Railroad Retirement Claiming: The Case of the Sole "Breadwinner"

What should you be considering when it comes to Railroad Retirement—especially if your spouse hasn’t worked? Welcome to another edition of the Highball Advisors Railroad Retirement Whiteboard. I’m John McNamara with Highball Advisors, and today we’re going to talk about what happens when a railroader is retiring, but their spouse hasn’t worked in the railroad industry or doesn’t have their own Social Security benefits. What should the claiming strategy look like in this case? I want to help you start thinking about this scenario and how it might impact your financial plan as you approach retirement.

Let’s quickly review the basics of Railroad Retirement. When you retire, you qualify for a Service and Age annuity, which includes both Tier 1 and Tier 2 benefits.

• Tier 1 is based on your top 35 earning years, combining both your railroad and Social Security work history.
• Tier 2 is based on your total months of service in the railroad industry, and it’s calculated by taking your top 60 months of earnings.

Your spouse, if you've been married for more than a year, is entitled to a spousal benefit as well. They can receive 50% of your Tier 1 benefit and 45% of your Tier 2 benefit.

Now, what if your spouse hasn’t worked in the railroad industry or doesn’t have enough quarters for Social Security benefits? For Social Security, you need 40 quarters of work (roughly 10 years) to qualify for your own benefits. Some spouses may not meet that requirement. So what should you be thinking about if this is your situation?

Let’s go over a simple example. Let’s say you have 30 years of railroad service and both you and your spouse are 60 years old.

• Your Tier 1 is $3,000 per month.
• Your Tier 2 is $1,500 per month.
• Your spouse would get 50% of your Tier 1 ($1,500) and 45% of your Tier 2 ($675).

This is a straightforward claiming strategy. You’re not losing out by claiming at 60 because you’re not really benefiting much by delaying beyond that age, especially since your spouse will be entitled to the spousal annuity with no age reduction once they turn 60. So in this case, you can claim and move forward with confidence.

However, things get a little trickier if you have less than 30 years of service, or if you're retiring before full retirement age. If you retire before reaching full retirement age (typically 67), your annuity will be reduced by up to 30%. This is especially important to consider if your spouse is also retiring at the same time and will be relying on the spousal benefit.

Let’s say you’re retiring at full retirement age (67), but your spouse is only 62.

• Your Tier 1 benefit stays at $3,000 and Tier 2 at $1,500.
• However, your spouse’s spousal benefit will have a 30% reduction, so instead of $1,500, they’ll only get $1,050 for Tier 1, and their Tier 2 will drop to $473.

The crucial point here is the survivor annuity. If you were to retire early (say at 62), the reduction in your benefits would carry over to the survivor benefit that your spouse would receive after your passing. So, while your spouse might be able to rely on their own Social Security if they’ve earned enough, it’s critical to ensure that the survivor annuity would be sufficient to support them in the event of your passing.

If you plan to retire early, you’ll need to carefully weigh the impact of that 30% reduction on both your and your spouse’s long-term financial security. Ensuring that the survivor annuity will be enough for your spouse after you retire is a key part of the claiming strategy you’ll need to consider.

In summary, when you decide to start your Railroad Retirement, you need to make sure the survivor annuity is enough to provide for your spouse in the future. Whether you're at full retirement age or considering retiring earlier, this is something to keep in mind as you plan your retirement.

If you're nearing retirement and want to discuss claiming strategies, feel free to reach out. I’d be happy to help you navigate the process and make sure everything aligns with your goals. Don’t forget to like, subscribe, and share this video with your coworkers who might find it helpful. Thanks for the great feedback, and I look forward to helping you!

Until next time, stay safe, stay on track, and take care! So long, everyone.

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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.