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VIDEO: A Railroader's 401k Guide for Railroad Retirement Thumbnail

VIDEO: A Railroader's 401k Guide for Railroad Retirement

Tier 2 Retirement Financial Planning Investing


Welcome everyone to the Highball Advisors, Railroad Retirement whiteboard. My name is John McNamara with Highball Advisors and today's the railroaders 401k guide for a railroad retirement. So I want to talk about some strategies, some opportunities for railroaders that are really unique to railroaders with their retirement portfolios, their assets in going into retirement. And then even after retirement, some ideas and strategies that you want to think about. So I saw an interesting statistic MarketWatch published a number that 70% of companies automatically enroll their employees in 401ks. And of that 86% are enrolled in target date 401k funds. So basically that means they set a data which you're projected to retire and build a portfolio, a glide path. That's the term where they manage your assets all the way to retirement. And you retire, you have a nest egg and that's the 401k strategy of it.

So let's look over here on my right. So here's your typical glide path, right? So you're young. Let's say you enter the workforce at 20 right? You plan railroad, right? You work till 60 so this is a typical target date fund. And so this individual retire at 60 they start off very early in equity positions, right? Because their inequities, obviously the best returning asset class historically over time. So however, with equities comes volatility as we've seen from the 2008 and the 1999 in the world. But if you can stay in it, it's the best performing asset. So they say, okay, well early on in these target date funds, you can stay in equities. But as you move along and progress along your career, you're going to start moving out of equities and more into fixed income, fixed income, bonds, safer investments, still a good return but much safer investment.

Because as you get nearer, the theory behind the target date fund as you get closer is, this is the money that you're going to need to sustain you in retirement, right? So with target day funds, you'll have your social security and then you have this nest egg of 401k, right? And then you've got to make sure that you have enough retirement income to do that. So your administrators or your 401k take a traditional, really a non railroad look at it, and this is just kind of a typical glide path. So at the 60 when you retire, you'll have 50% equities and 50% bonds, because you still need equities because even though you retire at 60 you really got planned for another 30 years. So you need that equity growth that comes along with it. So this is a traditional 50% equity, 50% bond at retirement, right?

You're all the way up here to start. But let's look at a railroaders point of view here. And what I did is I added different access because this is important, it's the Tier 2 valuation, right? So Tier 2 is another source of retirement income, right? So over here you have your nest egg and you're going out to purchase retirement income, right? That's what a non railroader does, right? Say, I need, right? What's the biggest concern in retirement? Do I have enough money in retirement? I don't want to run out of cash. So they figured, okay, here's your nest egg, go out and find some other additional retirement income besides social security. So people buy CDs, well they're really low interest rates, not much going on there. You have bond ladders and those are low. And then you can go out, have a nice dinner and get sold an annuity.

And that's, another way of income stream. So you spend your money there. However, right? So railroader, so let's say they start at 20 and their Tier 2 starts vesting at 25 right? Five years of service before your Tier 2 vests. But however, they're building up that retirement income stream along with their 401k as they progress through the railroad. So after five years, 10, 15, 20 the value, right? The cash value, although you can't turn it in for cash, it's more of a replacement value of that Tier 2 annuity, I assign a value to it. So a person here, this is just a single individual. In this case, let's say 40 years of railroad service retires at 60, we'll have a Tier 2 income of almost $2,100, $2,200 right? So if I had to go out to the marketplace to purchase a single premium immediate annuity, I would have to get an insurance company, a half a million dollars to replicate that.

So you have to assign a value on that. And what that does is gives you now an opportunity as a railroader to think about this glide path. Is this the correct glide path or any target date glide path? Is that the proper glide path for you as a railroader? Right? So you're 50% equity, 50% bond, and let's say this number is $500,000 right? You've retired and you have this, but wait a second, I also have a $500,000 annuity, a Tier 2 annuity. If you add that up, I only have a 25% equity now position. I'm way underneath this line, right? So the point I'm trying to make with this is this line, this here, this valuation of your Tier 2 is giving you an opportunity to draw your own line, on how comfortable you are as opposed to this target date fund.

Okay. So some people might say, okay, well I can take more risks now because I know I have my expenses covered or the benchmark I use as long as I have 80% of my cover expenses covered in retirement, I would be comfortable taking more risk, right? I can stay in equities longer because my retirement costs are essentially covered. And that's up to each individual. So what we do at Highball Advisors is we calculate this Tier 2 all the time, right? And that will determine how this curve should fit for railroaders. And that's what you need to be doing. You need to be calculating how many years of service do I have? What can I expect from my Tier 2 annuity? What can I expect from my Tier 1? My Tier 2? And that's your floor.

And that will determine what your glide path will be. That will be one of the factors, obviously the other factors, Hey, what am I comfortable with? Right? I'm not comfortable being in equities my whole life. It's just too risky. I understand that. All I'm saying is this line here gives you the opportunity to run out your glide path longer versus bringing it down here. So I hope you found this useful. Reach out to me if you want to discuss this further. I think this is a tremendous opportunity for railroaders. And to me that's a lot of opportunity being left out on the table by falling as simpler glide path. This will get you there, I'm not knocking that, but I'm just saying that there's opportunity here if a railroader wants to go out to get it. So I hope you found this useful. Please subscribe to my YouTube channel. I always appreciate that, you can reach out to a free 30 minute meetings, still doing those. So in the meantime, everyone please stay safe, stay on track and take care so long everybody. Bye.

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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.