What You Don’t Know
On the satisfaction front, it's great to be able to provide a piece of information that makes a difference to an employee's future. In my case, this happens fairly often. Here are a few examples from the past few weeks where something I've been able to clarify or correct has been able to make a difference in someone's retirement plans.
Spousal Survivor Benefits
If I had a nickel for everyone who has considered -- and then rejected -- the idea of buying life insurance instead of choosing the federal spousal survivor benefit, I might be on a beach in Bali right now. I'm not saying it should never be done. That's a personal choice. What I'm saying is that there are a lot of people who haven't considered what they give up and what they gain by providing their spouse with an annuity. Actually, it should be the spouse who truly understands this decision, since he or she ultimately is the one who will be affected by a poor choice.
Here are a few things to consider:
- The reduction to your retirement to provide a survivor annuity reduces your taxable income. In other words, it isn't as expensive as it looks. Many insurance salespeople don't know this.
- The annuity is adjusted for inflation during your retirement as well as during the life of your surviving spouse. Consider that a $10,000 per year retirement under the Civil Service Retirement System in 1979 would now be worth $31,838 annually, due to the effect of cost of living adjustments. How much life insurance would you need to provide an income equal to the value of a survivor annuity based on this retirement? Hold on, because the math gets a little complicated. The annuity in this example would work out to about 55 percent of $34,000 (the approximate value of the retirement before the reduction for the survivor annuity, or $18,700 annually). You would need about $300,000 to produce a comparable amount of income to replace that. If you withdraw $1,550 a month from $300,000, add a 3 percent cost of living adjustment and assume you'll earn 6 percent interest on the principal, this money would last about 17 years. A few things to note: Where can you get a 6 percent return today? Would you have bought this much life insurance 30 years ago? What if you live longer than 17 years?
- If your spouse dies first, under both CSRS and the Federal Employees Retirement System, your retirement benefit will "pop" back to the amount it was before it was reduced to pay for the annuity.
- The check comes every month for the rest of your spouse's life. The life insurance payment is a one-time deal.
- If you purchase a term life insurance policy, what happens when the term is up? Do you renew? Very expensive. Drop the coverage? Then your spouse gets nothing when you die.
Continuing Health Insurance
I've encountered a series of misunderstandings about the rules regarding continuing Federal Employees Health Benefits Program coverage into retirement. Here are a few rumors I've had to shoot down:
- Retirees pay more for health insurance than employees pay. Nope. The government continues to contribute the same amount to the premium for retirees as it does for employees. The only difference is that you won't see your premiums separated from your income on your W-2 form for tax purposes in retirement. Federal law enforcement officers can deduct the cost of their health insurance (up to $3,000 per year) from their taxable income in retirement, though.
- You must cover your spouse for five years before you retire if you want family coverage in retirement. In fact, you can wait to choose self and family coverage until after retirement. If your spouse is still working and has his or her own health insurance, and you don't have dependent children who need coverage, you can keep self-only coverage while you're working and switch later. But be sure you have self and family coverage on the day you die. The only way a surviving spouse gets coverage if you die first is if he or she is covered on the day of your death -- and they or another family member also must be entitled to a survivor annuity.
- Two federal employees who are married cannot switch from self and family coverage to two self-only plans if they are within five years of retirement. In this situation, it might seem like the spouse who was covered under their spouse's self and family coverage wouldn't have five years of "their own" coverage prior to retirement. But you need not be the one paying for FEHBP for five years prior to your retirement, you only need to be covered under the program. Some couples make this change because they no longer have children who are qualified to be enrolled in their self and family coverage. Two self-only plans are generally less expensive than one self and family enrollment.
Leaving Early Under FERS
Many people seem to think you have to be 62 or older to be eligible to retire under FERS. The fact is, if you will have 30 years of service by the time you reach the FERS minimum retirement age (55-57, depending on your year of birth), you can retire. You will be eligible for an unreduced basic retirement benefit (about 30 percent of your high-three average salary -- or more, depending on how much service you have beyond 30 years). And you'll be eligible for a retirement supplement that will substitute for Social Security until you turn 62, which will be computed using all of your civilian service covered under FERS.
You'll also be entitled to make monthly withdrawals (or purchase an annuity) from your Thrift Savings Plan without incurring a 10 percent early withdrawal tax penalty as long as you leave in the year you turn 55 or later.
Keep in mind, however, that other eligibility rules apply to people who do not have 30 years of service, and some people will not be able to make ends meet on the retirement benefit they will be eligible to receive even with 30 years of service.
Can you believe I got through a whole column this week without mentioning Medicare? There are some myths about that subject, too, but I thought I'd give you a break, since I've focused a lot on Medicare in the past few months.
By the way, if you've sent me an e-mail recently (or not so recently), please be patient. I want to answer your questions, but some of them take some time. With the seminar season heating up, my time is more limited these days.
In the meantime, make use of the resources available at your agency and on the Internet. The answers are out there. You just have to find them.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.