As we do around this time of year; check on the financial health of Railroad Retirement. If you’re between the ages of 40 and 70, the health of your Railroad Retirement benefits is likely top of mind.
After all, your hard-earned money contributes to a retirement system that you’ll count on when you tie up for the last time. So, how financially healthy is the Railroad Retirement system in 2024?
Let’s dive into the current state of the system, review recent reports, and explore what that means for your retirement planning.
The Railroad Retirement System: An Overview
Before we go deep, let’s briefly look at what the Railroad Retirement system is. We have discussed RR benefits extensively over the years on this site, and are currently producing a book.
Information about Tier 1 and Tier 2 benefits can be found here.
Quick summary of both tier 1 and tier 2 Railroad Retirement benefits:
- Tier I: Similar to Social Security, but in most cases greater benefit payout.
- Tier II: Provides additional benefits that are unique to railroaders.
This system is managed by the Railroad Retirement Board (RRB), and its financial health impacts both current and future retirees.
Key 2024 Financial Reports
The Railroad Retirement Board (RRB) provides annual financial reports to Congress on both the retirement and unemployment systems. In 2024, the 29th Actuarial Valuation was released, summarizing the assets and liabilities of the Railroad Retirement system.
These reports offer a snapshot of how the system is performing and whether corrective actions, like tax changes, are necessary.
What the Reports Say
As of September 2023, the Railroad Retirement system’s assets totaled $26.5 billion. This includes funds managed by the National Railroad Retirement Investment Trust (NRRIT) and accounts at the Treasury. For the railroad unemployment insurance system, the cash balance stood at $362.8 million.
The big takeaway? The financial health of railroad retirement system is stable right now, but its health over time will depend on factors like railroad employment levels and investment returns.
As has been the case in the past.
Long-Term Projections: The Good News
When the RRB conducted its latest Actuarial Valuation, they used a 75-year projection period (2023-2097). They looked at three scenarios: optimistic, moderate, and pessimistic, to predict how the system would perform.
The good news is that under all employment assumptions — even the pessimistic assumption — the Railroad Retirement system is not expected to experience cash-flow problems during that time.
This means that, unless there’s a drastic reduction in railroad employment or significant investment losses, retirees and pre-retirees can breathe a sigh of relief.
The system is designed to remain solvent for at least the next 75 years. That’s great news for anyone in their 40s, 50s, or even 60s who is planning for their financial future.
The reason we consider individuals in their 40s, is because that person may work for another 25 years, and be retired after that for another 25 years or more. This is well within the 75 year projection concluded by the railroad retirement board.
What Does This Mean for You?
Planning for Pre-Retirees (Aged 40-60)
If you’re in your 40s or early 50s, retirement may feel far off, but it’s not too early to start planning. One of the things I emphasize when working with clients in this age group is diversification.
Sure, your Railroad Retirement benefits look secure, but putting all your eggs in one basket isn’t a good idea. Here are some strategies to consider:
- Maximize contributions to other retirement accounts: While you’ll receive Tier I and Tier II benefits, don’t neglect your 401(k) or IRA. Make sure you’re contributing as much as possible to these tax-advantaged accounts.
- Consider investment diversification: When was the last time you rebalance your portfolio? Depending on your risk tolerance and investment time horizon it maybe time to consider reduce some of the risk in your investments.
- Review your long-term financial plan: This is the age to reassess. Are you saving enough? Do you need to boost your retirement savings to meet your goals?
Don’t neglect your other savings options
Depending on your situation automatic contributions to savings and/or investments can assist in meeting or achieving your comfortable retirement goals.
Planning for Retirees (Aged 55-70)
If you’re already in your late 50s or early 60s, retirement is just around the corner. At this point, your focus should be on maximizing your benefits and ensuring that you’re well-prepared for healthcare and other potential expenses. Here’s what to keep in mind:
- Timing your retirement: When you decide to retire affects your benefits. By delaying retirement, you may increase your monthly payments, which is especially helpful for Tier II benefits.
- Healthcare planning: Railroaders often have access to retiree healthcare benefits, but don’t rely solely on that. Medicare kicks in at age 65, but if you’re retiring earlier, make sure you have a plan in place for health insurance.
- Long-term care: Many retirees overlook the potential costs of long-term care. Explore long-term care insurance or other strategies to cover these expenses in case you need them later in life.
Key point
Review your plan for retirement, making sure your desired lifestyle can be achieved. Consider the potential cost of healthcare before and after medicare.
The Importance of Employment Trends
The financial health of the Railroad Retirement system depends heavily on railroad employment levels. While the 29th Actuarial Valuation didn’t raise any red flags, the RRB made it clear that a sudden, unanticipated decrease in railroad employment could spell trouble. Why? The fewer workers paying into the system, the harder it becomes to sustain benefits at current levels.
As the industry faces automation and other challenges, it’s something we’ll need to keep an eye on. However, the system’s flexibility allows for adjustments to the payroll tax rate if necessary to maintain solvency.
Below we address if the Railroad Retirement Board decided if there was a need to adjust payroll tax rates.
Unemployment Insurance: A Smaller Piece of the Puzzle
The RRB also released its report on the railroad unemployment insurance system. While smaller than the retirement system, it’s still important to know how it’s performing, especially if you’re concerned about job availability.
The RRB found that, even with unemployment levels fluctuating, the system is expected to stay solvent through 2034. However, in the worst-case scenario (the pessimistic projection), the system might require small loans in 2028 and 2029, but these would be repaid by 2029.
If unemployment rises significantly, contribution rates could adjust to keep the system in balance.
No Immediate Changes to Payroll Taxes
Another piece of good news from the report is that no changes to payroll taxes were recommended in 2024. Both employers and employees will continue to contribute at current rates, so there are no surprises on that front.
Staying Informed and Prepared
If there’s one thing you take away from this article, let it be this: stay informed. The financial health of the Railroad Retirement system is stable now, but it’s always a good idea to monitor the situation as things can change.
This is especially true if you’re relying on these benefits as a significant portion of your retirement income.
We will continue to provide insights on understanding the Railroad Retirement system. Stay in the know and sign up for more updates.
Conclusion
The financial health of Railroad Retirement system is in good shape, but like anything in finance, it’s always smart to plan for the unexpected. Whether you’re just starting to think about retirement or you’re on the verge of retiring, the key is diversification and proactive planning.
Take control of your financial future today, and make sure that your retirement years are as secure and comfortable as possible.