This old grizz could use a comfortable retirement. Fortunately, the WRS pension has what she needs. Photo by 🇸🇮 Janko Ferlič on Unsplash
The WRS Public Employee Pension Plan serves more than 450 employers across the state “including state agencies, school districts, counties, cities and towns and other government organizations.” By Wyoming standards, it’s a big pension.
I’ve had the pleasure of helping several employees navigate some of the ins and outs of this pension plan, so it felt timely to do an overview of how the plan works, giving detailed focus to the benefit areas that have carried the most importance for my clients. The complete WRS pension handbook can be found at retirement.wyo.gov in the “Pension Handbooks” subsection under “Members.”
In future posts I’ll help readers consider the pros and cons of certain WRS pension benefit strategies, and how to consider WRS pension benefits as a part of their larger retirement picture, factoring in Social Security benefits and retirement accounts, like 457 plans.
WHAT IS A PENSION?
It’s important to first define what a defined benefit pension plan is, and what it’s not. Pensions are sometimes referred to as defined benefit plans. This means the pension plan sets certain terms and defines what the benefit will be for the participant (and possibly his or her beneficiary) if those terms are met, or what the benefit will be if they are not met.
Example: Joe has worked in a state government office his entire career. He’s a participant in their pension plan, which provides a lifetime benefit upon his retirement by taking his highest 12 months of continuous salary times his total years of service, times a 3% multiplier. If Joe’s highest 12 months of salary was $80,000 and his total years of service were 25, his estimated annual benefit would be $80,000 * 25 * 0.03 = $60,000 or $5,000 per month.
Contrast this defined benefit plan with a defined contribution plan, like 401(k)s or 457s. Defined contribution plans come with no benefit guarantee, but rather specify the employer contribution amount to the plan, usually in the form of a match or profit share. The employee also selects the amount they would like to contribute to the plan.
HOW WRS CONTRIBUTIONS WORK
Your WRS define benefit pension plan has employer and employee contributions made to the plan. In every case I’ve seen so far, the employer actually makes the employee’s required contribution to the WRS plan as well as their own. The funds are then invested to grow over time.
(Important Note: This payment of the employer and employee contributions all made by the employer is a huge benefit to participants. In the 401k world, it will be comparable to your employer saying, “We know you’ve been contributing to your retirement to earn our company match, but from now on we’ll make your contribution for you, including our own, and you don’t need to contribute anything.”)
YOUR WRS BENEFIT AMOUNT
As with most pension plans, your WRS benefit is calculated using a predetermined formula. The WRS plan has two tiers of service for determining your benefit: Tier 1 and Tier 2. Tier 1 benefits are for employees who started their service prior to September 1, 2012, while Tier 2 benefits are for employees who started after this date.
Tier 2 Benefits
The math is simpler for Tier 2 benefits, so let’s start there. Tier 2 benefits are calculated by multiplying your highest 60 months of continuous salary, times all years of service, times a 2% multiplier. Tier 2 employees are eligible for unreduced benefits as long as they reach age 65 or the Rule of 85 (explained later).
Example: Karen is a Tier 2 employee and has worked for a Wyoming school district for 28 years. She’s coming up on her 65th birthday and is considering retirement. Her highest 60 months of continuous salary is $65,000. Karen’s estimated annual benefit is $65,000 * 28 * 0.02 = $36,400 or $3,033 per month.
Tier 1 Benefits
Tier 1 benefits are similar with a few key differences:
The multiplier is higher
The continuous salary is only 36 months in length rather than 60
The multiplier actually increases the higher your years of service
Unreduced benefits start at age 60, rather than 65.
(Important Note: Most WRS members I’ve worked with have a gradual salary increase year after year. As a result, your salary 60 months ago could be quite a bit smaller than it is today. This is a benefit of the shorter Tier 1 continuous salary span of 36 months. There are fewer months where your salary is taken into account, so those lower salary years are ignored, increasing your benefit overall, relatively speaking.)
Below are how the multipliers change based on years of service:
The multiplier is 2.125% for the first 15 years of service
The multiplier increases to 2.25% above 15 years of service
Example: Susan is a Tier 1 employee and has worked for 25 continuous years. She’s 60 years old. Her highest 36 months of continuous salary is $60,000. Susan’s estimated annual benefit is ($60,000 * 15 * 0.02125) + ($60,000 * 10 * 0.0225) = $32,625 or $2,718 per month.
(Important Note: Notice in these Tier 2 and Tier 1 examples that even though Karen worked 5 years longer than Susan and averaged a higher salary, Susan’s monthly benefit was only about $300 less than Karen’s, due to the advantage of Susan being Tier 1. )
RETIREMENT ELIGIBILITY
As stated earlier, under Tier 1 you’re eligible for your full pension benefit once you’ve reached age 60, while under Tier 2 you’re fully eligible at age 65. By not waiting until age 60 or 65, you will be subject to a reduced retirement benefit of 5% for each year you’re below age 60 for Tier 1 and age 65 for Tier 2. Early retirees beware!
However, full eligibility can also be reached under the Rule of 85 which is determined by adding your years of service plus your age. In this case, it’s possible to receive an unreduced pension benefit even before the age of 60 or 65 if you’ve worked long enough and you’re old enough.
Example: Ruth is a Tier 1 employee who started working for her employer at age 22. She’s now 50. Ruth has worked 28 years for her employer which means in 3.5 more years she’ll reach the Rule of 85. This means Ruth will be 53 ½ and eligible for full retirement, almost 7 years ahead of the typical age of 60 for most Tier 1 employees!
(Important Note: When calculating how far you are from the Rule of 85, remember that one year of additional work has a “double benefit” toward the Rule of 85. By Ruth working one more year her age is now 51, plus she has 29 years work experience.)
APPLYING FOR RETIREMENT
Once retirement is in your sights, you need to get serious about which benefit option is right for you. This can be fairly complicated, as there are options for just you, you and a spouse, you and another beneficiary (possibly including a non-spouse), as well as pop-up provisions and term certain benefits.
I won’t go into all the options (as a reminder, the complete guide can be found at retirement.wyo.gov), but I’ll focus my time on three options that get the most attention.
Option 1: Single Lifetime Benefit with Beneficiary, AKA the “I’m Not Worried About My Spouse, Just Give Me More Cash” Option
This option is tempting initially, until you realize there’s a big difference between a “beneficiary” and a “joint survivor” (Options 2 and 3). Under Option 1, the monthly benefit is for you, the worker, alone. When you die, your designated beneficiary receives the lump sum of any remaining funds in your account. This is a very important distinction, and fortunately the WRS handbook explains that “Typically, a retiree draws all the funds from his or her account within three to five years of retiring, after which the retiree is paid with WRS investment earnings. Therefore, it is rare a lump sum payment is paid at a retiree’s death.”
The primary benefit to Option 1 (and its cousin Option 5) is they’re the highest paying benefit options. While they don’t come with survivor benefits, this may not be important to some retirees, such as those who have a spouse already receiving his or her own pension. In this case a couple may prioritize the higher monthly cash flow of Option 1 (typically $100 to $150 per month compared to Options 2 and 3).
Option 2: 100% Joint and Survivor Benefit, AKA the “I Want My Spouse Better Off When I’m Dead” Option
The Option 2 benefit is lower than Option 1 and 5, but it carries the incredible benefit of your listed survivor receiving your same benefit if you precede them in death. I call this the “Better Off Dead” option, because in most cases household spending decreases once a spouse passes away (one less person to feed, pay for healthcare, insure, etc); however, this option sets up the surviving spouse to maintain the same income level even though they’re the only one left at home. How generous!
Option 3: 50% Joint and Survivor Benefit, AKA The “Maintain the Same Lifestyle” Option
Option 3 is set up to be reduced by half if the member dies before the designated survivor. The Option 3 monthly payout is naturally higher than option 2, since WRS is on the hook for only half of the member’s benefit if they die first. This approach generally maintains a household's spending levels relative to the number of persons in it: the household members were reduced by half due to death, so the monthly benefit was reduced by half.
The COLA Feature
The WRS pension’s COLA feature adds another wrinkle to your benefit decision. COLA stands for “Cost of Living Adjustment.” It’s an annual guaranteed increase to your benefit starting on the second anniversary of starting your benefit. You can choose no COLA increase, or a 1%, 2%, or 3% COLA increase, and the COLA option cannot be changed once you start your benefit. This adjustment is beneficial because over time inflation lowers the purchasing power of your dollars. An annual COLA increase helps your dollars keep up.
Example: Carl is in his second year of full WRS retirement. His monthly benefit is $3,000 per month and he elected a 2% COLA. In Year 3, his benefit will increase to $3,060; in Year 4 his benefit will increase to $3,121.
(Important Note: Notice the COLA increases are compounded, meaning in Year 4 Carl’s 2% increase was based on his previously increased benefit of $3,060. This compounding effect can have a significant impact on your benefit over a 25+ year retirement.)
I hope this has been a helpful overview of the Wyoming Retirement System pension. Overall this is an excellent plan, with great benefits including a strong multiplier (especially for Tier 1 employees) and reasonable retirement ages of 60 and 65. The Rule of 85 presents a nice retirement package for eligible employees who have given most of their professional lives to serving Wyoming communities.
Because it’s a great plan, it’s worth doing the work to make sure you get the benefit that will work best for you, and being strategic about when to retire in the first place!