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How Much Is Your Railroad Retirement Really Worth Thumbnail

How Much Is Your Railroad Retirement Really Worth

Tier 1 Tier 2 Retirement Financial Planning

Most railroaders really don’t know the valuable benefit they receive from collecting a Railroad Retirement Annuity. The large majority of them just see money coming out of their paychecks every pay period with the expectation of getting some sort of benefit when they retire. In this blog article, I will attempt to put some sort of value on their Railroad Retirement Annuity. By understanding the value of your Railroad Retirement Annuity, it will give you better opportunity to plan properly for retirement.

Almost all non-railroaders receive Social Security benefits when they retire. A portion of their paychecks are garnished every month with those funds going to Social Security. Railroaders pay the exact same amount  as Social Security recipients into Tier 1 benefits of Railroad Retirement. Tier 1 pays out similar to Social Security for those in retirement. One exception for railroaders who are at least 60 years old and have 30 years of creditable railroad service may collect their Tier 1 FRA benefits significantly earlier then a individual on Social Security. In 2019, Tier 1 payroll tax was 6.2% on the employee and 6.2% on the employer. These are the identical taxes non-railroaders paid for Social Security. However, railroaders paid an additional 4.9% of their payroll to fund Tier 2 of their Railroad Retirement Annuity. The railroad employer contributed 13.1% for the employee into Tier 2. This part, Tier 2, is where we need to understand the value. It has a generous funding mechanism between the employee and employer. So what is it worth to a railroader?

In order to understand Tier 2, let’s look at how your Tier 2 benefit is generated. In order to figure out your Tier 2 benefit you need this formula as follows:

Average of 60 Highest Earnings Months X Years of Creditable Railroad Service X .007 = Tier 2 Monthly Benefit


Casey Jones,60 years old is a railroad professional of 30 years. He and his wife,Charlotte, who is 60 years old are about to retire. He currently makes $135,000 and he has been receiving 2% salary increase for the last ten years since he moved to a management position on the railroad. What would be his and his spouse Tier 2 benefit?

$7,750(Average of 60 Highest Earning Months) X 30 Years of Service X .007 =Casey's Tier 2 Monthly Benefit is $1,628
$1,628 (Casey's Tier 2 Monthly Benefit) X 45% =Charlotte's Spousal Tier 2 Benefit is $733

Now we know how our Tier 2 benefits is calculated. We need to assign a value to the Tier 2 amount. The best way to find the value is to find a product or instrument that produces the same result as Tier 2 payout. When you look around all the financial products out there, the most similar product to Tier 2 is the Single Premium Immediate Annuity(SPIAs). They are purchased with a lump sum of money and offer a guaranteed source of income for retirement.

Using the example above, let’s find the replacement value of the Tier 2 Railroad Retirement Annuity income with a 1% Cost of Living Adjustment (COLA)

Tier 2 Monthly IncomeAnnuity TypeCost*
Casey Jones$1,628SPIA w/ Joint Life$493,365
Charlotte Jones$733SPIA$198,863

* Cost is an estimate from immediateannuities.com , a aggregator of immediate annuities

Casey Jones needs to purchase a Single Premium Immediate Annuity with Joint Life which basically means that income stream will continue to pay until both have passed.

Charlotte Jones only needs to purchase a Single Premium Immediate Annuity as she is trying to replicate a spousal benefit from Tier 2.

The Replacement Value of Casey and Charlotte Jones Tier 2 Railroad Retirement Annuity is valued at $692,228.

So now imagine yourself as a  non-railroader and you want to replicate that income stream in retirement. For most people, it would require a significant portion of their retirement assets.

As a career railroader who is expecting a significant Railroad Retirement Annuity benefit, your goal for Tier 1 and Tier 2 Railroad Retirement Annuity should be to cover your fixed expenses in retirement. Fixed expenses include housing, food, utilities, insurance,and similar items. By having your fixed expenses covered it gives you opportunities with your remaining portfolio. You know that whatever happens to the markets and your portfolio, income will be coming in to cover the basics. You won’t have to reduce basic expenses and shouldn’t be tempted to sell assets near the bottom of a bear market. You also don’t have to worry about outliving your money, because the income to cover your required expenses is guaranteed for life.

Hopefully I have given you a better understanding of the value of your Railroad Retirement Annuity.

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Photo by Michael Wilson

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.from Highball Advisors, and all rights are reserved.