Will raging inflation destroy your railroad retirement?
Welcome, everyone, to another edition of the Highball Advisor's Railroad Retirement Whiteboard, my name's John McNamara of Highball Advisors. And today we're going to talk about inflation and the impact it's going to have on railroad retirees, right? People going into retirement, you're always thinking about fixed income, controlling your costs, those type of things. Right? So I thought what I'd do is demonstrate where inflation's going to impact and how we're going to try to fight against it. All right. So let's first look at the income coming into a retiree. All right. So we have tier one, tier two and pensions. Some people have pensions, some people don't, but stay with me. So tier one, it's really protected against inflation, because there is a cost of living adjustment, right? So if inflation goes up 4% on the year, your cost of living adjustment will be 4% and you'll be keeping pace with inflation. So that's fine.
Now your tier two is a different story. It will only go up 0.32% of the cost of living adjustment. Right? So to give you an easier way to think about it, let's say the cost of living adjustment is 3%. Then your tier two would only go up technically around 1%, a little bit less. But you get to the point. Now your pensions, if anybody has a pension, there is no cost of living adjustment. So as inflation, especially if it's spirals out of control, your pension's just not going to keep up. Now, if we can get back down to our 2% level every year, then the pension will be great, but that's something to keep an eye on, right?
So this is your guaranteed retirement income right here. So you need to understand that, right? That's a very important calculation. Then you have the variable stuff, right? The building up the nest egg, so to speak. Your 401ks, your IRAs. The impact of inflation on those, if it's just short term inflation, maybe this is a supply chain crisis. I don't know. It seems to be going on a little bit longer. So if it's just that, then it will be okay. However, the real impact, the real trouble area, especially on investments is if inflation's such that, say running at 5% and you have a market that's just not keeping a pace with that 5%, you're going to be losing money. So if we get into a scenario where it's just kind of, hey, the market's up 4% this year down 2% and up five, then down three, that sideways market. And you're constantly losing to inflation. That is a bad scenario there. Because you're not keeping pace. So this is your income side ledger. Very, very important to understand the impact of inflation on this side of the ledger.
Now, if we go over to the spending side, because you're saying, okay, well, how am I spending money? So when you look at retiree studies, you're spending declines basically 1% a year annually. Because think about it. If you're retiring at 60 you just have a lot more energy, you're doing a lot more things. And just as you get older, you're slowing down and you're just spending less and less and less every year. You're just not maybe going on those four trips a year instead maybe you do three, then two, then one, then you go, I'm staying home after that. So spending in the seventies is about half of what you're spending in your late fifties. So think about that. Now, although you do have, late in life, that late possible healthcare surge of spending. So you kind of have to plan for that. So that's the spending side of the ledger.
So what does this all mean? What kind of action items do you want to take away from guarding against inflation? First thing you got to do is know your guaranteed retirement income. You got to know your tier one, tier two, what's that monthly amount coming in. Do I have a pension? What's that coming in? I have to understand what that is. And then secondly, know your safe withdrawal rate. So how much can I take out of the nest egg every month and still keep a nest egg? So if I have, let's say a million dollars, well, I can't take out 50% of it every year. It's not going to last for 30 years. So you have to come up with that number. Is it 4%, 5%, 6%. Right. So that's a very important number to come up with on that safe withdrawal rate.
And then finally is okay, well I know what the inputs are. Just build a starting budget because I think a starting budget is a great way to go. So build, hey, this is what my retirement looks like. Let's say at 60, 65, we're more active. And now we know we can adjust that budget because it will decline as we get older, right? We're going to be spending less. So when you of your budget, that's what you can do about that. So there's a lot going on there, you can overcome inflation as long as you know what's going on about it. Let's not get panicky about it. As long as it doesn't get completely out of control.
But if you follow these steps, I think you'll have a good handle on what inflation looks like, especially on your retirement budget. So I hope you found this video very helpful. Reach out to me if you want to go through and try to get these numbers through my boarding for railroad retirement process. And the way you can sign up by that is just go into the description section of the YouTube video and there'll be a link there for a free boarding for railroad retirement assessment. Especially if you're nearing retirement, it's really important to know those numbers. If you're 35 years old, you really don't need to worry about it yet, just keep growing the nest egg, as they say. All right. Click on the subscribe button on this YouTube video. And that way you'll get all the videos coming in from the Whiteboards and other videos that I put out. And click on the notification bell, that helps. And share this also to other railroaders. All right. So until next time, everyone, please stay safe. Stay on track and take care. So long everybody.
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