How to Retire From the Railroad on $500KTier 1 Tier 2 Retirement Financial Planning
Learn how to retire from the railroad with a $500,000 nest egg.
Welcome, everyone, to the Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors, and today we're going to just talk about some retirement strategies, big overview type stuff.
So a lot of railroaders come to me, and they'll say, "Hey, how much do I need to retire?" So I thought maybe we'll just throw a number out, and we'll try the $500,000. And just kind of that might be the right number for some, might not be right for others. But let's just think about how we want to think about, "Hey, can I retire?" Right? I mean, at the end of the day, what do I need to retire? That type of thing.
So let's start over here on the right. We start with step one is a spending plan, right? I mean, how much are you spending? So great way to start is just do your actual budget now. What are you spending now, right? You got a lot of things. Some of the things you won't have in retirement, obviously like travel and commuting and all that stuff. But figure out what your budget is right now, all right?
And then figure out, okay, what percent of that budget do I need? Probably about 80%. That's kind of the norm. So if you're spending $5,000 a month, you figure, okay, I need $4,000 a month. And also figure in retirement, maybe your house is already paid off in retirement. So those mortgage payments, they might not be there. So those are the type of things you want to think about.
And then think about kind of a lifestyle estimate, right? What does that retirement look like? Is there a lot of traveling, maybe some golf, maybe it's that RV purchase? That type of thing. So that's that lifestyle estimate, very important spending plan, big part of the formula, right?
And then the next step is go to the income. What does the income look like in retirement? So you have your railroad retirement, right? Your tier one, tier two, that's going to be your first stream of income, your guaranteed retirement income. And then you might have a pension, right? Some of you might have pension. That's a big part of your guaranteed retirement income is understanding that. So those are two building blocks right there, one for a lot of people and two for maybe another.
And then the 401k, right? How much are you contributing to that? How is that building, right? Where will that number be when you are thinking about retiring, right? Understanding the compounding of it, taking advantage of growing that tax-deferred. Very, very important, right?
So then you might have a rule, a lot of people have a 4% withdrawal rule. So if you had the $500,000 and you took out 4%, a 4% withdrawal rate, that's $20,000 a year that you would have. So you factor that in and say, "Okay, well, my railroad retirement is 35,000. My pension is another 20,000, and this is 20,000, and I plan on spending 70,000. I'm right around there." So, hey, that would work for you, right?
So those are the kinds of maths you want to do, right? So it's your income, step three, right? Understand your income here, right? The guaranteed, and then the variable, right? The variable and the 401k, understand that. Then understand your spending, right? So minus your spending. And that's just basically going to add up if you're going to be able to retire or not. It's that simple. Income minus spending equals retirement.
So if you're not there yet, here are some strategies to think about. Hey, how can I get there, right? Fortunately some of you can work longer, right? What does that do? That increases your railroad retirement, right? Extra years on the tier two, right? So that grows it, tier one, tier two, especially at tier two, that multiplier kicks in. It increases your 401k contributions, right? Another year of kicking into the 401k, right? That will boost the number up. And then also you shorten your withdrawal, right? So if you're not retired as long, it's just kind of basic math. You don't need to withdraw money as much, right?
Another strategy that I do with my clients is I'll do a dynamic spending guardrail approach where instead of saying, "We'll do a 4% withdrawal rate," we'll do a 5.4%, and then it moves up and down based off how the market is performing, right? So if the market goes up, you will increase that number. If the market goes down 20%, it will decrease that number. And that's the dynamic spending guardrails, and I actually have a couple of videos on that.
And then finally, another thing you can do is safety nets, right? I talked about maybe in retirement, you have that home equity paid off, right? Or your house paid off. You can use your home equity as a safety net, not a lifestyle net, a safety net. Maybe a long-term care issue might come up. You can do something with the house there. So those are a couple of strategies.
So there you go. Think about putting those numbers together, putting that on paper, figure out my spending plan, my income plan and then say, "Hey, can I make retirement?" And you'd be surprised. You might be closer than you think.
So feel free to reach out to me. I do those boarding for railroad retirement assessments, and this is kind of the stuff that I talk about in those free assessments that I give out to railroaders. So reach out to me, schedule that. I think you'll find very good value in that.
Also, please subscribe to my YouTube channel. I'm trying to get to 1,000 subscribers. YouTube gives me a lot of benefits that I can pass onto you guys when I get to 1,000. So please share the video. Click on the notification bell also. So that way, when new videos come out, you'll know about that. And in the meantime, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
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