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VIDEO: Railroad Retirement Reductions From Non-Covered Pensions

Tier 1 Annuity Spouse Annuity Financial Planning


Welcome everyone to another edition of the railroad retirement whiteboard. My name is John McNamara with Highball Advisors. And today's topic it's kind of unique. It's kind of a niche-y type a topic is a railroad retirement reductions for non-covered pensions. So basically this is going to affect people who have worked in positions that haven't paid into railroad retirement or haven't paid into social security, right? So the way I look at it is people that have worked for federal, state or local governments, you know, police officers you know, that type of thing. Excludes the military or people who have worked in the VA. Okay. Or you've worked for a nonprofit and they never paid in social security that would be a non-covered position, which would might have a non-covered pension. And then if you worked for a foreign government or a foreign employer so in my case, I worked two years over in Ireland, right? For an employer over in Ireland. And that was, that was the non-covered position. All right. So that's what non-covered means, right? So basically you haven't paid into social security or railroad retirement. So let's just take a step back and look at the railroad retirement annuity and how it, how this affects it, right? So RERA retirement annuity made up a tier one, tier two, tier two is unaffected by any reductions on the non-covered pensions, right? So let's drop that off. Okay. Tier one is where the reduction could possibly come into play, right? So tier one, social security, same conversation. So let's look at tier one and you can see this math again on my video. Understanding a tier one benefits on the YouTube channel. Check that out. So average index, monthly earnings, the top 35 years, that gives you what your monthly pay payment would be for tier one, right? So your tier one monthly would be 90% of aim. For the first nine and $26 plus 32% between nine 26 and 55, 83 and 15% over 55 83. So that gives you what your monthly tier one benefit is going through that very fast. Like I said, you can check that on tier one. So that's now here comes the important part when it comes to non-covered P pensions, right? So you've, let's say you've done 20 years in the railroad and 20 years for the federal government, right? So you have, you're gonna have a reduction there, right? So how they, how they come up with the reduction. So it's years of service and it all comes off of this number here. This is the important number, 90%, right? So if you've done 30 years, OK in the railroad, 90%, 90%. So there's no reduction, okay? 30 years equals no reduction. That's important. And then every year below 30, it's gonna it's going to knock off 5%. So 85% for 29 years. This number, this a big multiplier becomes 85%, and it goes all the way down 5% every year, and then stops at 20 years at 40%. So it can never go below 40%. Is the bottom number here. So if it's 15 years, this would still be 40%. So that's where the a railroad that's where the reduction comes in on on your a tier one. So let's just go through an example and see if this helps you out here. So you have a railroader stone, 20 years in the railroad and 20 years. I said in the federal government, 67 years old, he's gonna he's going to retire. So he has a, a non-covered pension of $3,000 a month. And theoretically he should have a tier one benefit of $3,000 a month. Awesome. Okay. However, because he did the 20 years in a non-covered position, there's going to be a reduction on his tier one. So let's work through the math on this. So 20 years we know it's 20 is 40%, so it's gonna be 40% times the $926. The first $926 is $371, and then 32% times the balance here is 2000 $74 to $664. So is adjusted. Tier one is going to be 1030 $5. That's what he'll get at full retirement age at 67 on the tier one. So he will get his pension of 3000 is non-covered pension of $3,000 a month. But from the railroad retirement board on the tier one, he will get 1000 $35 a month. Okay. Tier two is not affected. So whatever his tier two calculation would be, that's what he would be get on that. So now also, which is interesting is just on a spouse, right? So if the spouses also collecting the pension there a spousal benefit part of the pension her tier one, her spousal benefit on tier one will be deducted of by two thirds of what she is receiving on her on her pension. So yeah, it gets, it gets a little bit significant, but you have to kind of do the math on that. So like I said, it's kind of niche-y for those people that have worked in the non-covered positions. But it's very important sit down and figure out this math cause you got to make that retirement budget right? Very important to plan. You know, what, what kind of resources am I going to have in retirement? And those, you know, those are the things that I help you out at high ball advisors. We figure out what the, what these numbers look like and how does that fit your budget and lifestyle in retirement. So, you know, feel free to reach out and give me a call. In the meantime, check out my YouTube channel, putting up a lot of videos. I'm also putting up a Q and a every day, one to two minute Q and A's. So send in your questions and I'll do a video on and answer that. In the meantime, stay safe. Stay on track and take care of 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.