Much of the confusion of planning your retirement from the railroad has to do with folks not understanding that it's more than simply saving. Good planning involves actionable steps to visualize getting from now to the desired tomorrow. Here are six ways to make that idea a specific, detailed plan towards a railroad retirement date you can live with:
Step #1: Set Reasonable Income Goals
We would all love to be millionaires in our retirement, but that’s not reality. A practical, doable railroad retirement plan starts with identifying what one really wants as a livable, enjoyable income in railroad retirement. For some that might be $50,000 a year. For others, it might be $300,000 a year. Whatever the number, spend some time pegging the true cost and spelling out why it should be that number. How you get to the number then defines your railroad retirement date.
Step #2: Determine Where Your Income Will Come From
Most of us assume our work will be enough and whatever is taken out of our paychecks will pay for our later years. For a few with a defined pension plan, that might still be the case. But for the rest of us, the exact income sources will matter. If more is needed when retired anticipate then that it will be a mix of retirement savings, Railroad Retirement benefits, and potentially still working more. The worst surprise reaching retirement is realizing you don’t have enough and then having to go back to work.
Step #3: Evaluate the Necessary Real Savings
This is where time comes into play. Based on your target goal of income per year, saving early in your life adds more funds for later. So, 10 percent of net income (after taxes) is probably fine for someone in their 20s. But if you’re in your 40s, you have less time and need to save more for the same target. Start with pre-tax savings first as this will cost you less in taxes later on. Post as much as you can in a pre-tax IRA or 401K. If there is an employer-match, do it as this is free money for you. Then post to a post-tax Roth IRA. Most are limited by contribution caps. Whatever that amount is, add it to the rest of your savings to get to your overall percentage target each year. The combined amount will be your railroad retirement savings.
Step #4: Take a Look at Your Health
If your family history is one with a lot of 100-year-olds, there’s a good chance you’re going to genetically do the same. So your savings plan needs to anticipate you will need more retirement for a longer time window. If, on the other hand, you’re closer to the average mortality rates, take that into account too. No one knows for sure how long they have, but with modern medicine people overall are living much longer, well into their 80's. Your retirement has to account for this fact if you want to live comfortably.
Step #5: Consider Health Insurance Coverage
Many folks peg an age number to railroad retirement and hope everything falls into place. But practical issues often get in the way. The most common is health insurance coverage. Folks who retire before they are eligible for Medicare coverage (a required health insurance for seniors from the government) find they are suddenly strapped for medical costs. Then they have to un-retire to afford medical help needed. If you can’t afford good health insurance in early retirement, don’t retire early, period. The easiest health insurance to have and retain is the employer-provided package while still employed. Then, at age 65 you can get Medicare. So don't retire too early or you’re on your own.
Step #6: Starting Late Is Better Than Not Starting at All
Believe it or not, starting late for retirement is still a good idea versus no planning at all. While Railroad Retirement Benefits are better than Social Security, however don’t ever assume it will be your safety net without any planning. It doesn’t work like a hospital emergency room. Starting in your 50s, you will have a higher climb and have to save more aggressively, but you gain advantages. After 50 you can put more in tax-deferred or tax shelter IRA accounts, protecting more for retirement. You will likely have more discretionary income as your major bills will stop, such as mortgage, the kids’ college tuition, loans, etc. Use those funds to save more as well. Also, try downsizing your life. Just avoiding buying gourmet coffee every morning can produce $868 annually ($4 x 217 working day stops at Starbucks). Packing a bag lunch can save $1,953 every year instead of eating out ($9 x 217 fast food lunches). These changes are simple, easy to make and hardly make a dent in our lives overall.
Photo by Marcos Mate`
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.