Retirement Planning Retirement PlanningRetirement Planning
Advice on how to prepare for life after government.

For Richer, For Poorer

ARCHIVES
I recently received an e-mail from a reader named Melanie. She and her husband are both federal employees, and they're planning to retire later this year. They want to know if it makes sense to provide each other with spousal survivor annuities, or if it would be better for each of them to take their own full annuity with no reduction. Let's look at their situation and see if you can help me decide what I should tell them.

Melanie is entitled to an unreduced Civil Service Retirement System benefit of $40,000 a year. If she provides Matthew with the maximum spousal annuity, her retirement will be reduced by $3,730, to $36,270. (This also reduces her taxable income, so the net difference is less than $3,730 when you take taxes into consideration.) The reduction is permanent, but if Matthew dies first, she can have the full annuity amount restored to $40,000. If Melanie dies first, Matthew will be entitled to 55 percent of $40,000 or $22,000 a year for life. Cost-of-living adjustments would be applied to the benefit both before and after death, regardless of which spouse dies first.

Matthew, who has been working longer than Melanie and has a higher salary, has an unreduced CSRS benefit of $65,000 a year. If he decides to provide Melanie with the maximum spousal annuity, his retirement will be reduced by $6,230, to $58,770. Melanie would be entitled to 55 percent of Matthew's unreduced CSRS benefit if he dies first, for a lifetime survivor annuity of $35,750 a year.

Each spouse is entitled to the maximum survivor annuity of the other. In order to provide only a partial survivor annuity or none at all, a retiree has to get the notarized consent of his or her spouse. Let's look at some of the options Melanie and Matthew could consider:

Matthew elects no survivor annuity: Melanie elects no survivor annuity: Total retirement income
$65,000 $40,000 $105,000
Matthew dies first: Melanie is the survivor:
$0 $40,000 $40,000 (loss of $65,000)
Matthew is the survivor: Melanie dies first:
$65,000 $0 $65,000 (loss of $40,000)

Matthew elects full survivor annuity: Melanie elects full survivor annuity: Total retirement income
$58,770 $36,270 $95,040
Matthew dies first: Melanie is the survivor:
$0 $40,000 + $35,750 $75,750 (loss of $19,290 income)
Matthew is the survivor: Melanie dies first:
$65,000 + $22,000 $0 $87,000 (loss of $8,040 income)

Matthew elects full survivor annuity: Melanie elects no survivor annuity: Total retirement income
$58,770 $36,270 $98,770
Matthew dies first: Melanie is the survivor:
$0 $40,000 + $35,750 $75,750 (loss of $23,020 income)
Matthew is the survivor: Melanie dies first:
$65,000 $0 $65,000 (loss of $33,770 income)

Wait, There's More

Of course, these aren't Melanie and Matthew's only choices. They could provide partial survivor annuities for each other. Under CSRS, one spouse can leave 55 percent of any base amount up to the full retirement benefit. For example, Matthew could elect to leave Melanie 55 percent of $30,000 rather than 55 percent of his full annuity. This would reduce his retirement by $2,730 instead of $6,230, and would leave Melanie $16,500 a year rather than $35,750.

From the information we have so far, it's hard to tell what to do. There are two very basic questions couples should consider when thinking about survivor benefits:

  • If I die first, how much money will you need?
  • If you die first, how much money will I need?

In reaching an answer to those questions, here are some other things to consider:

  • How much money do you need to maintain your current lifestyle so you won't have to sell the house, stop buying groceries, or move in with your kids?
  • Do you have other money that would be inherited by the surviving spouse that could be another source of income? (This could be Thrift Savings Plan investments, or funds in an individual retirement account).
  • Is either spouse entitled to other retirement benefits, such as Social Security, military retirement, or other vested pension benefits from previous employers?
  • Do you have long-term care insurance? If you used some of your money for insurance premiums rather than choosing a survivor annuity, then other investments could be preserved if one spouse were to need care.
  • Is life insurance an option instead of survivor benefits? A term insurance policy on one or both spouses could be used to cover a mortgage and other debt. A whole life policy also could work, but be sure to check with an insurance agent about exactly how it would work.

Popular Demand

In fiscal 2009, for every three former federal employees on the retirement rolls, there was one survivor annuitant. Spousal survivor annuities remain popular for several reasons:

  • There's no need to worry about stock market performance, or the need to manage an investment. The annuity is paid for the life of the surviving spouse, no matter how long she or he outlives you.
  • Cost-of-living allowances are applied to the annuity both before and after the death of the annuitant.
  • If your spouse dies first, the reduction to your annuity will end and your full annuity will be restored. If you remarry, you can choose an annuity for your new spouse.

Another important reason annuities are popular is that federal health insurance passes to a nonfederal spouse through these vehicles. If you leave no survivor annuity to your spouse and if he or she is not entitled to the insurance through their own federal salary or retirement benefit, then they lose you, your retirement and your health insurance if you die first. This isn't an issue for Matthew and Melanie, since they are both going to receive federal annuity benefits, but it can be a major concern for others. It pays to have at least a partial survivor annuity to protect your spouse's right to maintain health insurance coverage.

Next week, we'll look at annuity considerations for those under the Federal Employees Retirement System.

Clarification: The third paragraph of this article has been updated to clarify how much of Matthew's CSRS benefit Melanie would be entitled to if he dies first.

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.

Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at www.tammyflanagan.com and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

FROM OUR SPONSORS
JOIN THE DISCUSSION
Close [ x ] More from GovExec
 
 

Thank you for subscribing to newsletters from GovExec.com.
We think these reports might interest you:

  • Forecasting Cloud's Future

    Conversations with Federal, State, and Local Technology Leaders on Cloud-Driven Digital Transformation

    Download
  • The Big Data Campaign Trail

    With everyone so focused on security following recent breaches at federal, state and local government and education institutions, there has been little emphasis on the need for better operations. This report breaks down some of the biggest operational challenges in IT management and provides insight into how agencies and leaders can successfully solve some of the biggest lingering government IT issues.

    Download
  • Communicating Innovation in Federal Government

    Federal Government spending on ‘obsolete technology’ continues to increase. Supporting the twin pillars of improved digital service delivery for citizens on the one hand, and the increasingly optimized and flexible working practices for federal employees on the other, are neither easy nor inexpensive tasks. This whitepaper explores how federal agencies can leverage the value of existing agency technology assets while offering IT leaders the ability to implement the kind of employee productivity, citizen service improvements and security demanded by federal oversight.

    Download
  • IT Transformation Trends: Flash Storage as a Strategic IT Asset

    MIT Technology Review: Flash Storage As a Strategic IT Asset For the first time in decades, IT leaders now consider all-flash storage as a strategic IT asset. IT has become a new operating model that enables self-service with high performance, density and resiliency. It also offers the self-service agility of the public cloud combined with the security, performance, and cost-effectiveness of a private cloud. Download this MIT Technology Review paper to learn more about how all-flash storage is transforming the data center.

    Download
  • Ongoing Efforts in Veterans Health Care Modernization

    This report discusses the current state of veterans health care

    Download

When you download a report, your information may be shared with the underwriters of that document.