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Railroad Retirement along with 401k and Roth IRA?...Need some advice

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  • Railroad Retirement along with 401k and Roth IRA?...Need some advice

    I am just looking for some opinions or advice on my retirement planning. I am 35, Single and employed by a US Railroad (5 years) where we don't pay into SS, but instead pay into Railroad Retirement which is automatically deducted like SS would be. Average retired railroad worker gets a monthly check from RR is around $2700-$3000. I think most even make more if they have worked loads of overtime throughout their career, longer years of service, etc. I hear many retirees say they get around $4000 month plus their spouse gets a nice chunk too. But anyway, I also contribute about $450/month between my 401k and Roth IRA. I currently have about $30k in 401k and only about $3k in Roth IRA. What do you think? Is this a good plan? Should I be doing both the Roth IRA and 401k? I can't afford to max out the Roth just yet, but will eventually. I have to work there my entire career and can't retire until age 60 to get the full RR benefits.

  • #2
    Well, all you can do is plan based on today's tax law. Railroad benefits are taxed the same way SS benefits are. So for a single person, if half of RR benefits plus all other income is less than 25k, then your RR benefits are not taxable. So supposing your RR benefits are 36k per year, and supposing you end up with a 500k or so nest egg, perhaps half of your RR benefits will be taxable. (This is very "rough and dirty", but gives you a general idea for planning purposes).

    Using our current federal income tax brackets, you get your first 12k of taxable income taxed at 0%, your next 9.5k taxed at 10%, your next 29k taxed at 12%. Looks like you're not going to pay tax higher than 12%. (Using the 4% safe withdrawal rate, a 500k nest egg provides an annual withdrawal of 20k. 18k (taxable portion of RR benefits) + 20k = 38k. )

    What is your marginal tax bracket right now? Is it 12% or 22%?

    In your situation, I think I'd be splitting my nest egg contributions between tax-deferred and Roth, but I'd focus on the tax-deferred. Maybe $100 per month to the Roth and the rest in tax-deferred. Even though tax-deferred is the clear winner (avoid 12% or 22% tax now, pay 0-12% later), there is no telling what tax rates may be in the future. Plus, the Roth offers flexibility that the tax-deferred just doesn't.

    Every 5 years or so, you should re-visit this question. If your circumstances and/or tax laws have changed, it may be that the Roth becomes the clear winner.

    Also, you should be certain that you are putting quality, low-cost investment vehicles in your Roth IRA and are choosing the best options available in your 401k. Make certain you have a reasonable asset allocation plan.

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    • #3
      To echo Petunia's comments - costs are one thing you have control over. Market movements aren't something you can control, so you'll want to limit your investing costs and find a way to at least mitigate market fluctuations.
      james.c.hendrickson@gmail.com
      202.468.6043

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      • #4
        1. How much do you earn?
        2. Is there a match on the 401K?

        I would not include the RR pension in your retirement planning if at all possible.
        a) You might not work there for 25 more years.
        b) The pension may or may not exist in its current form 25 years from now.

        So my advice is 15% to some combination of your 401K and Roth.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

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        • #5
          Originally posted by SilverJK View Post
          I am just looking for some opinions or advice on my retirement planning. I am 35, Single and employed by a US Railroad (5 years) where we don't pay into SS, but instead pay into Railroad Retirement which is automatically deducted like SS would be. Average retired railroad worker gets a monthly check from RR is around $2700-$3000. I think most even make more if they have worked loads of overtime throughout their career, longer years of service, etc. I hear many retirees say they get around $4000 month plus their spouse gets a nice chunk too. But anyway, I also contribute about $450/month between my 401k and Roth IRA. I currently have about $30k in 401k and only about $3k in Roth IRA. What do you think? Is this a good plan? Should I be doing both the Roth IRA and 401k? I can't afford to max out the Roth just yet, but will eventually. I have to work there my entire career and can't retire until age 60 to get the full RR benefits.
          Focus on several variables not mentioned
          1) How much do you SPEND per year?
          1a) will the RR retirement cover most spending (define in absolute dollars and by %, for example if you spend $6000/month and the RR pension could pay $3500/mo or 58% of income. This would define a problem that you need to make up $2500/year in spending, or 42% of your income
          2) At what age do you WANT to retire
          2a) redefine answers to 1a adding an age- both in absolute and by %)
          3) At what age is maximum RR income (for example SS has different payouts at age 62 and at age 70)
          3a) now redefine answers to 1a in terms of retirement at age 62 and retirement at age 70

          For example, the question you want to ask yourself
          If you retire at at age 62 and need to replace 45% of your income (not covered by RR), what is the plan to achieve this?
          If you retire at age 70 and need to replace 20% of your income (not covered by RR), what is the plan to achieve this?

          In general, if you spend $Y per year, you need 25X that amount to retire.
          If the RR pension pays $3500/mo, multiply by 12 to get annual benefit ($42000 for example=12*3500)
          then if you spend 6000/mo=$72000/year
          subtract $72,000-$42,000 and you have a gap of $30,000 per year needed, 25X this amount is $750,000
          your approximate goal to make up a $30,000 per year income gap is $750,000 invested in the 401k and Roth IRA

          Because of taxes, you could save less than $750,000 and still make this work- for example if you had $600,000 in the Roth, I think that would be better than $750,000 combined in Roth+401k. This is an approximate guess.

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          • #6
            How does someone get 600k in a Roth?

            Even assuming $5500 per year. Then some increase and the catch-up phase.

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            • #7
              Originally posted by Jluke View Post
              How does someone get 600k in a Roth?

              Even assuming $5500 per year. Then some increase and the catch-up phase.
              Conversion, maybe. Or someone is over 110 years old.
              Last edited by msomnipotent; 10-21-2018, 06:40 AM.

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              • #8
                Originally posted by Jluke View Post
                How does someone get 600k in a Roth?

                Even assuming $5500 per year. Then some increase and the catch-up phase.
                rule of 72 10% return
                600K age 65
                300K age 58
                150k age 51
                75k age 44
                38k age 37

                38k could be $5500 contributes for 10 years age 28-38=$55,000
                from that point the balance doubles every 7 years

                rule of 72 8% return
                600k age 60
                300k age 51
                150k age 42
                75k age 33
                38k age 24

                150k of contributions/returns by age 42 very doable 5500 contributions over 20 years=$110,000 ages 22-42.

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                • #9
                  the problem has been that Roth hasn't been around that many years and contributions I swear were $2000, $3000, etc. It wasn't $5500 until after 2010 I fee like. So more than likely conversions.
                  LivingAlmostLarge Blog

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