COLA vs benefit indexing

As a retiree, it’s important to know how your pension works. There are certain rules in place that allow your pension to grow over time with the cost of inflation.

All Plan 2 and 3 retirees are eligible to receive a COLA every July. But not all plans or members are eligible for the inflation protection of benefit indexing.

The purpose of benefit indexing is to help the value of your pension benefit keep up with inflation before you start collecting it.

Here are the key differences between cost-of-living adjustments and benefit indexing.

Cost-of-living adjustment (for all Plan 2 and 3 members)

Each year after you retire, DRS may adjust your pension payments annually up to 3% based on inflation.

If the cost-of-living has gone up, pensions receive a cost-of-living adjustment (COLA), regardless of how many service credit years you have.

If you’re in Plan 2 or 3 and have been retired at least one year, you’ll receive a cost-of-living adjustment (COLA) automatically each July — no matter how many years you worked.

The amount is based on the prior year’s Seattle area inflation index (CPI-W) and it may be less than 3% if inflation was lower. Read more about COLAs

Benefit indexing (for Plan 3 and LEOFF Plan 2 members)

Benefit indexing is a form of inflation protection you may be eligible for based on what plan you are in and the number of years of service you have. It takes into consideration that your pension is calculated based on a salary amount.

Eligibility for benefit indexing requires you to:

  • Be in Plan 3 or LEOFF Plan 2 and
  • Have at least 20 service credit years before you stop working
  • Separate before reaching normal retirement and delay receiving your pension benefit.

For every month you delay collecting your pension, your benefit amount will be increased by 0.25%. Benefit indexing stops once you have reached your normal retirement age. Once you retire, you will also be eligible to receive an annual maximum 3% COLA., as described above.

Francis is a Plan 3 member who is 64 years old, with 20 service years and an average monthly salary of $5,000.

Their Plan 3 benefit calculation is: 1% x 20 years x $5000. This would provide Francis with $1,000 per month.

In addition to a monthly pension, Francis also has an investment account to draw from in retirement.

Francis also has the option to stop working prior to age 65 but choose not to receive a pension benefit until their first eligible unreduced date of age 65. During that time, their pension will grow. Here are two scenarios of how that could look:

Scenario 1:

Stop working at age 64
Start collecting a pension at age 65
The pension benefit increases about 3% in one year (.25 x 12 months = 3)
The pension is $1,030/month

Scenario 2:

Stop working at age 65
Start collecting a pension at age 65
The pension benefit calculations is: 1% x 21 years of service x $5,000
The pension is $1,050/month

A note about Plan 3:

Plan 3 has two separate accounts: An employer-funded pension, and an investment account you fund with your contributions.

The main reasons customers choose Plan 3 are personal control and growth potential. Plan 3 customers have separate pension and investment accounts, which means they can withdraw funds from one without affecting the other. In the example above, Francis could withdraw an income from the investment account at any age once they separate from service.

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