I come across many people in the railroad industry and there is varied attitude regarding how much they enjoy their careers. You have individuals who are just marking time until so they can get “early” retirement to individuals who would be there for as long as they physically can do their job. I am going to discuss the “early” retiree camp so these particular individuals can better understand the financial ramifications of their decision.
The earliest a railroad employee can retire not assuming disability is at the age of 60 with 30 years of experience. It is what I call the Daily Double of Railroad Retirement. It is a tremendous hard earned benefit. However that isn’t “early” retirement, it is full retirement with all the benefits associated with it. “Early” retirement is an individual who is 62 years old with less than 30 years of creditable service. A 62 year old is eligible to retire at 62 with reduced benefits. The purpose of this blog isn’t to critique individuals who retire “early” and please don’t take it this way, but I’m not a fan of the word “early” retirement. The word “early” in my opinion conjures up all sorts of images. Railroaders have all kinds of reasons for retirement. It is a very hard physical career for some in the industry that takes it toll on the body. However, let’s call it what it truly is and that is “reduced benefits” retirement. You are getting a portion of the benefits that you could have earned at full retirement age. So now that we have called “early” retirement by its real name lets’ look at the cost of taking a “reduced benefits” retirement.
You railroad retirement annuity is made of two tiers which you have contributed to throughout your years of working for the railroad. The annuity is made up of two tiers, Tier 1 and Tier 2. Let’s look at the impact on each Tier separately. We will assume in this case that full retirement age is 67 because that is where it eventually going for people born in 1960 or later.
The maximum railroad retirement annuity reduction for Tier 1 at age 62 is 30%. The early retirement reduction factor for an employee is 1/180 for each month of the first 36 months of the reduction period and decreases to 1/240 for each month over 36 months.
The reduction is 1/180 for each of the first 36 months the employee is under the full retirement age and decreases to 1/240 for each additional month.
Example of “Reduced Benefits” Retirement:
|Age 67 Full Retirement||Age 62 "Reduced Benefits" Retirement|
As you can see a “reduced benefit” retirement would be $600/month less take home income. It adds up to $7200 a year. Taking one step further if you had invested that extra $600 a year from 62 to 67 at a 6% return for example then you would have in excess of a $125,000 at full retirement age. There is a significant opportunity cost to a “reduced benefits” retirement. Another item to consider when taking a “reduced benefits” retirement at 62 is the additional cost of healthcare as Medicare isn’t available until 65 years of age. If you don’t have coverage for those years then you will need to plan for it.
I hope I have given you some food for thought before you plunge into “early” retirement. The purpose of the article wasn’t to scare or condemn people who take “early” retirement, but to fully understand the financial ramifications of such a decision. There are many factors besides just financial that go into retiring so I wish you all the best. However the best way is to have a plan in place with facts and figures that justify the decisions made. If you would like help with your plan please schedule a free consultation with Highball Advisors and let’s get you plan in place.
Photo by Chase Gunnoe
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