VIDEO: Buyouts and Railroad RetirementRetirement Financial Planning
The railroad has just offered you a buyout. Learn the effects that it will have on your railroad retirement benefits.
Welcome, everyone to the Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors. Today we're going to talk about a subject that's, I guess, going around in the industry a lot, especially over these last few years and accelerated by the COVID-19 virus, is buyouts and railroad retirement. Right? So the railroad comes to you and offers you a buyout to leave the railroad. They're trying to reduce their costs. So what effect does that have on your railroad retirement? So I'm going to walk through this, maybe take away some of the misnomers out there about what goes on, and see if I can help you out here. All right.
So let's start with non-forfeiture over here on my right. Right? So once again, once you have five years of paying into railroad retirement, you'll always go through the Railroad Retirement Board, right? You can't lose it. Right? Your tier two benefits are always there. So that's non-forfeiture, right? Just because you're leaving the railroad doesn't mean that you're leaving behind the railroad retirement benefits. It's very, very important to remember. All right. So five years after 1995, 10 years before 1995. All right. Those are kind of the vesting periods. I assume most people are five years after 1995.
Let's move into the two types that the Railroad Retirement Board recognizes. First one up is relinquishing your job rights. Right? So you're going to get a payout. You're going to leave right away, no more rights to working for the railroad. Right? So the payment is called a separation allowance by the Railroad Retirement Board. Right? They're giving you money for the separation, and it will go towards the railroad time and the board will recognize the last month that you worked for the railroad for the accreditation of your tier two benefits. Right?
Just to refresh everybody, every month, you get a credit for your tier two. And that's a big part of how your tier two grows. It's based on your monthly service. So once you relinquish your job rights, you get your separation allowance. That will be the last month's work. So no additional credit months under this type of buyout, relinquishing of your job rights. Additionally, you will have to pay payroll taxes. The usual tier one, tier two, Medicare, those types of payroll taxes will come out of that severance payment. So that's important to budget for that also.
And the second type of buyout is you still retain your job rights. Right? So in that case, they'll buy you out, but yet you'll be receiving monthly payments, and you could still earn credit months for tier two. So that's a whole different type. And you will retain your current connection, that type of thing. But the important part there is earning your credit months for tier two. Right? So it's still going on and on, but it won't be that lump sum payment that would be from the separation allowance. It would be those monthly payments. That might be six months, could be a year, depending upon how that's negotiated with the railroad. And then once again, you will have payroll taxes, tier one, tier two, Medicare.
So when we look at that, let's look at some of the strategies on how it affects different individuals. Right? Because everybody's at different stages of their career. Right? So let's say if you can retire, maybe 62 and above, or if maybe you were a 60/30, maybe you're 60 years old and you've had 30 years and that's full retirement age, you can retire. So what should you take?
Should you do the relinquish job rights or retain your job rights? So if you're thinking, well, I've had enough, I'm just going to retire. I am 60, I've got my 30 years. Then you want to just relinquish your job rights, and that way you can start your railroad retirement annuity right away. Okay? Because your tier two isn't accumulating, right? It's done. So now you just go, you relinquish your job rights, you're retiring, and off you go. You get your severance allowance and then you're going to get your railroad retirement annuity. So that's that strategy for retiring.
But let's say you're still building in your career. Right? You want to take the retaining job rights, because you want to get those credited months. Right? Now you're not going to get that lump sum payment from the separation allowance, but you'll receive monthly payments, but you will get that tier two. And I'm a big fan of tier two. So if I can keep that growing, it's of great value. So for those who aren't retiring, I highly recommend try and retain your job rights, get on that monthly payment, try to keep growing that tier two. I don't know if your railroad will offer that to you, but if you can, if you have those options, that's the best way to do it for those not looking to retire.
Now important also, some of you might be going on unemployment because you've left the railroad. Especially now with the virus going on, it might be tough to find another position for the next few months, so you might go on unemployment. So when can you go on unemployment? And it's important when you take the severance separation allowance, a lot of that will be lump sum, that doesn't mean you can go on unemployment, have the big severance allowance check and then go right on unemployment.
What they're going to do is you can collect unemployment at the end of the earned amount of the allowance. So basically, just giving an example, let's say, if you make $3,000 a month, I'm just using an example here, $3,000 a month from the railroad, and they gave you a severance allowance for 12,000. Right? So that's four months that they're giving you a severance allowance for. You have to wait until the end of that fourth month for you to go collect unemployment. Right? So you have to wait for that whole allowance to be paid out before the Railroad Retirement Board will do the unemployment. Also for those retained job rights, you can't collect unemployment until the end of those monthly payments. Once they stop, then you can go out and collect unemployment.
So that's something also to think about from a budgetary standpoint if you take the buy out. When can I go on? I might need some unemployment assistance until my next job, especially with the virus going on, how that all works out. So there's some real planning going on there. You got to really crunch those numbers.
So I hope you found this useful. I kind of feel it's timely. There's a lot going on in the industry regarding buyouts. Feel free to reach out to me if you have any questions. Everyone, please subscribe to my YouTube channel. It's really starting to take off quite well. I'm very happy with it. I'd like to keep the momentum going. As always, check out my boarding for railroad retirement process. So it's a great way to understand your financial position. In the meantime, everyone, please stay safe, stay on track, and take care. So long everybody. Bye.
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