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VIDEO: Effect of Low Interest Rates in Railroad Retirement Thumbnail

VIDEO: Effect of Low Interest Rates in Railroad Retirement


Welcome everyone to the Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors. And today, we're going to talk about the effects of low interest rates on your railroad retirement, okay? The interest rate, the yield is just collapsing, right? We're seeing 10-year treasury bonds at a half a percent. Mortgage rates are coming down significantly, right? I think the 30 year is... Geez, it's like 3% now. So, interest rates are just coming down. And why is that? Well, the world economy has slowed down significantly. Commodities have fallen down. They're trying to stimulate some growth into the economy, so they're lowering the interest rates. That's kind of basically what's happening. There's no inflation, a lot of other things, but I don't want to get too technical, but what I want to show you is how these low interest rates affect railroad retirement.

Let's just walk down memory lane here. So, the 10-year treasury bond interest rate. 1980 was 12%. Actually, a little bit higher. 12%, right? So ,you give the treasury $1,000. I buy $1,000 10-year bond, you get $120 every year. It's great deal. All right. Except your inflation was running really high street, so you're probably actually a net loser, but whatever. So, 12% in 1998 and a half. 2010, three and a half. You can see the trend here. Today's rate, March... I don't know. What are we, 8th? Something like that. Half a percent. Half a percent. So, you give the treasury $1,000, okay? And you get $5 back. So, yeah. $5? No, that's not really going to do much for you. So, you get $5 back.

 I want to take this now from a non-railroader perspective, right? So, as a non railroader, you collect your social security and you're trying to get some retirement income, right? Now you have to go out and find retirement income. So, normally, back then, you'd go to the bank... Let's say in the nineties, you go to the bank, you go get your CDs and you buy them for a year and you roll over every year and you're probably getting your seven, 8%, and, okay, life's okay. That's fine. Inflation's probably like 4% back then, but that's fine. We can do that. But now, if you're retired and you've got to go get CDs, well you go to the bank, well the banks aren't going to loan you out because the 10-year's only a half a percent. So, who has that kind of money with CDs? So that's not really an option per se in bonds or whatever. So, a lot of times, they'll also go to annuities, right? You go to an insurance company, guaranteed... You've seen the ads, guaranteed retirement income through insurance companies.

Let's look at an insurance company, right? So, when they price the annuity for the individual, right? The non-railroad incomes, they look at the age, right? That's important. If you're going to live long, it's going to cost more. They don't want you living. The amount of payment, right, is how much a month you want. $1,000 a month, $500 a month, $2,000 a month, whatever.

Length of the contract. Well, a lot of people want it for the rest of their lives, right? They want to guarantee the... You can also get annuities, immediate annuities for five years, 10 years. But mostly they good for the life of the contract, and they'll also good for their spouse. So, that's even more. If you have two people on it, it gets even more expensive.

But the final thing that's important is the interest rate, right? Because the insurance company, they got to make money. So, if you wanted $1,000 a month in 1980, 12%, the insurance company can do that. We don't require that much money to give you back $1,000 a month. We'll do that. But if you want $1,000 a month now and the insurance company goes, "Well, okay, fine. It's a half a percent on the 10-year. How am I going to go get..." Right? "I'm in the business to make money. I've got to go out and get yields somewhere." So, they're going to charge you a lot more for that annuity to guarantee that retirement income stream now. So, what might've been very inexpensive back in 1980, 1990 is tremendously expensive now to go out and buy that.

Iif you're not railroader, right, you have your 401k, you've done your nice collide path retirement, and you have your lump sum of money there and now you're saying to yourself, "Whoa, I got to give you a significant amount of this to guarantee retirement income." Back in the day, I could give you 15, 20% of it. But now, I'm almost half of my nest egg I got to go give to you if I want to go buy an annuity, and that's kind of what's going on now. But let's look at it from a railroader perspective because you guys are different, right?

Your retirement income is your tier one, obviously, which is social security for the most part, but you've also been funding this tier two. So, let's look at the tier two, which is retirement income, years of service. That's important, right? I'm looking at the factors here. Years of service, your five highest earning years of service or 60 months, right? And then the multiplier, 0.007 is the multiplier. But what you don't see here is interest rates. How great is that? It's not a factor. So, your pay out isn't determined by the interest rates.

No matter what goes on, the interest rates, it's all set. So, intrinsically, right, you could almost say that you know while your tier two wasn't worth that much in 1989, 1990, but today, right, if you want... So, let's just say if you were a couple, right, and you wanted to go out and say, "I'm going to get $3,000 from my tier one, and I need another $2,000 of retirement income," well, your tier two, but if you had to go replace that, that's an excess of a half a million dollars to go replace your tier two income. I'm assuming if you had 30 years of service or something like that and were 60 years old. But what I'm just trying to say is that, even though the interest rates are collapsing, your value, the value of your tier two is going up significantly. You're not affected by these low interest rates.

While your non-railroader friends who are in retirement or close to retirement are complaining about the low CD rates, it's just not a factor for you. In fact, if you needed money, you can go out and borrow money very cheaply. But as far as needing a yield from it, if you have your retirement income streams in order, your expenses under control, you're in great shape and these low interest rates shouldn't really affect you. In fact, they're a great benefit for you.

I hope you found that helpful about the low interest rates. It creates... The tier two, like I keep saying, is a powerful tool. It gives you a lot of opportunities, especially with your 401k and other retirement assets that you guys really need to understand. Reach out to me if you want to talk about this, strategize about it a little bit because there's some great opportunities available to railroaders that aren't really available to non-railroaders, to be perfectly honest with you. So, feel free to reach out to me, schedule a meeting. Also, subscribe to my YouTube channel. I appreciate that. 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.