The question comes up a lot. How much money would you have to invest to get a $120,000 pension (pretax) in Washington state? The answer might shock you, especially if you are a public employee in the state retirement system. Why $120,000? The median income in Seattle is $121,984 according to Neilsburg and is considered a comfortable living wage.
Industry experts will tell you, conservatively, that you will see 4%-5% annual return on a semi-liquid investment over the duration of a retirement. If that’s the case, for a million dollars invested, you would receive $40,000-$50,000.
$120,000 would require $3,000,000 invested.
That’s not the end of it though. In order to have $3,000,000 invested, you need to save or sell assets of approximately $4,000,000 to cover the taxes the federal and state governments will take.
For private company employees, 401K’s and IRAs are the typical way to save money (with investment return) for retirement. For public employees, it’s a guaranteed benefit pension, and for business owners it’s either an IRA or the sale of the business that funds retirement.
In our example, a business owner, who built a business over 20 or 30 years and is planning on selling that business, will need to sell the business for $4,000,000 to fund a $120,000 annual pension.
For all the teachers reading this, your TRS2 guaranteed benefit pension, 30 years of service doesn’t yield quite as much, but neither is the employee contribution as high as $4,000,000. For two married school district employees, making on average $80-90k each, the resulting pension would be close to $120,000 combined, but the contribution to that pension over 30 years will only be about $1,000,000 (combined). Your milage may vary based on what age you started, your salary level and length of service.
Politicians in Olympia and other municipal jurisdictions have a similar retirement plan to teachers (PERS2) which many elected’ s will maximize by moving to high paying appointed jobs 5 years before retirement (the pension payout is based the highest 5 years of earnings once you are vested). Given the contribution levels to the pension being so low, the investment difference is made up with tax dollars from Washington residents, investment returns or future retirees still paying into the system. These are the same taxpayers that are trying to save for their own retirement.
With all the talk of the new 10% income tax and capital gains taxes at 10%, it may now be obvious why business owners are choosing, some reluctantly, to leave the state. When the government requires the business owner to pay another 10% on the income or sale of a business, it cuts into retirement plans that have been built over 20 or 30 years and there is no way to recoup that money at the end of employment. Given the high cost of living in Washington, that 10% can make the difference between living comfortably or just making it.
Remember this when a politician says a business owner is a millionaire and doesn’t deserve to have all that money. It might just be the capital is their hard-earned retirement dollars and not a slush fund for a yacht in the Bahamas.
It’s expensive to retire in Washington and Olympia is making it worse.
