Welcome everyone to the Railroad Retirement whiteboard. My name is John McNamara, Highball Advisors, and we're going to talk about protecting that survivor annuity before railroad retirement. Really important subject. I say that a lot, but this one is really important because it affects your family. And at the end of the day, it's all about family.
So, what is survivor annuity? Survivor annuity is the annuity payments that the Railroad Retirement Board would pay your spouse in case something unfortunate happens to you. Okay. So, there's two parts of the survivor annuity just like there is to your railroad retirement annuity. Tier one and tier two. Now, what happens is everything's fine if you work your whole life, and you go through the railroad, and then you collect your railroad retirement annuity. You have no risk to your survivor annuity. That's fine.
However, what happens is people accumulate a lot of years working for the railroad ... 20, 25, 30 years, and they leave the railroad before they can actually retire. So, there's that window of risk from when you retire until you collect your a railroad retirement annuity where your survivor benefits are in jeopardy. And in this video, what we're going to talk about is protecting that window from when you leave the railroad to when you collect railroad retirement. Protecting that, right?
So, how can you lose your survivor annuity? You lose your current connection to the railroad. If you haven't worked 12 months, the last 30 months because you left the railroad, you can lose your current connection. If you go work for a non-railroad employer, you lose your current connection. What's the ramifications of that? If I lose my current connection, something unfortunate happens, and I haven't hit the retirement age yet.
Well, your spouse would not collect the tier two benefits, which you've been paying into and you've worked your whole career for. Right? Worked hard. He or she would directly go into the social security system, which would pay out the tier one part of your railroad retirement annuity. But it's actually social security. You're no longer dealing with the Railroad Retirement Board. Straight to social security you go. And all those tier two amounts are gone. They can't collect those.
Let me work through an example here. Let's say a 22 year old, they enter the railroad right out of college around military service, something like that. They start at 22, they worked 30 years, 52. They said, "I'm done," or they've been asked to leave after 30 years. Leaving the railroad. However, this gap here ... they can't collect their railroad retirement until 60. Now they have 30 years of paying into tier two, and we know that as valuable.
Let's just look at this part here. Let's say they're going to get $2,000 a month at the age of 60 for their tier two portion of the railroad retirement. All right. That's a significant amount of income. You've got to put a value on that. $2,000 a month, and what is that worth? Well, if I go out ... and the way I value it, and if you see my previous videos, pretty much the only way to really evaluate it ... is if you go, "Well, I can go an insurance company and go buy an immediate annuity, and say to them, 'I would like $2,000 a month of retirement income.'" And they say, "$2,000 a month. Please hand me a half a million dollars."
So, it's $2,000. To get $2,000 it costs you like a half a million dollars. From 52 to 60, if you could lose your tier two, you have a half a million dollars worth of risk here that I don't believe railroaders are really fully comprehending the risk here. You need to get some sort of a term life insurance for those eight years ... in this example, eight years. And some people it might only be three years, or it might be five years, or 10 years depending upon how you want to do.
The first thing you want to do is figure out, "Okay, when am I retiring? I've left the railroad maybe at 50, and I have 20 or 30 years at 50, let's say, so I'm going to retire at 65. 10 years, I have to cover." So, now I got to put a value on the tier two. And I just did that, right? In this case, put a value on it. Replacement income. If I'm going to get $2,000 from my tier two, what's the replacement value? And it's almost a half million dollars. So, I've got to go out and find a term life policy. In this case, that's ... what? Eight years. But nobody does an eight year term life policy. You can't find those.
I'll go out and purchase 10 year term life policy, and I'll just pay it for eight years. Maybe I'll keep the extra two. I don't know. Maybe it's a good rate. But eight years, I'll just pay it for eight years. And now I'll do an eight year policy for a half a million dollars. Let's say that will cost between $500,000 a year. But at least I've covered this risk, because I have a half a million dollar asset. This is an asset that needs to be protected, and you can protect that with a term life policy.
Like I said in the beginning, this is a really important subject. Taking care of the family is important, and understanding the risk of losing that survivor annuity. Because you don't want to say something happens in between here, and you're moving your ... he or she down to social security, and you've worked really hard for that survivor annuity. Especially that tier two portion of your survivor annuity, and they deserve that.
I hope you find this helpful. Reach out to me if you have any questions. I do free 15 minute meetings. You can schedule those. Please subscribe to my YouTube channel down the bottom of the corner there. Get the updates on these videos like that. And everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
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.