Wife returning to work - Wisconsin Retirement System qs

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Wife returning to work - Wisconsin Retirement System qs

Post by Scorpion »

My wife has recently decided to go back to work as a public school teacher. We live in Wisconsin. She has not previously worked in Wisconsin. We have substantial (>$1M) savings accumulated over many years of diligent saving. About 35% of our savings are in retirement accounts. We are in our late 30s. I have a high stress, high compensation job that I sometimes think about retiring early from (maybe in just a few years), so I want to keep that option open. She loves her job and wants to work until normal retirement age. We are presently invested 100% in stocks and real estate investments (no real fixed income or cash - I know that many of you may not approve of this, but that may be a topic for another post). We are not risk-averse but instead are risk neutral; we did not sell at all during the 2008-2009 downturn and instead bought stocks with every penny we possibly could, both all the way down and all the way up. If I did retire early, we would likely try and live on her salary and draw on savings as little as possible, although I would also think we would shift a substantial portion of our assets out of stocks to protect against a market downturn, given that we would no longer have my salary.

1. We need to decide what to do about her pension election and her retirement savings generally. Her employer deducts 7% of her salary to deposit into the Wisconsin Retirement System, and the employer matches that. In the Wisconsin Retirement system, you can elect for the money to go into either the (A) 100% Core option, where 50% of the assets are in stocks and the other 50% are a mix of alternative investments, fixed income, etc. or (b) 50% in Core as above, but the other 50% in a Variable option that is comprised of 100% stocks. I understand that the Variable option was originally created years ago when the Core option was 100% fixed income, but the Variable option has been retained as a choice even after the Core option was modernized to be fully diversified. I understand that most employees do not select the Variable option. As of the most recent annual report, the variable option had $7.1 billion in assets, while the Core option had $86 billion in assets. From 1986-2013, the Core option averaged a 9.8% return, and the Variable option averaged an 11.2% return (with much greater volatility).

I am not sure what other information I should try and gather to make this decision on whether to elect the Variable option. It would normally seem to be a no-brainer to choose Variable given my risk appetite in exchange for higher returns, but I am just not sure if the extra risk is worth it in this instance. I understand the historical returns are certainly no indication of future returns, but I am just not sure what other information there really is to gather. While I would certainly appreciate any feedback, it would be especially interesting to hear from anyone who has specific experience making this choice with Wisconsin Retirement System.

2. Her work also offers a 403(b) option. One of the choices is Fidelity (no Vanguard, unfortunately), so I assume we would just open an account there and contribute the max $17,500 each year until I retire, investing in Spartan funds. Any reason we should not do that? There are other options for the 403(b) for annuities and for investing through an arm of the union, but none of those seem as attractive. As far as I can tell, Fidelity does not charge big fees in connection with administering a 403(b).

3. The pension contribution and the 403(b) contribution would eat up about half her salary pre-tax, which is good. Apparently there are also options to contribute additional amounts to the pension fund with after-tax dollars. Given that I might want to retire early, there does not seem to be any good reason to do this. We both contribute to a TIRA and do a backdoor conversion to a Roth each year, by the way.

Sorry for the long post - I appreciate any help you can provide.
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by flyingbison »

I'm in the WRS (for 10 years now), and I've stuck with the Core fund, though my partner has the Variable. It really boils down to your own risk tolerance, and how the pension plan fits into your overall retirement savings. Sounds like the WRS will be a relatively small piece of your overall savings, so it probably won't matter much which option you select. One thing to keep in mind, though, is that I believe you can only change your election once. In other words, if you pick the Variable option now, you can change it sometime down the road, but then you're done and you can't change it back again.
Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by Calm Man »

Just for clarification, is this system such that each employee has his/her own account so what you are investing is all your own and does not go into some general fund like most other states where you get an annuity (in whole or part)? If so that's good and then you would just invest it as a part of your overall allocation, right?
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by flyingbison »

Calm Man wrote:Just for clarification, is this system such that each employee has his/her own account so what you are investing is all your own and does not go into some general fund like most other states where you get an annuity (in whole or part)? If so that's good and then you would just invest it as a part of your overall allocation, right?
It's actually a hybrid system. The contributions and investment returns are tracked in individual accounts, but when you retire you will get the higher of either A) an annuity purchased with your accumulated account balance, or b) a traditional pension payment based on a formula of salary level, years of service, age, etc. The formula also accounts for whether or not one invested in the Variable option.
sschullo
Posts: 2839
Joined: Sun Apr 01, 2007 8:25 am
Location: Long Beach, CA
Contact:

Re: Wife returning to work - Wisconsin Retirement System qs

Post by sschullo »

I would go with the fixed pension plan rather than the hybrid. Hybrids are relatively new and carry risks. I am not sure if its the same risks that we would normally carry with the usual equity and bond exposure. I would be interested what others say.

Bottom line, there is nothing wrong with having a guaranteed payout from a pension plan to balance out your entire holdings.

Fidelity Spartan funds would be fine for the 403b.
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by flyingbison »

sschullo wrote:I would go with the fixed pension plan rather than the hybrid. Hybrids are relatively new and carry risks. I am not sure if its the same risks that we would normally carry with the usual equity and bond exposure. I would be interested what others say.
The choice isn't between a fixed pension plan and a hybrid plan - it's between a Core (balanced) fund and a Variable (stock) fund for the employee contribution.
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by Scorpion »

Thanks for the responses so far.

1. I have not seen anyone advocate for putting more after-tax dollars over and above the pension contribution and the 403(b) contribution. Let me know if anyone disagrees with that.

2. Sounds like 403(b) with Fidelity is the way to go.

3. Flyingbison, what was your thinking in terms of not going with the Variable option? Unless you are close to retirement, doesn’t it make sense to take a good amount of equity risk? What was your partner’s thinking in going with the Variable? Is your partner planning to move out of the variable once retirement occurs? One thing I noticed in the 1986-2013 historical data is that the variable option seems to do substantially worse in terms of annuity adjustments once you are in retirement. The annuity very rarely goes down on the Core side, and it often goes up (and, by law, it can never go below your starting annuity). If your annuity started half in Core and half in Variable in 1986, your Core annuity would be 9.4% higher than the Variable at the end of 2013. Also, I do not know how carefully you have looked at this, but it seems like, at any reasonable assumed annual return, say 5%, the money purchase calculation (i.e., this account concept with Core vs. Variable) exceeds the traditional pension payment based on a formula. If I am right about that, it would be pointless to purchase additional years of service based on my wife's prior teaching work in another state, since the benefit would be calc'd on the money purchase account anyway, not the traditional pension formula.
fposte
Posts: 2327
Joined: Mon Sep 02, 2013 1:32 pm

Re: Wife returning to work - Wisconsin Retirement System qs

Post by fposte »

Have you checked to see if there's also a 457b? That would give you even more tax-deferred space.
mjadas
Posts: 4
Joined: Wed Jul 23, 2014 1:45 pm

Re: Wife returning to work - Wisconsin Retirement System qs

Post by mjadas »

Scorpion wrote:Thanks for the responses so far.

1. I have not seen anyone advocate for putting more after-tax dollars over and above the pension contribution and the 403(b) contribution. Let me know if anyone disagrees with that.

2. Sounds like 403(b) with Fidelity is the way to go.

3. Flyingbison, what was your thinking in terms of not going with the Variable option? Unless you are close to retirement, doesn’t it make sense to take a good amount of equity risk? What was your partner’s thinking in going with the Variable? Is your partner planning to move out of the variable once retirement occurs? One thing I noticed in the 1986-2013 historical data is that the variable option seems to do substantially worse in terms of annuity adjustments once you are in retirement. The annuity very rarely goes down on the Core side, and it often goes up (and, by law, it can never go below your starting annuity). If your annuity started half in Core and half in Variable in 1986, your Core annuity would be 9.4% higher than the Variable at the end of 2013. Also, I do not know how carefully you have looked at this, but it seems like, at any reasonable assumed annual return, say 5%, the money purchase calculation (i.e., this account concept with Core vs. Variable) exceeds the traditional pension payment based on a formula. If I am right about that, it would be pointless to purchase additional years of service based on my wife's prior teaching work in another state, since the benefit would be calc'd on the money purchase account anyway, not the traditional pension formula.
I've been in WRS about 21 years. My father had around 35 years when he retired.

1. I've got enough invested there already, so I've invested my additional money elsewhere. Other reasons would be lack of access prior to FRA, and I'm not enamored with the distribution options at retirement.

2. Fidelity was where I went. I echo the suggestion to see if she has access to a 457 like Wisconsin Deferred Compensation (that's what state/UW employees like me have access to). If she has both 403b/457, that's 35k of available deferral space.

3a. The annuity adjustments to variable my father experienced are one thing that scared me off of it. With core, you're ~60/40. With variable you'd be ~80/20. I felt 60/40 was aggressive enough for this part of my retirement plan.

3b. The contribution rate isn't always 7+7% http://etf.wi.gov/employers/wrs_contribution_rates.htm. That coupled with my low starting salary means that the formula benefit is larger for me, even after 21 years. The formula is slightly more generous for years prior to 2000, so that tilts mine a bit as well.
flyingbison
Posts: 1363
Joined: Wed Mar 12, 2014 8:52 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by flyingbison »

Scorpion wrote: 3. Flyingbison, what was your thinking in terms of not going with the Variable option? Unless you are close to retirement, doesn’t it make sense to take a good amount of equity risk? What was your partner’s thinking in going with the Variable? Is your partner planning to move out of the variable once retirement occurs? One thing I noticed in the 1986-2013 historical data is that the variable option seems to do substantially worse in terms of annuity adjustments once you are in retirement. The annuity very rarely goes down on the Core side, and it often goes up (and, by law, it can never go below your starting annuity). If your annuity started half in Core and half in Variable in 1986, your Core annuity would be 9.4% higher than the Variable at the end of 2013. Also, I do not know how carefully you have looked at this, but it seems like, at any reasonable assumed annual return, say 5%, the money purchase calculation (i.e., this account concept with Core vs. Variable) exceeds the traditional pension payment based on a formula. If I am right about that, it would be pointless to purchase additional years of service based on my wife's prior teaching work in another state, since the benefit would be calc'd on the money purchase account anyway, not the traditional pension formula.
The Variable is just too volatile for my taste, particularly as you noted, in the annuity adjustments for retirees. Also, the WRS is only one portion of my retirement savings, so I have more risk in other sources that I have more control over. I think my partner chose the Variable option because she was starting retirement savings relatively late and though she could make up more ground with the Variable fund.
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by Scorpion »

Thanks for all the responses; this was very helpful. The Wisconsin Deferred Compensation 457 plan is not available in all districts, including my wife's as it turns out. I guess I'm leaning towards the Core at this point plus the Fidelity 403(b). I'll check back occasionally in case anyone has further thoughts.
Sconie
Posts: 970
Joined: Sun Feb 07, 2010 9:23 am
Location: Arizona

Re: Wife returning to work - Wisconsin Retirement System qs

Post by Sconie »

Two years ago my wife retired as a WI public school teacher with 34 years of credited service----she was enrolled in the WRS core fund and, FWIW, did just fine.
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan
spencer99
Posts: 486
Joined: Thu Apr 01, 2010 5:17 pm

Re: Wife returning to work - Wisconsin Retirement System qs

Post by spencer99 »

Scorpian,

I'm in WRS and have thought about all this but it's been awhile so this is very general info.

I thought I heard that one can no longer add additional $ to one's retirement account. Is your information current? There's a good WRS website available. At any rate if memory serves when I looked into this at one time there were aspects that struck me as less than optimal, at least as opposed to my 403/457 options.

When I started employment the variable option had been discontinued. Later it was added and we were given the option of changing to 50% variable. I did and after maybe ten years I was behind (WRS provides a running total of variable plus/minus vs. core). I finally got to even last year and made my one-time switch back to core (I'm approaching possible retirement and simply wanted the predictability and stability of the core. I can take more risk in my 403/457 if I want). Naturally I switched out of the variable just before a 30% gain year. :annoyed

A retired friend was in the variable fund (still is) for many years and is much, much ahead of where he'd have been in the core. His yearly pension fluctuates widely, dropping $500 - $700 per month some years but as he says even with those drops it never gets as low as his core base would have been. It helps that he participated in the market gains of the '80s and '90s.

You mentioned the two pay out options - money purchase or formula. WRS always gives the highest outcome and computes your annuity based on that calculation. The friend I mention above received the money purchase benefit (I think because the value of his account was so high). I'm not aware of anyone recently who would not receive a higher annuity through the formula benefit. (Not exactly sure why that is except that individual account growth in the last 20 years or so hasn't been that great and our annuity is a factor of both our individual account balances and the overall WRS account balance.

As you look into this (and you may already know) it's worth investigating how different the WRS is from other state pension funds. With the exception of the guaranteed floor of the original annuity (if you're in core and which pretty quickly becomes meaningless with inflation) there is neither a certain annuity payout or inflation increase. Rather, annuitants share in the risk - their annuity rises and falls with the success/value of the value of the WRS account, albeit with a five year smoothing of losses (not sure about gains).

There was a really informative white paper published within the last two years outlining a private audit of the WRS system. A worthwhile (and comforting) read about the sustainability of the system. I'd guess that's still linked on the WRS website. Governor Walker had commissioned the report to assess whether transitioning to a defined contribution pension plan should be considered.

Summary - for me the more conservative pension option along with SS will be something like my secure liability matching portfolio (loosely put, I do not fully understand the concept). Pays the bills and other investments can handle more risk accordingly.

S
spencer99
Posts: 486
Joined: Thu Apr 01, 2010 5:17 pm

Re: Wife returning to work - Wisconsin Retirement System qs

Post by spencer99 »

I was wrong about the after-tax option. It is permissible. The change I recalled was to limit before tax contributions (other than the usual employer and employee contributions).

Reference:

"If you are a WRS participant who is currently employed with a WRS employer you can make voluntary additional contributions to your WRS account. All active WRS employees are eligible to make voluntary after-tax contributions to the WRS. If you have made voluntary additional contributions you can also use your additional account to buy any creditable service that you are eligible to purchase.

Note: Prior to January 1, 2009, employees of certain educational institutions could make tax-deferred additional contributions to their WRS account under Section 403(b) of the Internal Revenue Code. However, beginning January 1, 2009, the Department of Employee Trust Funds (ETF) can no longer accept tax-deferred additional contributions."

(Above from WRS website)
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Re: Wife returning to work - Wisconsin Retirement System qs

Post by Scorpion »

Thanks for the detailed thoughts, Spencer99. It just doesn't seem worth it to do after-tax contributions. I am thinking we are going to go with the core option, even though it runs counter to all the investing I have done in my life to this point (i.e., taking lots of risk in the hopes of higher returns). I wasn't aware this pension fund is different from others - it is the only one I have looked into.
Post Reply