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VIDEO: Understanding Tier 2 in Railroad Retirement Thumbnail

VIDEO: Understanding Tier 2 in Railroad Retirement

Tier 2 Video Retirement


Your Tier 2 annuity is what separates railroaders from non-railroaders, watch this video to have a working knowledge of these valuable benefits that you will be receiving in retirement.

Welcome, everyone, to the railroad retirement whiteboard. My name is John McNamara of Highball Advisors, and today we're going to talk about understanding your Tier 2 in railroad retirement. The basics, the fundamentals, all right? It's a big part of why people stay in the railroad, quite frankly, is the valuable benefits of Tier 2. So what I'm going to do is just walk you through the basics, and hopefully at the end of this video you'll have a good working knowledge of Tier 2 that you can share with other railroaders, because there's a lot of misconceptions out there. And it will help give you an understanding for retirement planning, because it's a big part.

So let's get started. We'll start on the basics. What is Tier 2? And to use an analogy, it's a pension. Think of it as a pension, it's going to be a retirement income stream coming to you in retirement. It's managed by the National Railroad Investment Trust, which is a quasi-government agency made up of management, labor, and government official, I believe. And they collect all the money, and they manage it. So they invest it, unlike Social Security where it buys treasury bonds. This they'll invest in everything from equities to real estate to hedge funds. A lot of things go in the soup there.

So how's the Tier 2 funded? It's funded by you guys, the railroaders, and the railroads. You pay into it. So there's a payroll tax comes out of everyone's paycheck. 4.9% comes out of the railroader and 13.1% comes from the railroad, these are 2020 numbers. Your 4.9% goes up to your salary of $102,300. That's the cap. Any dollar over that amount does not get taxed for Tier 2. All right? That gets changed every year.

So what are we talking about with Tier 2? We're talking about retirement income, that's the benefit of the Tier 2. So just quick breakdown of how the formula is calculated. There's no tests, so you won't be tested on it. Average monthly compensation for your 60 highest months in the railroad. So those are the top 60 months earning years. That gives you an average, what was the average of those 60 months, times the years of railroad service, 10, 20, 25, 30 years, times .07. Have no idea what that means, but it's there. And that will give you your monthly Tier 2 benefit number. What you can expect every month from your Tier 2. So somebody this year, in 2020, if they retired with 30 years of service, can expect almost $1,700 a month in Tier 2 benefits, just Tier 2. 20 years, about $1,118, and 10 years, about $560.

Now, what's important here is at full retirement age for people underneath 30 years. So if you're underneath 30 years, you have to wait till full retirement age to receive the full benefits. Otherwise, there will be a reduction in the Tier 2, similar to Social Security. However, if you're at 30 years, and let's say you're 60 years old, you're at full retirement age as a railroader, then there'll be no reduction. So your reduction penalties can be quite severe if you don't hit the 30 years and receive your Tier 2 below the age of 67. It can be upwards of 35% reduction, if you take it at 62, when your full retirement age is 67. So that's something you really have to plan about. All right?

Now, let's get into just some of the important things that I listed, and there's a few more, and I have them in other videos, taxes on Tier 2 and survivor annuities. That's a big one on the Tier 2. But so what's important about Tier 2? It's that guaranteed retirement income. So now you've got your Tier 1, which is kind of Social Security. And now you have Tier 2, you have two income streams, guaranteed income streams in retirement. Very, very important, great value there. Maybe even some of you might even have pensions, that's three guaranteed retirement income streams. Holy cow, that's great.

Another thing I get from a lot of railroaders is, "Oh, I left the railroad after 11 years or 10 years, do I lose my Tier 2?" No. Once you've done five years past 1995, you're vested, you can't lose your Tier 2 benefits. Although, it's a note, check out my other videos on survivor benefits. Your survivors can lose it if you leave the railroad and work for a non-railroad employee, that's a current connection issue. But you, the railroader, can never lose your Tier 2. All right? Spouse, there's a spousal benefit on the Tier 2. 45% of what you get, so if you got $1,000 a month in Tier 2, your spouse would get $450 a month, so that's a great benefit.

The cost of living increase, so it moves with the CPI, adjusted for inflation. However, only moves at 30% of CPI, so you have a little inflation risk there, but inflation is very low right now. So knock on wood, hope that. Another important thing about Tier 2 is no delayed retirement credits. So with Social Security and Tier 1, if you go past 67, you can get up to 8% a year growing on your Tier 1 or Social Security benefits. 8%, that's great. However, once you hit full retirement age on your Tier 2 benefits, there's no delayed retirement credit. So you'll have to come up with a good reason why you're not taking your railroad retirement annuity at full retirement age, because you're losing out on money. You're giving a free loan to the Railroad Retirement Board.

So these are just some of the important facts. I hope you all now have a working understanding of Tier 2. Feel free to reach out to me. If you have any questions about it, I can help walk you through it. Just put a comment on the YouTube channel here on this video and I can answer it that way. That's probably the best way. You can always reach out to me, schedule an appointment for a free railroad retirement assessment at highballadvisors.com. That's always there. Please, please, please, subscribe to my YouTube channel, want to keep the growth growing, and 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.