This week, I am going to take on a topic that always sparks a lively discussion during my seminars: whether or not to get a survivor annuity for your spouse.
In the federal system, you can make regular payments through a reduction in your retirement annuity in exchange for a monthly amount of money which will be paid to your spouse (or former spouse or someone else with an "insurable interest" in you), when you die.
But the benefit isn't cheap. Choosing a spousal survivor annuity at retirement causes a 10 percent reduction to a Federal Employees Retirement System basic annuity benefit and slightly less than that to a Civil Service Retirement System benefit. And if you choose this option, you might spend the rest of your life living on a reduced retirement benefit, only to have your spouse die before you. What can be done?
There are alternatives to electing spousal survivor benefits:
- Marry a spouse who is independently wealthy and doesn't need this benefit. (But you'll have to get him or her to sign a waiver, since they are "entitled" to it whether they need it or not. And if your spouse waives the survivor annuity benefit, he or she also may lose federal health benefits if you die first. To protect health insurance coverage for a nonfederal spouse, be sure to select at least a less expensive partial survivor benefit.)
- Purchase life insurance to take the place of the survivor annuity.
Judging from the responses I've received to previous columns, the second option looks attractive to a lot of federal employees. Here are a couple of examples:
- "Please explore purchasing term insurance -- $500,000 or more, 25-year level term or more, depending on your needs, in lieu of survivorship reduction. This is a government ripoff. Just take the minimum reduction to allow your spouse to have medical coverage if you die, no more."
- "I wish more retirees were explained this option in greater detail near retirement. The key, of course, is if you are insurable at or near retirement. If you do the numbers, you usually make out much better in buying the term insurance as opposed to taking the full or partial survivorship reduction option. The government wants you to take the survivorship option because of the payout reduction. Remember, the survivor gets the insurance proceeds income tax-free, as opposed to the taxable annuity."
In any case, choosing a spousal survivor annuity is much like buying life insurance. You're paying premiums (in the form of reduced retirement payments) so that your spouse can get a benefit if you die before him or her. Comparing the Benefits
Let's look at a couple of hypothetical examples:
Suppose Bill and George both retired at age 58 in 1980 under CSRS. They both received a CSRS retirement of $20,000 per year. (A GS-12 Step 10 earned $35,033 in 1980!)
Bill elected a survivor benefit for his wife, Carol. So his retirement was reduced by $1,730 ($144 per month) to $18,270. If he died before his wife, she would have received 55 percent of $20,000, or $11,000 a year. (Of course, since Bill retired, his retirement benefit and Carol's potential benefit have increased through annual cost of living adjustments. See the table below to track the value of these benefits.) George elected a minimum survivor benefit that would allow his wife, Linda, to keep her federal health insurance if he died. His retirement was reduced by $90 per year (to $19,910), so if he dies before Linda, she gets 55 percent of $3,600 or $1,980 per year. (Again, this amount is adjusted through annual COLAs.) George also purchased a 25-year level term life insurance policy for $250,000 at a cost of $2,988 per year ($261 per month).
| Year | CSRS COLA | Bill's Retirement | Carol's Survivor Benefit | George's Retirement | Linda's Survivor Benefit |
|---|---|---|---|---|---|
| 2006 | 3.3% | $41,309 | $24,869 | $44,970 | $4,476 |
| 2005 | 4.1% | $39,989 | $24,075 | $43,533 | $4,333 |
| 2004 | 2.7% | $38,414 | $23,127 | $41,862 | $4,162 |
| 2003 | 2.1% | $37,404 | $22,519 | $40,762 | $4,053 |
| 2002 | 1.4% | $36,635 | $22,056 | $39,923 | $3,969 |
| 2001 | 2.6% | $36,129 | $21,751 | $39,372 | $3,914 |
| 2000 | 3.5% | $35,214 | $21,200 | $38,374 | $3,815 |
| 1999 | 2.4% | $34,023 | $20,483 | $37,077 | $3,686 |
| 1998 | 1.3% | $33,225 | $20,003 | $36,208 | $3,600 |
| 1997 | 2.1% | $32,799 | $19,746 | $35,743 | $3,554 |
| 1996 | 2.9% | $32,124 | $19,340 | $35,008 | $3,480 |
| 1995 | 2.6% | $31,219 | $18,795 | $34,021 | $3,382 |
| 1994 | 2.8% | $30,428 | $18,319 | $33,159 | $3,297 |
| 1993 | 2.6% | $29,599 | $17,820 | $32,256 | $3,207 |
| 1992 | 3.0% | $28,849 | $17,368 | $31,438 | $3,126 |
| 1991 | 3.7% | $28,009 | $16,862 | $30,523 | $3,035 |
| 1990 | 5.4% | $27,009 | $16,261 | $29,434 | $2,927 |
| 1989 | 4.7% | $25,626 | $15,427 | $27,926 | $2,777 |
| 1988 | 4.0% | $24,475 | $14,735 | $26,672 | $2,652 |
| 1987 | 4.2% | $23,534 | $14,168 | $25,646 | $2,550 |
| 1986 | 1.3% | $22,585 | $13,597 | $24,612 | $2,447 |
| 1985 | None | $22,295 | $13,423 | $24,297 | $2,416 |
| 1984 | 3.5% | $22,295 | $13,423 | $24,297 | $2,416 |
| 1983 | 3.9% | $21,541 | $12,969 | $23,475 | $2,334 |
| 1982 | 8.7% | $20,733 | $12,483 | $22,594 | $2,246 |
| 1981 | 4.4% | $19,073 | $11,484 | $20,786 | $2,067 |
So how might Bill and George's choices have played out in the real world? Let's look at some hypothetical situations:
| If… | Carol will receive: | Linda will receive: |
|---|---|---|
| Husbands die one year after retirement, and wives are 55 years old. | 55 percent of $20,000 for life as shown in above table with annual cost of living adjustments. | 55 percent of $3,600 for life as shown in above table, plus $250,000 life insurance. If Linda invests her insurance proceeds at a rate of 5 percent, she will be able to receive an income of approximately $1,000/month with a 3 percent increase annually. Her money will run out in a little less than 30 years when Linda is in her 80s. |
| Husbands die in 2006, 26 years after retirement. Wives are 80 years old. | $24,869 per year for the rest of her life, with annual cost of living adjustments. | $4,476 per year for life. Term insurance expired and was not renewed because it would have cost more than $1,500 / month. |
| Bill's retirement is… | George will | |
| Wives die the year after husbands retire | Restored to the unreduced amount. If Bill later remarries, he may again choose a reduced retirement for a future spouse as long as he does so within two years of the date of remarriage. Bill must agree to pay a deposit equal to the difference between the amount of annuity actually paid and the amount of annuity that would have been paid if the survivor election had been in effect continuously since the date the reduction terminated. | Change the beneficiary of the life insurance to his children, or possibly just cancel the policy. If George remarries, he may provide a spousal survivor benefit for his future spouse even though he did not elect this for his first wife. If he does so, he must pay a deposit equal to the difference between the amount of annuity actually paid and the amount of annuity that would have been paid if the survivor election had been in effect continuously since the time of retirement. Interest is assessed against the amount owed at the rate of 6 percent, compounded annually. |
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