Should You Consider Early Railroad Retirement in a Recession?Retirement Financial Planning
Early railroad retirement in a recession. Let's have a look.
Welcome everyone to the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors, and today we're going to talk about leaving the railroad for early retirement. So this is individuals that are thinking about leaving early and kind of some of the trigger points that they want to be thinking about. This is different than being asked to leave the railroad by the company, so this is kind of a different strategy saying, "Well maybe I kind of get nervous about this, maybe I'll just leave and retire."
So I just kind of want to think about some of the things that you should be going over in your mind as we approach this. So let's kind of take it over here on the right side. So this is what I call my no-brainer category. You're close to retirement. You're right near retirement. You're probably a couple months away, maybe a year away, that type of thing. You've prepared financially for retirement. You've saved up money in the 401(k). You followed everything that John's told you to do, so you have a good little nest egg put away, so you're prepared financially for retirement.
And then the railroad comes to you with a buyout package or a severance. Because let's face it, the railroads are reducing head count. So they've come with this buyout package and you're right near retirement anyway, so that's the no-brainer. You might as well take it because you're pretty much set anyway.
But let's look at what everybody else has to go through when you think about this. So from this category, there's a lot of decisions, there's a lot of thinking going on here because you're nervous about, "Well, I could just leave the railroad and retire early, but what's the implications of that?" So here's kind of the thought process that you might want to approach it.
So you've got to say, "Well, I'm giving up a paycheck because I'm not in retirement, so I'm giving up that paycheck and that's income." And now we're in a recession, so the job market's scarce. So even though I think I could get a job, you're not sure because the job market's scare. So that's a variable. So you don't know about that. And you have to understand what your severance is going to be if they offer you a severance or a buyout. Most companies are two weeks for every year that you work, and then usually it's up to six months' severance is how most companies ... So those are the kinds of things that you want to think about.
And then on the other end, let's get to the financial side of it. The expenses. Because of the amount of money not coming in right now. So what's your current spending plan? How are you spending that money every month? Could you cut it a little bit? Reduce on the spending plan? And then you're going to have additional expenses. You're going to have COBRA coming in. So COBRA is that health insurance that your company will offer you. Well, they were paying a lot of those premiums. All those premiums are on you now, and I think even plus 2% on top of that.
So if anybody's shopped around for healthcare lately, that can get very expensive. So really got to crunch those numbers on the spending plan, throw in those new variables like the COBRA, or if you're going to go out onto the exchanges and look for health insurance, but that's a big factor because the bridge to Medicare.
And then you have your income. Well if you're not going to be working, you're going to have to have some money coming in from somewhere because you're thinking of taking that early retirement. Now, if you take that early retirement, let's say at your tier one, tier two, if you don't have your 30 years, is going to be reduced starting at 62 years old. And that's a 35% haircut on that, so that's got to be factored in.
Some of you might have pensions. That's going to be reduced. Remember all those multipliers on those on the tier two and the pensions all are with years. And even your tier one is based off 35 years, but these other two, those years really multiply the out pay on that, so they're going to be reduced. And then you say, "Well, I've got a 401(k)." Now, if you're retiring before 59 1/2, there's a 10% penalty on your 401(k). So taking money out of there, not only will you have to be paying ordinary income tax, they're going to throw another 10% on top of you on top of that.
So these are the things that you want to think about, you have to really understand, and the key part here is in a recession. So when you make this decision, this might be a decision that you might have to last with for a while until the job market picks back up. So it might not be something where, "Oh, I'll retire. If it doesn't work out, I'll just go get a job." No, the key word, once again, is recession. So these are the things that you want to think about, make that decision.
So I hope you found this useful. Feel free to reach out to me if you have any questions or comments, I'll try to help you as much as I can. In the meantime, everyone, please subscribe to my YouTube channel. It's growing and it's great. I appreciate that. And I appreciated you sharing it with your colleagues, I get a lot of great comments off of that, so I do enjoy that, and it gives me some good topics also. In the meantime, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
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