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Stop, Look & Listen: Railroad Retirement Benefits Q&A

Answers are provided by Robert S. Kaufman

401(k) vs. Railroad Retirement

(Posted December 22, 2000)

Question 81: I'm 37 years old, with over $11,000 in a 401(k) account. I've been offered a job with a railroad. Would I do better in retirement with a Railroad Retirement pension than continuing my 401(k)?

Answer: Starting at 37, you would have about 25 years under Railroad Retirement when you reach 62. This could produce a fairly significant pension benefit. And many railroads also offer 401(k) accounts so you could have both types of retirement benefits. If not, you could always contribute to an IRA to supplement Railroad Retirement.

There is a basic difference between "Defined Contibution" plans such as a 401(k) or IRA and "Defined Benefit" plans such as Social Security, Railroad Retirement, and private pensions.

In a defined contribution plan, the individual takes all the risk in producing a retirement benefit. The worker has to either manage the investment of the funds, or hire someone to do it for them. And the investments have to generate income at a certain level annually in order for worker to met his or her retirement needs. If, for example, the funds are heavily invested in the stock market and the market falls, some of the retirement funds may be lost. (Just look at what's happened in 2000!)

In a defined benefit plan, the plan-- not the individual worker-- takes all of the risk. And the investment of funds is handled by the plan's trustees, not by each worker. Also, the pension funds are insured to a great extent by the federal government through the Pension Benefit Guaranty Corporation (in case the company goes out of business or the plan becomes insolvent). You perform X years of service and earn a benefit of Y dollars per month, and the plan spells out when you can start to receive it.

By the way, in 2001 if you had retired with 25 years of service, Railroad Retirement could pay you well over $1,000 a month. (This of couse would be much higher by 2026.) To generate the same income with 401(k) or IRA funds you would need to accumulate $172,000 and invest that amount so that it earns least 7% per year. If you only can earn 5%, then you would need $240,000.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.

Copyright 1997-2017 Robert S. Kaufman
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