Check out Jeremy’s latest podcast on the Wisconsin Retirement System by listening on “Apple Podcasts” or “Google Podcasts” or read below for 4 Ways To Maximize Your Pension in the Wisconsin Retirement System.
#84 – Pension plans often contribute heavily to your retirement income.
If you’re living in Wisconsin, you might have heard of The Wisconsin Retirement System (WRS), the 9th largest public pension fund in the U.S.
Today, we’ll talk about how you can maximize your retirement benefit with the WRS!
Although the numbers discussed mostly pertain to Wisconsin, the strategies can be applicable to your own pension plan decisions, even if you’re living outside of Wisconsin or part of a private pension system.
In this episode, Jeremy Keil speaks with Dennis Eisenberg of Eisenberg & Associates, who is a Wisconsin pension plan consultant. Dennis explains what the WRS benefits are all about and how it can benefit a state employee.
- How to tackle the risk of “outliving” your retirement savings
- Caveats concerning accelerated retirement benefits
- How delaying your pension by only two years can earn you thousands of dollars every year
- Alternative plans worth looking into before contributing to your 403(b) accounts
- And more
Before we get started its helpful to get a little background into WRS benefits. There are many benefits beyond your retirement benefit. Since we’ll be focusing on the public employee retirement benefit in this article, we’d encourage you to visit the Employee Trust Fund to learn more about things like health insurance and life insurance.
The Wisconsin Retirement Fund is paid for through a required contribution split between the employer contribution and the employee contribution.
The Employee Trust Fund handles the administration, and the State of Wisconsin Investment Board invests the money on behalf of plan participants.
Be proud of being a WRS participating employee – as the Wisconsin retirement fund is one of the few public pension funds that is fully funded.
The following is general information for state workers about how to get the most from the retirement savings benefits offered by their WRS employer. We encourage you to speak with your human resource department about your coverage.
Also monitor your annual statement to see how much creditable service you have. Your WRS statement (usually received in May) will show you the different types of WRS service you have, as well as how much money you have invested into the Core Fund and the Variable Trust Fund.
4 Ways to Maximize Your Pension in the Wisconsin Retirement System
1) Maximizing the Long-Term Payout for Women
Longevity is a serious issue in retirement. Having a system like the WRS manage your money and providing consistent payments for the rest of your life can be a blessing for retirees.
When it comes to longevity, on average, women tend to live longer than men.
Having said that, most active employees in the Wisconsin Retirement System are teachers, who are mostly female (approximately 70%). However, the payouts are the same for all genders.
With a greater life expectancy and an equal payout, the monthly annuity for females can be more valuable – mathematically speaking. After all, it’s the same dollar amount, but you’re likely receiving it for more years.
This means that if you’re a couple, you can maximize your total annuity value by maximizing the long-term payout of the wife, even if it requires waiting on the pension for a few years (discussed more later).
2) Beware of Accelerated Benefits
Oftentimes, you have the option of increasing your retirement benefits through age 62 by reducing your future payouts.
The theory is that you’ll be getting Social Security at 62 so in order to get a level income when retiring before 62 you would get more from the WRS benefits until 62.
Once you turn 62, you would get less from the Wisconsin Retirement Fund and be able to start Social Security. The total amount before and after age 62 should be roughly the same.
It sounds nice, but Dennis believes accelerated programs are rarely beneficial for retirees. Dennis Eisenberg suggests that unless you have a health problem which severely reduces your life expectancy, don’t compromise on your future payouts.
Let’s look at an example to understand the effects of accelerated programs better.
You might choose to accelerate your pension benefit, and have it increased by 30% at age 59 for three years until you turn 62. Your pension might increase from $1,000 to $1,300.
How are you paying for this benefit? By having a lower pension for the rest of your life! You might only receive $800-$900 after 62.
To determine the amount by which your future pension is reduced, the WRS uses a discount rate of 5%. In reality, the current market conditions point to only a 3% rate of return. In other words, you’re giving up the opportunity to base your long-term pension numbers by 5% every year, which is 2% more than the current market rate!
The WRS also adjusts pension payouts to hopefully account for inflation. So, if you take your pension early, your long-term pension numbers will be adjusted by less. A pension adjustment on a lower number is a lower number!
Taking the accelerated benefits really encourages you to start your Social Security at 62, as well. You feel like you ‘have to’ take Social Security because you’ve lost out on some monthly income. You don’t want to go back to full time employment, so you start your Social Security benefits before it’s likely the optimal time to do so.
If you want to maximize the value of your pension over your entire retirement, beware of accelerated benefits.
3) Two Years That Are Worth Waiting
The Wisconsin Retirement System is premised on the individual having worked for 30 years and reaching age 57-65. If you’ve worked fewer years than that, your pension payout will be discounted, and you’ll receive less money.
This is a common challenge for women especially, who might spend a lot of their working years on childbirth and childrearing.
If you wish to retire at the minimum early as 55, know that the pay cut you take for an early pension is different every year.
Here, the magic number to highlight is 57. The discount applied on pushing the pension from age 55 to 57 is huge – a lot more compared to moving it from age 57 or later. So, when you hit 55, consider waiting on your pension for only two more years to significantly improve your pension payout.
Dennis has estimated that between getting 2 extra years of creditable service and getting less of a pay cut (or none at all), the typical WRS participating employee could see their pension grow by 25%!
These two years can make a difference of thousands of dollars every year!
Remember, working just two extra years to minimize the actuarial discount and can be well worth it for the rest of your life.
4) WEA Tax Sheltered Annuities, Wisconsin Deferred Compensation Plans and After-Tax Pension contributions
Public Employees have the opportunity to make an ongoing contribution into a 403(b). This allows you to contribute to your retirement savings directly through a payroll deduction. Many state employees, especially teachers are targeted by financial advisors to contribute to a private 403(b) account.
The 403(b) is sometimes knows as a tax-sheltered annuity (TSA), so you might here people refer to that.
Another option is the 457 plan, otherwise known as Deferred Compensation – it has a little more flexibility than the 401(k) offered by private employers, but the concept is the same: save money for your retirement!
Before contributing further to your financial advisor’s 403(b) account, consider putting money into the alternative plans offered as employee benefits.
The two main state employee and teacher retirement plans are the WEA tax-sheltered annuities and Wisconsin Deferred Compensation Plans, which don’t carry commissions like most 403(b) annuity contracts sold by financial advisors.
And don’t forget about additional contributions into your WRS account!
These plans generally have lower fees compared to external money managers and fiduciarily obligated oversight. Plus, you could have the benefit of the State of Wisconsin Investment Board managing your money by contributing additional amounts out of your paycheck into your WRS pension.
These options can be a lot cheaper and more valuable than perhaps contributing directly to 403(b)s or using external financial advisors. For more information, check out:
- 403(B) & IRA Investment Funds from WEA Member Benefits
- The 403(b) offered by WEA Trust has been nationally recognized by Forbes Magazine and the LA Times as a low cost, soundly managed retirement savings option for Wisconsin public school employees.
- Please compare the investment options you could get here to the ones offered by your financial advisor. Pay special attention to the fees, as well as the interest rate offered in the fixed interest accounts.
In 2022 the Prudential Guaranteed Investment account through WEA Trust offers a 2.40% yield!
- Wisconsin Deferred Compensation Program
- Wisconsin Deferred Comp is an optional retirement savings plan for state employees, university employees and some local government and school district employees (if their employer allows it – check with your human resource department).
- The WDC Program fees are quite low and because of its large size the fees on the investment funds available within the plan are below average as well.
- The biggest advantage of the 457 Deferred Compensation program is that you can take money out, after your retirement, without the 10% penalty. This is especially huge for protective services employees who can retire at 50. The 403(b) that might get sold to you requires you keep the money there until age 55!
- Additional Contributions into your WRS account
- If you are an active WRS participating employee you could make voluntary after-tax employee contributions into your WRS account.
- You could establish a payroll deduction through your human resource department, or even make an additional contribution online directly to the Employee Trust Fund (ETF).
- You begin to earn interest starting on the January 1 after your contribution is received by ETF and your contribution will be put either into the core fund or split between the core fund and variable (if that’s how you’ve already elected your employee contribution to be split).
- When you retire, you could ask for a lump sum of all your contributions and its earnings to be paid out to you (or rolled over to an IRA),
- or set up a monthly payout between 2 years and 15 years (which is currently guaranteed at a 5% interest rate!),
- or have the additional contributions in your WRS account applied to increasing your lifetime retirement benefit through a single life annuity, or joint and survivorship annuity.
Do you want to learn more about pension planning? Check out the resources below!
If you have any questions, feel free to contact us or our guest Dennis Eisenberg using the contact information provided below!
- Teachers Retirement Transition Secrets Revealed with Jeremy Keil CFP
- Free Retirement Planning Video Course: 5stepretirementplan.com
- Retirement Checklist (Wisconsin Department of Employee Trust Funds)
- Your Benefit Handbook (Wisconsin Department of Employee Trust Funds)
- Calculating Your Retirement Benefits (Wisconsin Department of Employee Trust Funds)
- Wisconsin Deferred Compensation Program
- Additional Contributions (Wisconsin Department of Employee Trust Funds)
- Retirement Planning (State of Wisconsin Investment Board)
- 403(B) & IRA Investment Fund Comparisons (WEA Member Benefits)
- The SWIB Podcast
- 3 Things You Should Know Before Choosing A Financial Advisor
- 6 Questions Retirees Aren’t Asking But Should Be
- Subscribe to Retirement Revealed on Google Podcasts
- Subscribe to Retirement Revealed on Apple Podcasts
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- Book a call with Jeremy
About Our Guest:
Dennis G Eisenberg, Eisenberg & Associates LLC, has worked for education associations and:
Is focused on pension and group insurance issues including monitoring the Minnesota and the Wisconsin Retirement Systems (WRS). He has acted as a negotiator and arbitration specialist
and had executive responsibilities within the WEA Tax Sheltered Annuity (TSA) plan he also chaired a defined contribution pension committee for 20 years.
Dennis currently provides financial education for members and staff of regional teacher organizations. He consults and lecturers on pension plans and group insurance issues for the National Staff Union and their affiliates.
Results and figures presented within the above links are hypothetical, unaudited, and are intended for illustrative purposes only.
Keil Financial Partners assumes no liability, or responsibility for any errors, omissions, or other issues with the links and their respective contents. This includes both the website content and any potential bugs, viruses, or other technical threats.
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Keil Financial Partners does not provide any tax advice. No information or results from the links should be interpreted as tax advice. Please seek guidance from a qualified tax professional for any and all tax-related matters.
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The content and information provided through the links should not be interpreted as being investment advice or a recommendation of suitability for any particular security, portfolio of securities, transaction, or investment strategy, or related decision. Please seek assistance from a qualified investment professional for any and all investment matters.
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