If DCPS got evaluated on how well they explain their pension plan, I’m pretty sure they’d score Ineffective.
If you’ve tried to learn, I bet you found it hard to get reliable answers. Onboarding is a whirlwind, and who do you even contact? HR? Your union? The Retirement Board? Hold times are long, paperwork is confusing, and what questions are you even supposed to ask?
Most people give up after a while and decide to worry about it later. You’ve got 1,000 other things on your to-do list anyway.
After years working with DC educators on their finances, I put together the FAQ I wish somebody wrote for me when I got started. It includes the basics and a few case studies to help you think about handling your own pension.
If you have questions or suggestions for information to add, let me know at andrew@katzmosesfinancial.com. To be clear, none of this is individual financial advice. Seek out the help of a professional if you need it.
What is the DCPS pension? How do I know if I’m in it?
The DC Teacher Pension is a retirement plan DCPS and some charter educators contribute to in exchange for income in retirement.
If you’re contributing, you’ll see it as a line item on the left side of your pay stub about halfway down. It looks like this (the Teacher 8% thing):
What will my pension benefit be?
Only the DC Retirement Board can do the calculation, but for most folks a good estimate is:
# of years of service * (Highest average salary over 3 years) * 2%
For example, if you taught in DCPS for 30 years, making $116k salary at your peak, that’s:
30 * $116,000 * 2% = $69,600 annual pension benefit.
(Note: other compensation like summer school and IMPACT bonuses don’t count toward your pension benefit.)
When can I start getting my pension?
30 years of service – 55 years old
20 years of service – 60 years old
5 years of service – 62 years old
Less than 5 – you’re not eligible for a pension
Is the DCPS pension a good plan?
In my opinion and to dramatically oversimplify: yes. It’s a pretty good plan. It’s especially good for people who work in the system for 15 or 20+ years into their 50s.
In a world where pensions are under attack from privatizing interests and becoming less common, having a good pension plan is valuable.
There are downsides, however. The DC Teacher Pension is not particularly good for people who don’t work in the system very long, especially those who stay less than 5 years.
Does the money I contribute earn interest?
No. Unlike other systems, your contributions to the pension don’t earn interest. In Maryland for example, pension contributions earn 5% interest per year compared to 0% in DC.
This makes it especially important to have a plan for what to do with your pension when you leave DCPS. I repeat: YOU NEED A PLAN FOR WHAT TO DO WITH YOUR PENSION WHEN YOU LEAVE DCPS.
Is the money I contribute to the pension mine?
Yes. This is a huge misconception about the pension. People contribute for years, paying tens of thousands of dollars and think it’s essentially a fee they pay that evaporates into thin air.
This misconception is especially damaging if you work in DCPS for less than five years and forget about the money. You have thousands of dollars losing value to inflation when it should be growing for your retirement.
How do I know how much is in there?
To find out the precise dollar amount you’ve contributed, you have to review your pension statements or submit a Pension Balance Request Form to the DC Retirement Board.
I’ve submitted many Balance Request Forms over the years and have gotten…a handful of them back. You can submit one and hope for a response, or get pretty close with these calculations:
Rough estimate:
- Estimate your average salary
- Multiply that by the number of years you worked in DCPS
- Multiply that by 8%
For example, if you earned about $70k on average and taught for 4 years. $70k * 4 * 8% = $22,400.
For a more precise estimate: Go to DC gov Salaries and calculate the average of your salaries. Multiply that number by the number of years you worked * 8%.
What should I do with my pension if I leave DCPS?
This might be the most important question covered in this FAQ.
It’s impossible to give individual advice about what’s right for you, so let’s go through a few example scenarios that may help you come up with your own plan.
Ashley, 26 years old, taught in DCPS for 3 years and left to go to grad school full time.
Average Salary: $58k
Estimated Pension Balance: $14k
First key point here is Ashley is NOT entitled to a pension payment when she retires. Even if she waits until 62, she cannot collect any benefit because she has less than 5 years of service.
The first thing I would ask Ashley is: ‘what are the odds you come back and teach in DCPS?’
If she plans to come back to DCPS after graduate school, it’s a pretty easy answer. She should do nothing and leave the money in the pension. If she takes it out, she’ll need to start over at 0 years when she returns or transfer the money back with interest.
If Ashley says, ‘I’m moving far away from DC and never coming back’ it’s also easy. She should transfer her pension balance to an IRA and invest it. If she gets average investment returns, she’ll have ~$270k at age 62 compared to ~$14k if she does nothing. (note: if you want to play with your own scenarios, use a compound interest calculator)
If Ashley ignores her pension, she could make a quarter million dollar mistake.
Maybe Ashley says, ‘I’m not sure yet. I’ll either come back to DCPS after grad school or move closer to my spouse’s family on the west coast’. In this case, she might decide to wait until her plans are more clear, then revisit the pension question in a year or two.
One last note on Ashley: she could choose to have all of her contributions refunded to her directly, but I would almost never recommend doing that. She’d lose nearly half of it to taxes and penalties, and give up hundreds of thousands in the future for ~$8k today. A direct refund is an option for the following cases too, but I won’t include it as an option because I think it’s a bad idea for all of them.
Kareem, 30 years old, taught in DCPS for 6 years, left to teach in New York City and will not return to DCPS.
High 3 yr Average Salary: $88k
Pension Balance: $39,360
Unlike Ashley, Kareem is entitled to a pension benefit. If he does nothing and waits until 62, he can collect ~$10,560/yr in pension benefits for life.
It’s important to note Kareem’s pension benefit will not increase with inflation between now and retirement. The $10,560 he can collect in 32 years will be worth about as much as ~$4,100 is today.
So what should he do?
Option 1: Do nothing. Stay in the pension and collect $10,560/yr when he turns 62 for the rest of his life
Option 2: Transfer his $39,360 and invest it in an IRA.
(note: the New York pension system doesn’t allow transfers of service from other districts. Moving the $ to the New York system is not an option)
If he chooses option 2 and transfers his money, Kareem gives up his pension benefit and loses the assurance of annual income in retirement.
On the other hand, he will have more control and flexibility. He can invest the way he wants, spend more or less of it depending on the year, and pass along what he doesn’t spend as an inheritance.
If he chooses to leave the pension and gets average investment returns, he’ll have ~$550k by the time he turns 62.
With $550k in an IRA, he can pay himself much more than $10,560 per year. He can also use more of it while he’s younger to take big vacations, help his kids out, or do whatever else he wants, maybe passing some on to family when he dies.
Even if he got 5% returns (well below average), he’d still have around $200k in retirement and all the flexibility that comes with it.
On top of those considerations, Kareem’s going to be in the New York pension system and earning a payout from NY plus social security. He is on track to have a solid chunk of reliable income in retirement.
Even though he’d give up his DC pension, I’d likely recommend option 2 to Kareem.
Kenneth, 34, worked a CSO role in DCPS for 9 years and left to work for a private company. Does not intend to return to DCPS.
High 3 Yr Average Salary: $96k
Estimated Pension Balance: $60,480
Welcome to the messy middle!
Kenneth is on track for a pension payout of $17,280 when he turns 62 (~$8k/yr in today’s dollars).
He could decide to leave the pension, roll it over to an IRA, and invest the money. With average returns he’d end up with ~$600k in his IRA at 62.
So should Kenneth take his ~$17k/yr pension when he turns 62 or invest the money now in hopes he’ll have much more in retirement?
If Kenneth feels comfortable and confident with investing, he might feel great about leaving the pension and investing the money himself.
But investing returns are not guaranteed. What if he gets below average returns and ends up with $250k instead? Then he probably would be much better off playing it safe with the pension.
In this situation, there is no ‘right’ answer. Kenneth needs to consider the pros and cons of each option and decide what’s best for him.
Maybe he’s making a higher salary and saving plenty at his new job. He can stick with the security and confidence of the pension plus social security, and build up more savings and investments on his own.
On the other hand, he might prefer the added flexibility and potential better investment returns of leaving the pension. This would have the added benefit of simplifying his finances so more accounts are in one place, and he wouldn’t have to deal with DCPS or DCRB again.
It’s up to him to weigh the pros and cons and decide. What would you do?
Denise, 45 years old, taught and worked as an administrator in DCPS for 16 years before leaving to do freelance work on her own.
High 3 Yr Average salary: $160k
Pension Balance: $133k
Denise’s estimated pension payout at 62 is $51,200/yr (~$31k in today’s dollars).
If she rolls her pension to an IRA with average returns, she’d have ~$540k at 62.
Denise could decide she REALLY wants the freedom and flexibility with her $133k and roll it out. Some reasons Denise might decide to leave the pension:
- She has health issues and doesn’t expect to live a long enough life to get many pension payments
- She anticipates needing the money sooner than retirement and can’t wait until 62
- She doesn’t expect to need the pension payout and wants to invest the money to pass on to her children
Unless there’s a very compelling reason though, she’s probably best off sticking with the pension. At 45 years old, it will take very good investment returns to replace her pension. If Denise were a bit younger or had worked fewer years in the system, it might be different.
And who knows? She could return to DCPS again at some point, in which case her pension would only get better.
William, 54, worked in various WTU and CSO roles for 30 years
High 3 Yr Average Salary: $105k
Pension Balance: $172k
William could leave the pension and take his $172k lump sum. On the other hand, he could get $61k/yr for life, with cost of living adjustments.
This really isn’t even a question. Stay in the pension, Mr. William. You’ve earned it.
I’ve left and decided a pension rollover is the right move. How do I do it?
First, understand it’s going to be a pain and take a long time. 3 months minimum, probably more. Here are the steps:
- Make sure you have an IRA open where you want to transfer the funds. If you don’t have one yet, I recommend looking at Charles Schwab, Fidelity, or Vanguard.
- Complete the Application for Refund of Contributions form.
- Page 1 is all your personal information
- Section III you will likely select the second option: ‘I elect a direct rollover…’
- Get a notarized signature on page 5 Section IV
- Contact the company where you opened the IRA and have them complete a Letter of Acceptance. Send them a copy of your completed form to package with this letter and send to the DC Retirement Board. They should help you with this process because you are bringing them business.
- Once it’s been sent in, set a reminder on your calendar for three months. That’s when you’ll need to start contacting DCRB to check the status of your request. It could take multiple follow-ups. Don’t give up.
- If DCRB mails you a check directly for the balance, don’t sign or endorse it. Call your financial institution and ask them where to mail the check. They will deposit it in your account for you.
- Once the money lands in your account, don’t forget the last step! Make sure you invest it according to your plan. If you don’t feel comfortable investing, you can DIY with the help of resources like personal finance books (I recommend I will Teach You To be Rich by Ramit Sethi) or online communities like the 403bwise facebook group. You could also consider hiring a professional to help.
I called DCRB and waited on hold for over an hour. How do I get in touch with them?
I feel your pain. In all fairness, they are under-staffed and managing a lot. In addition to calling, I’ve found success using their online form.
I’ve left and decided staying in the pension is the right move. What do I need to do?
Nothing for now. Submit your retirement application request when the time comes.
Do I get cost of living adjustments in retirement?
Yes. It’ll be based on inflation and won’t exceed 3% per year.
I’m moving from DCPS to a charter school. Can I stay in the pension?
Yes. If you terminate your employment with DCPS and start with a Charter School within 60 days, you can continue with the plan.
You’ll need to submit a Continuation of Participation in the Teachers’ Retirement Plan Form.
Should you continue? It depends, but if you plan to stick around in DCPS and DC Charters a long time it’s probably a good idea.
Should I buy years of service from previous work in another district or a charter?
Another tough question I hate to answer with: ‘it depends’, but it depends. As with most pension questions, it’s a better idea to go all in on the pension when you plan to work a long career in the system.
If you’re in and out of DCPS or only working a short time, it becomes less attractive.
Also to state the obvious: you need money to buy years. If your cash flow is already tight and/or you don’t have money from a previous pension or retirement plan, you might not be able to pay for the years anyway.
The pension is the only place I’m saving. Should I save elsewhere? Where? How much?
YES.
Even if you’re one of the people for whom the pension works wonderfully, you’re probably replacing ~60% of your salary. For most people, that isn’t enough. And remember, if you contribute to the DCPS pension you’re not contributing to social security. Supplementing with additional savings is a great idea and will give you more flexibility in retirement.
I’d start by considering the 457(b) Deferred Compensation Plan run by Mission Square Retirement (you can sign up for this in Peoplesoft in ~5 min). Outside investment accounts like a Roth IRA and taxable investments might also be a good idea. If you need help with this piece, consult with a qualified fiduciary, fee-only investment advisor.
Be very careful with DCPS’ 403(b) offerings run mostly by high-fee insurance companies. For further reading, check out this post on DCPS retirement plans.
I have a question you should add to this FAQ
Cool! Email me at andrew@katzmosesfinancial.com and I’ll try to add it.