PERS 2 is Amazing—But You STILL Need a Plan

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:

• 100 percent of your PERS 2 pension is taxable income.
• Social Security may also be taxed if your total income exceeds $25,000 (single) or $32,000 (married filing jointly).
• Withdrawals from other taxable accounts (such as 403b or traditional IRAs) can push you into a higher tax bracket.

Example: How Taxes Can Reduce Your Pension Income

A retiree receiving:

• $60,000 from PERS 2
• $20,000 from Social Security
• $10,000 from IRA withdrawals

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:

• Use a Roth IRA to generate tax-free withdrawals in retirement.
• Strategically withdraw from different accounts to minimize tax liability.
• Consider Qualified Charitable Distributions (QCDs) from tax-deferred accounts to reduce taxable income.

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:

• Before age 65, retirees need to secure their own health coverage, which can be expensive.
• PEBB retiree health plans can cost $400 or more per month, per person.
• Medicare does not cover everything, requiring retirees to pay deductibles, copays, and drug costs.
• Long-term care is not covered by Medicare, and nursing home costs can exceed $8,000 per month.

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.

• PEBB Retiree Plan: $6,000 per year
• Out-of-pocket costs: $2,500 per year
• Total healthcare costs before Medicare: More than $25,500

Planning Tips to Handle Healthcare Costs:

• Contribute to a Health Savings Account (HSA) for tax-free medical expenses.
• Research Medicare Supplement or Advantage Plans to cover additional costs.
• Consider Long-Term Care Insurance early to secure lower premiums.

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:

• If inflation averages 4 percent per year, in 20 years they will need $130,000 annually to maintain the same standard of living.
• However, since the COLA is capped at 3 percent, the pension falls behind each year.
• By year 20, the pension effectively provides only $40,000 worth of buying power in today’s dollars.

Planning Tips to Protect Against Inflation:

• Maintain investments in stocks or real estate to provide inflation protection.
• Generate passive income sources such as rental properties or annuities.
• Consider delaying Social Security benefits to receive larger payments later.

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:

• Did you select a survivor option for your pension? If not, the pension ends when you pass away.
• Who will inherit your savings, home, and other assets? Without a plan, state laws will determine asset distribution.
• Do you have a will, power of attorney, and healthcare directive? Without these, legal and financial complications may arise for your family.

Planning Tips for a Smooth Transition:

• Choose the appropriate pension survivor benefit to ensure financial stability for a spouse.
• Establish a living trust to avoid probate and simplify asset distribution.
• Designate beneficiaries on all retirement and financial accounts.

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:

• The federal government is facing record debt, increasing the likelihood of future tax hikes.
• The 2017 Tax Cuts and Jobs Act lowered taxes, but these cuts expire in 2025.
• Retirees have fewer options to offset higher taxes because their pension is a fixed income.

Example: How Tax Increases Can Shrink Your Pension Check

A PERS 2 retiree receiving a $60,000 pension today:

• Under current tax brackets (22 percent marginal rate), they owe approximately $8,500 in taxes.
• If tax rates increase by 5 percentage points, their tax bill jumps to $11,000.
• That means they take home $2,500 less per year, without any change in their pension amount.

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:

• Diversify income sources to include tax-free withdrawals from Roth accounts.
• Convert some traditional IRA or 403b funds to a Roth while tax rates are still low.
• Be strategic with Social Security claiming to maximize benefits and reduce taxable income.

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:

• Account for taxes that could take a significant portion of your income.
• Prepare for rising healthcare costs.
• Plan for inflation to protect your buying power.
• Ensure your spouse or family is financially secure through estate planning.
• Have a strategy to deal with possible tax increases that could reduce your take-home income.

PERS 2 makes retirement easier, but planning ensures you keep more of your money, avoid financial surprises, and retire with peace of mind.