PERS 2 is Amazing—But You STILL Need a Plan
Ethan Meikle CDAA?
Helping Washington TRS & PERS Members Retire Early & Not Get Killed In Taxes | Certifed Digital Asset Advisor | Podcast & Youtube Host | Author | Independent Financial Planner
Comment addressed today: "I appreciate and agree with most of what you say, but the beauty of being on plan 1 or plan 2, given you work a few decades and retire at your designated age, is that you don’t really have to plan for much. I’ll retire soon on Plan 2 at the designated retirement age and will make more money from my pension and social security than I did while I was working. And the best part is…with much respect to you…is that I never had to plan for a thing!"
PERS 2 is Amazing—But You STILL Need a Plan
PERS 2 is one of the best retirement plans available. You work your years, reach your designated retirement age, and receive a guaranteed paycheck for life. There is no need to worry about stock market crashes, running out of money, or managing investments.
However, saying you never had to plan for a thing is not accurate.
PERS 2 takes care of your income, but it does not take care of everything else.
Even with guaranteed income, retirement's financial challenges require planning.
1. Taxes – You Will Pay Them, And They Will Hurt If You Don’t Plan
Many people assume their tax burden will be lower in retirement, but that is not always the case. Every dollar from your PERS 2 pension is taxable, and if you have other income sources, you could end up in a higher tax bracket than expected.
Key Tax Issues for PERS 2 Retirees:
Example: How Taxes Can Reduce Your Pension Income
A retiree receiving:
This results in a total income of $90,000. At this level, the retiree is in the 22 percent tax bracket, with an estimated tax bill of $12,000 or more, significantly reducing their take-home income.
Planning Tips to Reduce Taxes:
2. Healthcare – It’s Expensive, and You’re On Your Own Now
The moment you retire, your employer-sponsored health insurance disappears. Many retirees underestimate the cost of healthcare, which can become one of the largest expenses in retirement.
Key Healthcare Costs for Retirees:
Example: The Cost of Healthcare Before Medicare
A PERS 2 retiree at age 62 will need health insurance for three years before qualifying for Medicare.
Planning Tips to Handle Healthcare Costs:
3. Inflation – Your Pension May Not Keep Up
While PERS 2 provides a Cost of Living Adjustment (COLA), it is capped at 3 percent per year. If inflation exceeds this rate, the purchasing power of your pension decreases over time.
Example: The Long-Term Impact of Inflation on Pensions
A retiree with a $60,000 pension today:
Planning Tips to Protect Against Inflation:
4. Estate Planning – What Happens When You’re Gone?
If a retiree does not plan for estate management, their spouse or family may face significant financial challenges after their passing.
Key Questions to Address:
Planning Tips for a Smooth Transition:
5. Tax Increases – Will They Reduce Your Pension Over Time?
A major risk in retirement is the potential for tax rates to increase. The government can raise income taxes at any time, which would reduce the amount of pension income retirees get to keep.
Why Future Tax Increases Are a Real Concern:
Example: How Tax Increases Can Shrink Your Pension Check
A PERS 2 retiree receiving a $60,000 pension today:
Over a 20-year retirement, this could result in a total loss of $50,000 or more.
Planning Tips to Minimize the Impact of Tax Increases:
Final Take: PERS 2 is Incredible, But It’s Not a Magic Shield Against Financial Risks
PERS 2 is one of the best retirement plans available, but thinking you do not need to plan at all is a mistake.
You still need to:
PERS 2 makes retirement easier, but planning ensures you keep more of your money, avoid financial surprises, and retire with peace of mind.