How Working in Retirement Affects Your Railroad Retirement Annuity

So you have been busting it for all those years so you can kick back and enjoy the fruits of your labor. However as the months go by you realize you miss the companionship of your fellow workers or maybe the sense of purpose in your life or a financial need. This is a common refrain among some retirees. Retirement isn’t a one size fits all. Each individual is wired differently and has different ideas about what retirement looks like to them. Before you decide you want to reenter the workforce here are some things you should be made aware of regarding the effect on your Railroad Retirement Annuity.

Re-entering  the  Railroad Workforce

This is quite simple if you decide to go back into a covered position in the railroad industry. Neither your regular railroad retirement annuity nor a supplemental annuity is payable for any month that you are employed by an employer covered under the Railroad Retirement Act.

A spouse annuity is also not payable for any month in which the employee’s annuity is not payable. Also a divorced spouse annuity is not payable for any month when a divorced spouse goes back to work. I really don’t understand the thinking of the RRB on that one. Finally a survivor annuity isn’t payable if the survivor works for an employer covered under the Railroad Retirement Act.

Example: 

John Smith, a retired railroader with a railroad retirement annuity of $4,000 per month and a spousal annuity of $2,000 was offered a position to work for a shortline railroad that is covered by the Railroad Retirement Act. If John accepts this position his railroad retirement annuity and spousal annuity will stop immediately. He will go from $6,000/month in benefits to $0/month.

Re-entering the  Non-Railroad Workforce

This option gets a little trickier and requires individuals to do some math to weigh the pros and cons of their decision.  As we know your railroad retirement annuity is made up of Tier 1 and 2 benefits, they each have their own rules for when it comes to working in retirement. Let’s do the simple case first. If the retiree is of Full Retirement Age (FRA), then there will be no reduction on Tier 1 benefits. However the Tier 2 benefits and supplemental annuity payments will be reduced by $1 for each $2 of earnings received, subject to a maximum reduction of 50%.

Example:

John Smith has retired at FRA with a railroad retirement annuity of $4,000 per month and a spousal annuity of $2,000. He decided to take a part time position at Home Depot. It will pay him $20,000 a year.  For ease of this example let’s say his railroad retirement annuity of $4,000 is made up of $2,000 of Tier 1 and 2 benefits. Therefore his Tier 1 benefits of $2,000 would be untouched; however his Tier 2 benefits would be reduced to $1,000. His spouse annuity wouldn’t be affected at all.

Here comes the tricky situation. You have retired before FRA and you decided to go back to work. This will now affect your Tier 1 benefits. Tier 2 payments will be reduced by $1 for each $2 of earnings received, subject to maximum reduction of 50%. For 2019, your first $17,640 in earnings will result in no deduction in your Tier 1 benefits. Every $2 you earn over $17,640 you will lose $1 in Tier 1 benefits. If you are working in the year before your FRA, then the exemption increases dramatically to $46,920 for 2019. Also you reduction is $1 in Tier 1 benefits for every $3 earned in the year before you reach FRA.

Example:

John Smith has retired at 63 which is a full three years before FRA. He has a railroad retirement annuity of $3,000/month (Tier 1 $1,500 and Tier 2 $1,500). He also gets a spousal annuity of $1,500/month. He has decided to go back to work in his brother’s plumbing business at $50,000/year. Therefore his Tier 1 benefit would be reduced to $151/month and his Tier 2 benefits would be $750/month. The spousal annuity is untouched.  The Tier 1 math is as follows:

As you can see it isn’t as simple as going back to work and keeping all of your benefits. In my view there are two important parts to the decision of going back to work. There is the financial part which I laid out above which must be known before you make any prudent decision. However the emotional part of the decision is what should count the most. You should make the decision based on what is in your best interest that makes you enjoy your later years. Believe it or not continuing to work gives people a sense of purpose and accomplishment even in retirement. 

If you are thinking about going back to work and want to understand the effects on your retirement plan please don’t hesitate to reach out to me at Highball Advisors to discuss your options.

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Photo by Kevin Audrusia

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