Is the S&P 500 Enough Once Your DCP Becomes a Paycheck?

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

The fund that got you here

Picture a 55-year-old public works manager for a county in western Washington. PERS Plan 2, 28 years of service.

She and her husband have about $750,000 saved between them. The bulk of hers is in DCP, and nearly all of that sits in one fund: the U.S. Large Cap Equity Index Fund [5].

She picked it years ago because it was simple and cheap. Its manager fee is listed at 0.001% [5].

It's worked well for her.

She's in good company. Warren Buffett has written that the cash he leaves for his wife should go 90% into a very low-cost S&P 500 index fund and 10% into short-term government bonds [1].

If it's good enough for Buffett, why change anything?

It's a fair question. My answer is that the job her money does is about to change.

Saving and spending are different games

While she's working, she adds to DCP every paycheck. A bad year means she buys shares on sale.

Once she retires, the money flows the other way. Every withdrawal in a down year sells shares at a low price, and those shares aren't around for the recovery.

I ran an example using the historical return data published by NYU professor Aswath Damodaran [3].

Picture $1 million in the S&P 500 at the beginning of 2000, with $50,000 coming out at the start of each year and no raises for inflation. Using the actual returns from 2000 to 2025, about $95,000 is left by the end.

Then I ran the same 26 years of returns backward, from 2025 to 2000, with the same withdrawals.

That version ends with about $4.4 million.

The average return is identical in both, about 8% a year [3]. Only the order changed. That's sequence risk, and it only bites once you start taking money out.

Averages hide a lot

Since 1926, the S&P 500 has returned 10% or more a year over a 10-year stretch only about half the time [2]. About a quarter of the time, a 10-year stretch returned less than 7% a year [2].

From 2000 through 2009, the S&P 500 lost about 9% in total, dividends included [3]. From 2010 through 2025, it returned about 14% a year [3].

Someone who retired in 2000 and someone who retired in 2010 owned the same fund and lived very different retirements.

Nobody gets to pick which decade they retire into.

The bonds earned their keep

I ran the $1 million example one more time, with a 60/40 split between the S&P 500 and 10-year Treasury bonds, rebalanced every year. That plain mix ends 2025 with about $1.25 million [3].

The bonds gave the portfolio something to sell in 2000, 2001, 2002 and 2008, when stocks were down.

The withdrawal research points the same direction. Jonathan Guyton and William Klinger found that portfolios spread across several kinds of stocks supported higher starting withdrawals, with fewer spending cuts, than portfolios holding only the S&P 500 [4].

There's a real cost. From 2010 through 2025, that 60/40 mix returned about 9.5% a year, compared with about 14% for the S&P 500 alone [3].

Spreading your money out means something you own will usually look worse than whatever is winning. You accept that because no one reliably knows what wins next.

A Washington advantage

For Washington public employees, the fix is often easier than people expect.

Most of her savings is in DCP. Pretax DCP money is taxed when she withdraws it, so moving between DCP funds doesn't trigger a tax bill [5]. Washington's capital gains tax doesn't apply to transactions inside retirement accounts either [6].

She can shift to a broader mix without writing a check to anyone. DCP's build-and-monitor menu includes a Global Equity Index Fund, a U.S. Small Cap Value fund, an Emerging Market fund and a Washington State Bond Fund [5].

DCP does have a trading rule. If she moves more than $1,000 out of a fund, she has to wait 30 days before moving money back into that same fund [5]. Settling on a target mix first keeps her from tripping over it.

Her pension helps too. Her PERS 2 benefit covers part of her monthly spending, so her savings don't have to carry the whole load.

If some of it sits in a taxable account

Her husband has a brokerage account with shares he bought years ago. Selling those does create a gain.

The tax bill may be smaller than he fears. In 2026, a married couple filing jointly pays 0% federal tax on long-term capital gains up to $98,900 of taxable income [7]. The years between retirement and Social Security can be a good window to use it.

Washington's capital gains tax had a $278,000 standard deduction for 2025 [6]. Most people in her situation won't come close.

Shares held until death generally get a new cost basis equal to their value on the date of death [8]. Sometimes the right move with the oldest, biggest gains is to leave them alone. (That applies to taxable accounts, not DCP or IRAs.)

As a CPA, this is where I spend a lot of my time. The tax side often decides the order you make changes in.

A good place to start

Log into your DCP account and look at where your money is today.

Then ask yourself one question. If you were building this from scratch, knowing it has to pay you for the next 30 years, would you pick the same mix?

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If you’re concerned about your current financial plan and would like to explore professional help, consider reaching out.

I specialize in helping Washington Public employees who are nearing retirement or are retired, reduce taxes, maximize pensions, and retire stress-free.

No sales pressure. No obligations. Just professional guidance to help you make the best decision for your financial future.

-Seth Deal

Sources

[1] Berkshire Hathaway Inc. "2013 Letter to Shareholders." February 28, 2014. https://www.berkshirehathaway.com/letters/2013ltr.pdf

[2] Carlson, Ben. "10% Returns in the Stock Market." A Wealth of Common Sense. April 29, 2025. https://awealthofcommonsense.com/2025/04/10-returns-in-the-stock-market/

[3] Damodaran, Aswath. "Historical Returns on Stocks, Bonds and Bills." NYU Stern School of Business. Updated January 5, 2026. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

[4] Guyton, Jonathan T., and William J. Klinger. "Decision Rules and Maximum Initial Withdrawal Rates." Journal of Financial Planning. March 2006.

[5] Washington State Department of Retirement Systems. "DCP – Deferred Compensation Program." https://www.drs.wa.gov/plan/dcp/

[6] Washington State Department of Revenue. "Capital gains tax." https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax

[7] Internal Revenue Service. "Revenue Procedure 2025-32." https://www.irs.gov/pub/irs-drop/rp-25-32.pdf

[8] Internal Revenue Service. "Publication 551, Basis of Assets." December 2025. https://www.irs.gov/publications/p551