Understanding Your Retirement Investment Options

Maximizing Your Investment Strategy as a Washington State Employee

Your investment strategy plays a critical role in determining whether you thrive or struggle in retirement. As a Washington State employee, you have access to unique investment options that can shape your financial future. Making the right choices early on will set you up for long-term success.

One of the most important financial decisions you will make as a state employee happens within your first 90 days of employment—choosing between Plan 2 and Plan 3 of the Washington State retirement system. This decision is permanent, so taking the time to understand your options is crucial.

Choosing Between Plan 2 and Plan 3: Your First Retirement Decision

Who Needs to Choose?

Not every state employee gets a choice. If you work in law enforcement, firefighting (LEOFF 2), or other specific roles, your pension plan is already decided for you. However, for those working in school districts and various state agencies, you may have the option to pick between Plan 2 and Plan 3.

The Importance of Making an Informed Decision

If you fail to choose within the first 90 days, you will be automatically placed into Plan 2, and this decision cannot be changed later. This default placement might not be the best fit for your financial goals, so you must take the time to understand the differences.

Plan 2 vs. Plan 3: Key Differences

FeaturePlan 2Plan 3Pension StructureDefined benefit planHybrid (Defined benefit + Defined contribution)Employee ContributionsSet percentage of salaryYou choose from six contribution options (e.g., 5%, 10%)Investment ControlNo control (state manages investments)You choose investments for the defined contribution portionRetirement IncomeFixed pension formulaCombination of pension and self-directed investments

For those who want guaranteed income in retirement, Plan 2 is a solid choice. If you prefer more flexibility and control over your investments, Plan 3 could be better.

Watch this video to learn more about Plan 2 vs. Plan 3.

The Deferred Compensation Program (DCP) and 403(b) Options

Once you've chosen your pension plan, your next major investment decision is whether to participate in the Deferred Compensation Program (DCP) or a 403(b) retirement plan. These plans allow you to save additional money for retirement and build wealth beyond your pension.

DCP vs. 403(b): Understanding the Differences

• DCP (Deferred Compensation Program): A 457(b) plan designed specifically for public employees in Washington. Offers pre-tax and Roth (after-tax) contributions.
• 403(b) Plans: Similar to a 401(k) but for public school and non-profit employees. Some employers match contributions, making them a valuable option.

Why You Shouldn’t Rely Solely on Your Pension

While your pension provides a guaranteed income, it may not be enough to cover vacations, medical expenses, or unexpected costs. Investing in DCP or a 403(b) plan ensures that you have additional savings to support a comfortable lifestyle in retirement.

Pre-Tax vs. Roth: Which Is Better?

• Pre-Tax Contributions: Reduce your taxable income today but require you to pay taxes on withdrawals in retirement.
• Roth Contributions: You pay taxes upfront, but your withdrawals (including gains) are tax-free in retirement.

For many state employees, a mix of both pre-tax and Roth savings is a smart strategy.

Roth IRAs: An Essential Piece of the Puzzle

A Roth IRA is an individual retirement account that offers tax-free growth. Unlike DCP and 403(b) plans, which are funded through payroll deductions, Roth IRAs are funded with money from your bank account.

Why a Roth IRA?

• No RMDs (Required Minimum Distributions), unlike traditional IRAs and 401(k)s.
• Tax-free withdrawals in retirement.
• Flexible contribution schedule—fund it monthly or in a lump sum.

2024 Contribution Limits:

• Under 50: $7,000 per year
• 50 and older: $8,000 per year

A Roth IRA can be a powerful supplement to your pension and employer-sponsored plans.

The Importance of Asset Allocation and Diversification

Choosing the right investments within your retirement accounts is just as important as selecting the right accounts themselves.

Understanding Mutual Funds and ETFs

Most Washington State employees invest in either mutual funds or exchange-traded funds (ETFs). Within Plan 3 and DCP, investment options include:

• Target-date funds (automatically adjust based on retirement year)
• Index funds (track the S&P 500 or total stock market)
• Bond funds (lower risk, lower returns)

A well-diversified portfolio will help reduce risk and improve long-term returns.

Three Common Investment Mistakes to Avoid

1. Relying Too Much on Your Pension – Your pension is a great foundation, but it’s not enough for financial freedom.
2. Being Too Conservative – If you’re too risk-averse, inflation can erode your purchasing power over time.
3. Failing to Adjust Investments as Retirement Approaches – As you get closer to retirement, ensure that your investments align with your income needs and risk tolerance.

FAQs

1. Can I switch between Plan 2 and Plan 3 later?

No. Once you are enrolled in a plan, you cannot switch. That’s why making an informed decision within your first 90 days is crucial.

2. Should I choose pre-tax or Roth contributions?

It depends on your tax situation. If you expect to be in a higher tax bracket in retirement, Roth may be better. If you expect to be in a lower tax bracket, pre-tax contributions might make more sense.

3. How much should I save outside of my pension?

A good rule of thumb is to save at least 15% of your salary, including contributions to DCP, 403(b), and Roth IRAs.

4. What happens if I don’t choose a pension plan?

You will be automatically enrolled in Plan 2, and this decision cannot be changed later.

5. Can I contribute to both DCP and a 403(b)?

Yes! As long as you stay within IRS limits, you can maximize contributions to both accounts.

P.S. Join our free community and gain exclusive access to expert financial insights, personalized tools, and step-by-step guidance tailored for Washington State employees. Whether you're just starting out or nearing retirement, our community offers the resources you need to confidently plan your financial future. Connect with like-minded individuals, ask questions, and stay informed about the latest strategies to maximize your retirement benefits. Start your journey today and take control of your financial goals—it's completely free!

Join our free community to unlock essential tools and expert insights for Washington State employees. Get started today and take control of your financial future!

Ready to start taking control of your future? Schedule a meeting with us here.

Get Personalized Investment Advice on your TRS 3 & DCP Plans: Click here.