Episode 9 – Retiring at 55 — pros and cons
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS and today we’re looking at a few options for early retirement, specifically for Washington State employees. Yeah, and the sort of term that we get a lot of questions a lot about here at DRS which is separation… A separation date versus your retirement date.
Seth
Yeah, on some level, I feel like when we talk about this with folks, I feel like we’re the retirement police. We’re telling people, oh, you’re retiring wrong or whatever. When you quit work and you’re of a certain age, it feels like “I’m retiring.” Like, that’s retirement. Like I had my party, I ate my cake, my coworkers saw me off and I’m retired and DRS really talks about it in terms of retirement is a very specific point in time when you start collecting your pension benefit.
We [DRS] at that point then consider you retired. It’s really up to you on what retirement looks like. For some people, working part time is retirement, but there are lots of different ways to retire. You don’t have to be collecting your pension check to be retired. And I was actually just talking to a coworker… our mutual friend Stacy, who I think we’re both hoping to have on the podcast at some point to talk about early retirement cause she’s a big fan of early retirement.
I think for younger folks, thinking about early retirement is a good thing because it actually gets you to have a target and savings and like a goal in mind. And you might not actually hit that goal, but you’re usually better off along the way.
Jenny
Yeah. So your separation date is your last day that you work in public service. If you work for the state for ten years and then you decide to go work for Amazon or Microsoft, your separation date would be then the last day that you work for the state of Washington. So you go, then you work for Amazon and then you retire a couple of years later.
And I think with our with our early retirement options here, think what a lot of people haven’t considered is that you could still separate from the state at age 55 per say, but then not start collecting that pension paycheck until you’re 65. Yeah. So you know there’s this …if you separate from state employment at 55 and you start collecting a pension right away, your pension is a lot smaller than if you were to start collecting at 65 because then of course there’s all these factors.
We want to make sure that your pension is going to be able to support you. There’s more years involved, but I think this is a good option for people to consider. And again, this is all about having just different options.
Seth
The way I think about it. Yeah, we are going to be paying you for a longer period of time, so you’re going to get an extra ten years of payments. And so of course the payments have to be smaller because we’re paying you for a longer period of time. But it’s not a penalty. It’s essence. You’re still receiving the same amount of on average, people are receiving the same amount of money over their lifetime.
And I think for a lot of people, they’re used to this with Social Security because you can start your Social Security at age 62 or you can start your Social Security age 70. And there’s this big sort of debate, debate about when you should start or when the best and everybody has their own personal reasons for doing that.
In the same way for people who separate from public employment early, oftentimes they have that same question. We talked about this actually on the last episode from one of the questions from a listener about is there any reason to wait until after 65? And if you’ve already stopped working, there’s not you should start collecting at age 65. But for folks who stop working early, separate from employment at age 55, for example, they could start collecting their pension right away if they want, and they would get I think the number is about 36% of what their full pension benefit would be if they waited until age 65.
But that’s just, as you said, just a choice on how do you want to take that income stream? Do you want to have it smaller for a longer period of time, or do you want to have it larger for a shorter period of time?
Jenny
Yeah. And so basically it’s if you’re in PERS, TRS or SERS and there’s the rules are a little bit different for LEOFF – for law enforcement, or for WSPRS for Washington State Patrol. But if you’re in PERS, TRS, or SERS, if you have at least 20 years of service credit and you’re 55 and older, you can choose to separate from retirement.
Yes. I mean, sorry, separate from service, Separate from service.
Seth
And start your retirement. 20 years of service for the Plan 2’s and 10 years of service for people who are in Plan 3. As long as you’ve got 20 years, you’re good. You can retire early. It doesn’t matter what plan you’re in. You could start collecting your pension if you’re in PERS- the public employees plan, the School Employees Plan or the Teachers Plan, We’re usually really good about not using acronyms.
And so I want to make sure we stick to that, though it’s super easy. No, no, it’s super easy to jump into them. The other thing to consider, some people feel that is a penalty, like they don’t want to take that penalty. They don’t want to take that hit. And what I know some people will do is that they will save up money like in a DCP account or a 457 account or a 403b account and they’ll use that money that they’ve saved to live off of from age 55 to 65.
They call it a bridge. It’s the bridge to get them from when they stopped collecting…
Jenny
… separate.
Seth
Yet separate.
Jenny
To the actual point of quote unquote retirement when you start collecting your pension.
Seth
Yeah it’s really you’re going from getting your regular paycheck from your job and then you’re going to get your regular paycheck from your retirement. And if you stopped.
Jenny
Bridge in between.
Seth
Yes, exactly. That There’s that gap. And that’s where it’s really helpful to know how much you’re spending, what your expenses are, and how much money do you really need to help bridge that gap.
Jenny
Yeah. And so this is a great option for those who may have other income coming in from a spouse. Maybe your spouse really loves their job and they want to continue working until they’re 65 or they’re maybe a few years older than you, or if you had money that’s coming in from an inheritance fund, say a parent passes away.
So I think this is a good option for people to consider and something I hadn’t really considered myself before I started working here and kind of delving into all the details.
Seth
Yeah. And I think folks at DRS end up thinking about these options a lot more because we’re talking to people who are doing this. I remember very early on when I started working here, there was a guy who came in who was doing this sort of gap thing where he had stopped working, I think like in his late forties and his expenses were really low.
He was living like in somebody’s garage and really didn’t need that much money, but he was coming in asking about his DCP. He had this balance and he wanted to know how much he had taken last year and how much he was going to take this year. And it was really that was the idea was that he was using that savings that he had built up over time until his pension and his Social Security were going to kick in, you know, ten or 20 years down the road.
Jenny
Yeah, I was curious about the numbers and ran some numbers on this. And if your monthly expenses are $4,000 a month if you’re 55, you separate from work. You would need at least ten years of income then to kind of, like we said, bridge that gap until you turn 65. So $4,000 a month times 12 times ten years, it’s about $480,000 to cover that, that ten years of expenses.
So I feel like that seems like a moderately doable number, especially with DCP. And then the other example, like, you know, kind of halving that, so if you separate from work at 60, you would only need five years of extra income to bridge that gap or about $240,000. And so that seems something that again, I think is doable to save up with something like DCP.
Seth
Yeah, because exactly what you’re saying. And then at age 65, your pension, your…
Jenny
…you pension kicks in.
Seth
And so, you know, if you know how much that’s going to be and how much your Social Security is going to be, those other income streams kick in and then you don’t need to rely on your savings as much. In a lot of ways it’s similar when we talked previously about understanding what your income is and your income streams and your different opportunities for income.
It’s the same, same way as you’re starting to think about retirement. I think a lot of people have a really hard time thinking about taking money out of their savings, out of their retirement accounts. Like that, that’s a tough thing to wrap your head around because it’s like when you build up that habit over time, over decades, in a lot of cases, you’re then having to reverse that habit.
Jenny
Yeah, that’s true. Especially like you said, if you’re really good about saving your money and then all of a sudden it’s like, Oh, I can actually take out this money. This is what I’ve been saving it for. Is this part of my life- to be able to actually enjoy my retirement savings now. Yeah.
Seth
And I actually think it’s in some ways it’s easier for those folks who retire early to think about because they don’t have the other income streams. Whereas once your pension kicks in and when Social Security kicks in, like, that’s the money I’m living off of, that’s my check. That’s my paycheck. Really. It really is your paycheck. Yeah. And if people are used to living on their paychecks, it still feels difficult to dig in and dip into that savings.
Oh, I might need that in emergency. I mean, well, know, you say that money for retirement and this is retirement. So yeah, that can be tough. That’d be really tough.
Jenny
But I think it’s just a great option. Like I said, I never really considered that before I started working here.
Seth
But yeah, I think the big question for a lot of people when they consider early retirement, it’s the same consideration. Even people who are retired at normal retirement age. But you mentioned the law Enforcement and Firefighters retirement Plan or the Washington State Retirement plan, State Patrol retirement plan. Those folks are able to retire earlier or they have more physical, dangerous jobs.
But the biggest question that all of those folks have when they’re retiring is health insurance. It’s like, do I have a spouse who’s health insurance can I stay on? Is there something that I can get on the private market? Am I going to go work part time just for the benefit?
Jenny
Yeah. Yeah, for sure. And of course, that’s something that we want to acknowledge that doesn’t work into all these, you know, figures that we talked about for things like health insurance.
Seth
Yeah, I think once again it comes back to what are you spending money on? And when you’re working, you don’t see that, it’s in your paycheck, but you don’t see it. And then if you’re buying health insurance on the private market, those amounts can be vastly different for different amounts of coverage. And so trying to understand what that looks like and as we were talking about earlier, that’s why retirement looks different for different people.
You could downshift is what I hear people say in their career. They may have had a more stressful or a busier job and then they go to a part time job as kind of a partial retirement. And in the DRS technical sense, you’re not retired yet. You’re able to kind of ease into that retirement and maybe think about what else you’re going to do.
But it helps cover that insurance gap, which I think for a lot of people is really sometimes a bigger stress than the money. Like, I can always go live on somebody’s couch or in somebody’s garage. But if I if I get sick, like having insurance is super important.
Jenny
Yeah. Or of course, the other example I’ve heard is, you know, you take some job like working at Starbucks. Again, same sort of idea where it’s a less stressful job. I mean, maybe Starbucks isn’t a great example if it’s more of a customer service focus, but something different and you can still get those health insurance benefits.
Seth
Yeah, finding ways to like piece all of those expenses together or tackle those expenses in different ways. And I know we have a lot of a lot of folks in the public retirement plans who also have, you know, they’re retired from the military. Their health insurance is covered for the rest of life. So that isn’t part of the equation for them.
This is like the most common DRS question, like everybody thinks about retirement and the separation piece is, when are you actually quitting work? I feel like we need to help, change our own language about that.
Jenny
Probably.
Seth
It’s hard. I don’t… I know we’ve been working on it.
Jenny
So yeah. So I think just as a reminder, again, it’s your separation date is the last day that you work for state employment and your retirement date is basically the first day that you start collecting that pension, That paycheck.
Seth
Yeah. The ongoing.
Jenny
Yeah, yeah. And for a lot of people, you know, these are a couple weeks apart. But obviously for those who may choose to work somewhere else, like in the private sector or if they’re choosing to retire early, those two days can be many years apart.
Seth
Yeah, decades.
Jenny
Decades, Yeah.
Seth
All right.
Jenny
Thank you, Seth.
Seth
Yeah. Thank you, Jenny.
[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. The 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.
