Simplifying Your Benefits
By Jim Gaskins
In addition to training and study of the various public employee plans, I have worked with over 1,500 individuals employed by different states and universities, including the University of Minnesota, the University of Texas, Virginia Tech, Ohio State University, the University of Wisconsin, and many smaller colleges, community colleges and technical schools. With this experience, I have become quite knowledgeable about the different plans offered, as well as how best to utilize them for a given sit
The retirement plan offered through the University of Wisconsin has multiple features and benefits that should be understood so that participants can utilize and maximize their use of the plan.
What we’ll do here is summarize, in simple terms, how the plan works and even give some possible direction as to how you might best participate in its different aspects.
We’ll also go into detail on the pension, how it works, and how to calculate what your benefit will look like in retirement. In addition, we’ll cover what happens should you leave employment with the State of Wisconsin prior to retirement.
Part One: The WRS (Wisconsin Retirement System) Pension Plan:
The WRS pension works in a very similar fashion to most other state pension plans throughout the country. It is referred to as a “Defined Benefit Plan.” To simplify, this means that you don’t really have to track investments or their balance or anything like that to determine what you’ll have when you retire. Your benefit (what you’ll get out of it in the end) is already known, defined ahead of time, based on a formula.
The Formula:
This is much easier than you think. Here’s how to look at it. Let’s start with the base. For each year you work, you’ll add 1.6% of your salary to what you will receive for life once you retire. So the formula starts with this: 1.6 X the number of years worked.
Let’s say you are 50 years old and have worked at UW for 15 years, and you want to know what your pension will look like if you retire in another 15 years at the age of 65. , meaning you worked a total of 30 years for UW.
You start with the simple part of the formula:
30 years X 1.6 = 48
You will receive 48% of your salary as a pension, for life.
*(However, remember that this can be modified or reduced by early retirement and having a survivorship. See below)
Your “salary” is ultimately determined as the median of the 3 highest years of earnings while you’re working.
Let’s say that number is $75,000 per year.
$75,000 X 48% = $36,000 per year. That’s your pension.
Paid monthly, of course, you’ll receive $3,000 per month.
If you would like to get a more exact determination, there is a calculator available through the Wisconsin Employee Trust Funds website here:
(https://etf.wi.gov/retirement/calculators/wrs-retirement-benefits-calculator)
Survivorship:
- For those who are married, you may choose to have a survivorship on your pension. This survivorship can be 100%, 75%, 50% or even 25%. What does this mean? If you pass away after beginning your pension, your spouse will continue to receive the chosen percentage of benefits for the rest of his or her life.
- In choosing a survivorship, your benefits will be reduced slightly. The amount of decrease depends on the age of you and your spouse. There is a specific chart to make this determination, or you can call WRS directly and they can run the formula. The above calculator allows that information to be put into it and provides an excellent estimate.
Early Retirement
Yes, taking an early retirement can modify/reduce your pension. There is a chart for this as well. The most accurate way to calculate it will be, again, to contact ETF and have them run an estimate for you. The typical standard rule is, though, that you can retire with unreduced benefits at any age after 30 years of service.
Variable Fund
The Wisconsin Retirement System also has the option for you to choose to seek a higher return on your contributions, and thus a higher pension payment in retirement.
To this end, the Variable Fund was established, where you have the option to have 50% of your contributions put into the all-stock account, meaning that the performance of that half of your retirement funds will fluctuate over time.
The idea, of course, is that the market will provide a higher return in the long run versus the very conservative investments of the core pension fund.
However, there is a level of risk involved with this. Most people stick with the core pension fund, but it’s entirely a choice. Here’s a link to the ETF website to discover more about the Variable Fund and its benefits:
Part Two: Optional Retirement Plans
UW Madison also offers additional retirement savings options for employees to set aside extra money for retirement. The optional plans are the 403b and the 457 Deferred Compensation Plan.
*Quick note: the numbers that you see here referring to the plans – 403b, 457b (and also, things like the 401k) – are simply sections of the IRS code that define how they work.
These two plans are somewhat similar but have distinct differences between them. Neither of them will get a match from the university – that is, they’re entirely your own contributions, if you choose to put aside extra savings.
403b: The 403b is a common retirement savings plan with Public Employees and non-profit organizations. It is available as one of the choices for additional retirement savings.
This falls under the category of a retirement savings plan, and therefore has contribution limits in combination with other savings plans. That is to say, you can contribute a grand total of $23,000 (if under age 50) or $30,000 (if over age 50) to all retirement accounts combined.
This limit isn’t an issue for most people. However, for higher-income earners, or those with a spouse who has high income, it can make a difference. If you’re already putting money into, for example, a Roth IRA outside of work, that outside contribution counts toward your total of $23,000. Just be aware of that limit.
The big advantage to the 403 comes with the fact that it can be done pre-tax, or tax-deferred, like a normal retirement account, but you can also contribute to it post-tax, so it becomes a Roth. This means that the money inside of the account has already been taxed, and will not be taxed again, even in retirement, and it’s not subject to Required Minimum Distributions later on.
What does that mean? Well, essentially, any savings that you have done pre-tax will ultimately be required to be taken out (“distributed”), because it’s never been taxed and the IRS wants its tax money. This happens at age 73 currently for most people.
457b: The 457 plan is also another Public Employee plan, but it’s different in that it’s considered Deferred Compensation, rather than a typical retirement savings plan.
This means that there are a couple of major differences with the 457. It does not fall under the age 59½ rule, which states that retirement savings plan withdrawals (with some exceptions) are subject to a 10% penalty if taken before age 59½. This makes the 457 the preferred choice for those who want to retire early, and for those in emergency services positions, who often reach their full retirement eligibility at 55 years of age.
With UW, this can again be done either pre-tax or post-tax. Meaning if you do it post-tax, it will not be taxed upon withdrawal in retirement, and it will not be subject to Required Minimum Distributions rules.
For those in higher income brackets, another advantage to the 457 is that it does not count toward your total contributions in combination with other plans. Theoretically, if you max out your 403b explained above, you can ALSO contribute the same amount ($23,000 per year in 2024 if you’re under 50) to your 457 plan.
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That pretty much covers the retirement savings plans through UW. There are other aspects to planning your financial future, though, and I’m going to put a quick list of them here.
If you need anything at all, or have questions about any of these, please feel free to set a meeting with us or just send us a quick email. We can help with anything we have listed here:
- Estate Planning – Wills and Trusts
- Old 401k or other plan Rollovers
- Long Term Care Preparations
- Life Insurance to fit any age