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VIDEO: Basics of the Tier 2 Railroad Retirement Annuity

Tier 2 Retirement

Transcription:

Welcome everyone to the railroad retirement whiteboard. My name is John McNamara with Highball Advisors, and today we're going to discuss the basics of the tier 2 railroad retirement annuity. Hopefully at the end of this video, you'll have a basic understanding of how its funded, where the funds go, how you receive your tier 2 monthly benefits, and how it's calculated. With  all those things, you'll just have a good working knowledge of the tier two benefits. So let's get started. We'll go to the whiteboard here and let's decipher some of my chicken scratch. We'll see what happens. I covered funding in a previous video, so you can check that out on my YouTube channel, but just real quick, 4.9% of your paycheck goes to tier two with a maximum 98,700. The employer/railroad contributes another 13.1% into the tier two, the money is collected, and then there's a transfer payment made to the national railroad investment trust. Their charge is to invest the money to make the payouts for the tier two annuity. They're an independent agency outside of the Railroad Retirement Board. So, in 2001, they changed their charter, and they are now allowed to invest in more diverse assets such as equities and real estate commodities. The detailed pie chart here shows the 2018 breakdown. So in 2018, they returned almost 80%, 60% stocks for the domestic and 20% fixed income. They did some commodities and real estate, and I assume some hedge funds. So that's that side of the ledger, how it works, how it gets funded where the money gets invested. Now what's what you're more interested is how is your monthly benefit calculated. There’s a couple great things about tier two that I like versus Social Security is tier two is calculated on your high five highest earning years, which is great because at the end of your career, that's most likely going to be your five highest earning years, as opposed to Social Security where they take 35 years. Here's the calculation for average monthly compensation, and that's the 60 months of your highest earning 60 months that's the average monthly compensation times the number of years a railroad service. You got to have a railroad service and have five years after 1995 to qualify. I'll just presume everybody's after 1995. Years of service times .007 is the multiplier. Don't know where that number comes from I've asked a few people and they don't know. Please email me where .007 comes from if you know. I worked through an example, and I just assumed the individual looking to retire has maxed out their last final five years. So, here's the maximum numbers for the last five years from 2019 to $98,700, to 2015 $88,200. If you take their average monthly compensation of those five years, it is $7,750. Put that into the formula, number of years of service. So if you did 10 years and you maxed out those last five years. Congratulations, but you will have covered $543 a month of tier two benefits, going all the way down to 30 years of $1,628. Keep going. I mean there's people 35-40 years in there, and it will just keep moving. That's kind of an overview of the tier two basics, understanding of it, and your monthly amount payment. Tier two it's it's a great benefit. Getting a five year benefit is great, and you're really not taking much risk on an annuity.  You are paying the tax into it. I don't expect to increase unless something happens dramatically in the market coming up that would require increasing payroll taxes, but, anyway, it is a great benefit. I hope you have a great understanding of tier two. Please subscribe to my YouTube channel you can just google Highball Advisors on YouTube. Subscribe to it. I appreciate that. Also, schedule a free consultation if you need it. If you have any questions you just want to talk about, I would love to help. In the meantime, stay safe, stay on a track, and until the next time, take care.

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Disclaimer: This video 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.