later and saying, “this did me no good. And I spent three months working on it.” Like, there’s some pieces there.
Seth
That reminds me of another way that people end up not qualifying for this or not being able to purchase this time is if they’re already collecting a benefit from the other state, or if they’re eligible to collect a benefit from the state, I believe.
Jon
Yes. That’s right. So that’s for purchasing.
Seth
Yeah.
Jon
For purchasing. Yeah. For purchasing. If you’re going to purchase that time, you cannot be eligible to collect an unproduced benefit from them. Yeah.
Jenny
So obviously with the paid version you do have to put up some money upfront. Do you want to talk a little bit more about why someone would be interested in that paid version versus the free version?
Jon
The ultimate benefit is that you get more money in your pension, right? In order to do that directly. That is the paid version of what we’re talking about here. It counts as if you had taught here. So, it uses your average salary. Washington has pretty decent salaries from what I’ve seen, compared to a lot of other states.
And so, you might be saying, oh, if I put 40,000 in, it’s going to use, number twice as big as what my number was in that other state. And so that’s a benefit there. The other piece of that, and I’m going to somewhat ask: How, in depth are our listeners on the 2008 early retirement factor?
Seth
I think that’s one of the big factors that people are considering. Maybe you can give a little bit of context of what the 2008 early retirement factor is. And then that might be why people are interested in purchasing this time.
Jon
That could be an episode in itself. Yeah. So, I’m gonna do my best to boil that one down. Standard retirement age for Washington, is age 65. If you started before the middle of 2013 and you have 30 years of service credit or more, then that can be reduced to age 62 to get your full amount. That’s kind of the 2008 early retirement in a nutshell.
I have the full history that I’ll go into on the phone with people like why that came to be a thing. But I’ll spare the listeners. So that’s a big benefit. And that’s the 30-year milestone that I talked about earlier. Using the free version does not get you the ability to use that 30-year age 62 unreduced benefit.
It’s just not going to happen. It’s a free version. It is what it is. I hate to say it, but it is. Whereas if you wanted to purchase the time, that would count as if you taught here, it would count towards your 30. You can go unreduced it at age 62. And so that’s another one of those pieces, you know, what’s your plan?
What’s going to work best for you? Do you have the money to pay for it? Because that’s also like, I would not take out a personal loan to buy this time. That’s just my personal thoughts on it. There’s no right answer for one person, or for every person. I should say every person’s answer is right for them.
Seth
I think a lot of ways, this is similar to other conversations we’ve had on other episodes about purchasing an annuity or purchasing service credit. You’re turning a lump sum of money into an ongoing monthly pension income stream, down the road. And that is a personal decision on “would I rather have that lump sum of money, or would I rather have that ongoing monthly benefit?”
And what’s the cost benefit of that? Is it, as you said, you know, if it’s $40,000 or $100,000, do I have that money available? That’s probably the first question. But then the second question is, is it worth it to me? You can run all sorts of probably, you know, analysis on how long is it going to take for me to recoup that money, how long do I expect to live? All of those things.
And that’s one of the reasons it really is a personal decision. I think for a lot of folks, they hear about the free version and they think it should apply to the paid version. You know, they don’t understand that there is this cost associated with it exactly. As you said, you have to pay into the system to get that benefit out, because when you worked in Oregon or you worked in Idaho or you worked in Minnesota, you were paying into that system.
And so, you need to pay into the Washington state system. Someone needs to pay into the Washington state system to get that benefit out.
Jon
Yeah. Unfortunately, the money does have to come from somewhere.
Seth
Yeah, Jon. So, what are the ways I think you mentioned this already that the person needs to contact DRS. What are the questions that we would ask them when they contact us? And what would the next steps in the process be if this was something that may be beneficial for them?
Jon
Yeah, absolutely. I think the key question that I ask people when I start these conversations is: what’s your end goal? Because then I can help say, if they’re looking for the free version or the paid version, or if this isn’t going to matter anyway, because they have 40 years of service credit and they’re 70, all those different pieces there.
Seth
So, what steps would they take once they contact us?
Jon
Once they contact us, there’s a two-page form. Page one is for them to fill out and it says, here’s who I am, here’s my address, that type of stuff. Then they take that form. They give it to their old DRS, whatever state equivalent they have, and they fill out that form. They say, “hey, here’s how much service credit it is.”
They sign saying, yes, it’s true. Here’s how you can contact us to verify if we want to. And I’ll warn anyone trying to think they’ll pull a fast one. We do a random lottery, and we do pull and call the other states and verify. Just a heads up there. But there’s that piece, and once we get it back from them, we process, we do all that kind of stuff.
I will say, if you’re using the free version, you will not see that in your online account. That is a very manual thing that we do when you’re requesting an estimate. that’s the only time it’s going to come up. Even the online estimate request will not know if you are using that. And you might have to call us to get it logged, for the estimate at that point, because it’s a very manual piece. The purchasing, once it’s paid and everything, it will show up in your online account. There will be that extra time. and that’s when it gets factored in. But yeah, that’s the generals of the process.
Seth
Let’s walk through just a couple of scenarios on how this plays out. So, I’m 55 years old. I’m a Plan 2 teacher. I’ve worked 17 years in Washington and I’ve also worked three years in Idaho. If I wanted to, I could say use the free version, as you said, and be eligible to start collecting a pension at age 55, even though I don’t have the 20 years in Washington that I would need to qualify for that.
Jon
Absolutely. Yeah. We’d use the free three years. Some call it “air time.” That’s a common phrase around here. Yeah. And we say okay, now they qualify. So, we use the 17 years. it’s 2% per year. I’m a math person.
Seth
So yeah.
Jon
I can run all these in my head. Yeah. You would get 34% of your average five-year salary. And then you’d get that early retirement reduction on there. And but yeah, absolutely, you qualify.
Seth
So, if I wouldn’t have had that time in Idaho, I would have had to work another three years in Washington to be eligible for early retirement, because I need 20 years to be eligible for early retirement. So, it allows me to get to the eligibility for that early retirement.
Jon
Yeah, absolutely. That’s the eligibility piece there. and I’ll say alternatively, you can just wait until 65 to start collecting.
Seth
That’s it. I think a very good point.
Jon
Sometimes I talk to people that they, for whatever reason, need to leave their job immediately. And that is a very reassuring piece for people to hear, is that you don’t have to continue to work. You just have to leave your money in the system and wait until you’re eligible to collect. Yeah.
Seth
That’s a good message for teachers. It’s a good message for everybody.
Jon
Yeah. There’s the nugget of wisdom for everyone else listening.
Seth
Yeah that’s great. Yeah. If you’ve made it this far into the podcast as a non-teacher, that’s a perfect takeaway: to always remember that once you’re vested in the retirement system you just have to get to that normal age even if you’re no longer working.
Jenny
Yeah.
Seth
Is there anything else you want to make sure we touch on?
Jon
I said this on the last episode too, and it’s creating more work for me, but feel free to call in with questions. It is job security for me. If people continue to call or email, you can send the message through your online account and we can do the form there. If I know we talked a lot about calling because that’s the primary contact that we have.
But you don’t have to, it’s just you might have to wait, a day or two for a response from us instead of waiting ten minutes on hold. Yeah.
Jenny
Well, thank you, Jon.
Jon
Yeah, absolutely happy to come in. This is my podcasting career, so any time.
Seth
Sounds good. Thanks.
Jenny
Thanks.
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Disclaimer
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