Railroaders come into and leave the railroad industry everyday. However with Precision Scheduled Railroading (PSR) taking over Class 1 railroading, the departures seem to be outnumbering the arrivals. The relationships you have with fellow workers will be one of the things you will most likely miss by leaving the railroading. However for this blog article I will discuss the impact of leaving the railroad on your Railroad Retirement.
Whenever I do planning for a client one of first things I address is what are your plans if something unfortunately should happen to you. There are just too many stories out there of families not having the proper amount of coverage when something bad happens. The Survivor Benefit annuity provides a good backstop for families. It doesn't replace life insurance for families in their early years. It is however very helpful for a widow retiree who needs retirement income as they age in retirement. In order to be eligible for a survivor annuity you need a "Current Connection" to a railroad employer.
An employee who worked for a railroad in at least 12 months in the 30 months immediately preceding the month his or her retirement annuity begins will meet the "Current Connection" requirement. If you leave the railroad and work full or part time for a nonrailroad employer that can break the "Current Connection" Thereby rendering the loss of Survivor Benefits. Some exceptions are if you become self-employed and don't incorporate or if you work for certain U.S. Government agencies.
A "Current Connection" can also be maintained if the employee has completed 25 years of railroad service, was voluntarily terminated without fault from his or her last job in the railroad industry, and didn't decline a offer of employment in the same class or craft in the railroad industry regardless of distance to the new position. Each case is reviewed by the Railroad Retirement Board.
With all that said if you lose your "Current Connection" by leaving the railroad and working with a nonrailroad employer then you will lose the Survivor Annuity. Please don't confuse this with your regular Railroad Retirement Annuity and Spousal Annuity. Those can never be taken away once they have vested. However if you pass away and you are receiving a Railroad Retirement and Spousal Annuities and you didn't have a "Current Connection" when you retired then your spouse won't have a Survivor Annuity. This means he or she will no longer receive benefits from the RRB but be moved to a Social Security Survivor benefit. It is important to remember that Social Security only calculates benefits off of non-railroad years of employment. So your survivor can expect significantly less retirement income, because they would lose Tier 1 and Tier 2 annuities.
Tier 2 Annuity
I have produced many articles and videos and given webinars on the Tier 2 Annuity. You can check out these pieces on my blog and YouTube channel. It is a game changer for career railroaders retirement income. However in order to fully take advantage of Tier 2 payouts you need to gather years of service in order to grow your retirement income. There is a reason a retired railroader couple on average can expect in excess of $5,500/ month which is twice Social Security. It is because of the growth of the railroaders Tier 2 annuity. If you leave the railroad you will need to replace this retirement income. In order to replace that income in a low interest rate environment takes a large portion of your non-railroader retirement nest egg. So if you are thinking about leaving the railroad under your own accord then you should think about how much you need in the new position so you can replicate that retirement income loss from Tier 2. The bottom line is moving from a railroad to a nonrailroad position isn't a apples for apples exchange when it comes to Tier 2 benefits.
Everyone has different ideas of retirement. Some people want to keep working while others want pursue other passions in retirement. There is no correct way to retire. However the RRB allows railroaders to retire at 60 years old if you have 30 years (360 months) of creditable railroad service. Therefore 60 year old railroaders can collect full retirement benefits because they are deemed to be at Full Retirement Age (FRA). Compared this to nonrailroaders who don't achieve full retirement age until 67 years old assuming you were born in 1960 or later. Depending upon your situation by leaving the railroad you might need to work to FRA to acquire enough retirement income. There are significant reduction penalties to your Social Security if you claim benefits before FRA.
Hopefully you have a better understanding of some risks and costs of leaving the railroad industry. Not everyone leaves the industry voluntarily , but if you decide to leave for a nonrailroad position then you need to understand the associated costs of that decision. How am I going to replace income for my survivors if something should happen? Where am I going to get retirement income and how much will it cost? Do I want to work to 67 years old? These are just some the questions you should be asking and answering. If you would like to discuss more please reach out to me and schedule a free 30 minute meeting.
Photo by Trey Belton
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.