Railroaders might want to pay more in taxes.
Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors, and today maybe we want to pay more in taxes if you're a railroader. I don't know, it's kind of crazy but I thought I'd take a shot at this anyway, see if you guys can agree with me on that. So what am I talking about? I'm really talking about the Tier Two portion of railroad retirement. A lot of people say it's a tax, I think of it more as a pension contribution to be perfectly honest with you, kind of forced retirement savings, so if I can put more money away, the payout is so much better, all right? It's better than anything out there on the marketplace.
Let's just review the quick Tier Two fundamentals, so to speak. In 2022, 4.9% of your paycheck was garnished for the Tier Two portion "tax" up to 109,200. Okay? Now remember, the railroad kicked in 13.1% of that, and then 2023 that number's going up to 118,800, and the railroad's still 13.1%. Now, what that tells me is I can put, if I'm a railroader, I can put more money into the Tier Two system. I know more is coming out but I think that's a good thing. I think you're getting a much better return on your investment, so let me show you what I'm talking about.
Here's the Tier Two formula, .007, I have no idea why that is, times average monthly earnings, times years of service. Average monthly earnings, that's going to be the 60 highest month, your highest month. If you can contribute more in there, because the new number is 118,000 and still going up higher, this average monthly earning part, that's kind of a variable really, that will go a lot higher. Your monthly earning will be a lot higher so, therefore, your Tier Two payout is going to be bigger. Obviously, years of service are what they are, .07 doesn't move, all right? This is the big number that gets affected by that higher band, therefore a bigger payout on the Tier Two for retirement.
Let's just run through it for somebody with 30 years of service. At the end of 30 years, let's say, a railroader employer, employee I should say, might have paid $120,000 into railroad retirement for Tier Two, which is a lot of money. I'm not going to say that's not a lot of money but over 30 years that's what they might have paid in. At the same rate, using that number, an employer might have paid $320,816 in there. See how much more money they've paid in? That's like a three to one ratio almost so they've paid a lot more money into that.
Then, think of that railroader when they retire, their Tier One might be $2,000 a month and a spouse, which is 45%, would be 900 so that's $2,900 a month they're getting, which is great, $2,900 a month just for the Tier Two portion. What's that worth? If you went out today and said, "Hey, I need $2,900 a month, Mr. Insurance Company or Mrs. Insurance Company, how much do I have to give you to get 2,900?" That's $530,000 to replicate $2,900 a month so, "Hey, I've kicked in 120,000. I now have a valuable asset here of at least $530,000. This is fantastic."
What I'm saying is, the more where you can pump into the Tier Two, the higher they move that band, the payoff is better. When you think of taxes, you never really see that direct benefit of going into [inaudible 00:04:17]. You pay [inaudible 00:04:18], well you get sewer, you get police force, you get fire department, education system, those type of things, but this is different. Tier Two, it's just a contribution, it comes right back to you so you have to get a little different mindset so I like a little bigger Tier Two payment if I was a railroader, I think it's just a great thing to look at.
Anyway, feel free to reach out to me, discuss this. You say, "Hey John, you're nuts, nobody wants to pay more." That's fine, we can have a debate back and forth on that. If you want to understand your Tier Two and how that affects your railroad retirement and you're at or near retirement, reach out to me. Go through the Boarding for Railroad Retirement Process, that would be great. Click on the notification bell to get the latest video. Obviously, subscribe to the YouTube channel, really do appreciate it, really growing great. Until next time, 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.