More Things To Consider When Making Your Annuity Election

Understanding the value and cost of your choices can have a lasting impact for you and your spouse.

Last week, we covered “13 Things to Know About Your Annuity Options,” which outlined some of the choices federal employees have to make when electing Civil Service Retirement System or Federal Employees Retirement System benefits. Those include spousal survivor benefit elections for maximum or partial survivor annuity; no survivor benefit in the form of an annuity payable only during your lifetime; an insurable interest election to provide for someone who has an insurable interest in you (i.e. a financial need for the income that you are providing); and an option to provide for a former spouse even though the survivor annuity may not have been awarded in the court order at the time your divorce was finalized.  

After reading the comments that followed last week’s column as well as a number of emails I received about it, I decided that this topic deserves a little more attention.  

This is a critical decision federal employees make at the time of retirement. Understanding the value and cost of this election can have an impact throughout the remainder of your life and, if you are married, the life of your spouse.  

Let’s take a look at some of the comments as we dig a little deeper into this topic.

Could you please provide more information when there is a married couple where both spouses are entitled to their own retirement benefit?

To answer this question, it is important to understand what happens to all of your benefits when one spouse predeceases the other. This includes Social Security, life insurance, health insurance and the proceeds of the Thrift Savings Plan in addition to the election of a survivor’s annuity benefit under CSRS or FERS.

The most important question to ask each other when electing the spousal survivor benefit is: “If I die first, will you have enough income to support your lifestyle?” Don’t assume the older spouse will die first, or the one in poor health will predecease the other. Nothing is guaranteed. Also, remember that if both spouses are receiving Social Security retirement, only the higher of the two Social Security benefits are payable (or if the widow’s benefit is payable first, then the surviving spouse may delay their own earned benefit).  

It may be more important to ask other questions, such as:

  • Which spouse is the spender and which spouse is the saver? In my family, if I were to die first my husband would be better off financially (but very lonely!) since I am the one who spends most of the money. My husband is very frugal and I have been known to be a spendthrift at times. (You would think with my background, that wouldn’t be the case, but I would be lying if I said otherwise.)  
  • Is there other income from life insurance or the sale of property that would come into play upon the death of one spouse?
  • Is there is a source of income that may become available when we become “one of us instead of “two of us?” For example, choosing to delay Social Security for one spouse while both spouse’s are living so that you aren’t used to having the additional source of income and the benefits of delaying a Social Security benefit can provide a larger widow’s benefit to a surviving spouse. Consider “turning on” the second Social Security benefit at age 70, unless one spouse passes away at a younger age. It sometimes makes sense for the higher wage earner to delay as the delayed credits will provide an even greater benefit. Another example is to delay receiving substantial TSP withdrawals while there are two of you to allow a greater distribution for the remaining life of the surviving spouse.

Interesting that Tammy provided no discussion on the use of pension max for couples who are both federal employees/retirees. Would like to have seen some discussion on that.

Sure. Pension maximization is defined by Investopedia as a risky retirement strategy for couples that seek to secure the best annuity payout and balance that risk with life insurance. The words “risky” and “federal” usually don’t go together in the same sentence.  

Why is this considered risky? It’s because the value of life insurance (pension max is a life insurance product) is dependent upon answers to the following questions:

  • When are you going to die?
  • How long is your spouse going to outlive you, if at all?
  • What will inflation be over your lifetime and your spouse’s lifetime?
  • Are you healthy and young enough to purchase this product at a cost that will be less than the reduction to your CSRS or FERS annuity?
  • What is the beneficiary going to do with the proceeds to be sure they maintain enough income should they survive you?

Life insurance has a finite value on the date it is sold. It will generally have that same value on the date the benefit is paid. In other words, there is no cost of living adjustment or income guarantee on a term or whole life insurance policy. There are annuity products that provide a lifetime stream of income, but there are caveats to these products such as your health and age at the time of purchase, how long you delay receiving annuity payments from the date of purchase as well as the health of the insurance company backing the product sold. These products are quite complicated so buyer beware.  

Another factor related to the election of a CSRS or FERS survivor benefit is the need to provide protection to a surviving spouse for continuation of health insurance. In order for a surviving spouse to continue coverage under the Federal Employees Health Benefits program, they must have entitlement from their own federal retirement or salary, or they must be entitled to a survivor annuity (full or partial spousal election or be named as the insurable interest election) based on your CSRS or FERS retirement. Therefore, even if you provide a life insurance benefit, there may be a need to elect a minimum spousal survivor annuity in order for your spouse to maintain FEHB in the event you predecease him/her.

There is no “spousal protection” on the pension max product. The coverage can be canceled or changed without spousal consent. This is not the case with a spousal survivor annuity under CSRS or FERS, which is protected under spouse equity provisions of federal law.  

If you would like to learn more about pension max, here is an article from Susan B. Garland, Kiplinger’s Retirement Report, that points out the pros and cons of this option.

Be careful when considering pension max as a substitute for the spousal survivor benefit. And remember, there is a commission on the sale of insurance products. If you go the survivor benefit route under CSRS or FERS, there is no middleman.

The following comment came from James Marshall, Deputy Director of Federal Benefits, National Active and Retired Federal Employees Association: Unlike the rules for death-in-service OR for folks who get married shortly BEFORE retirement and make a spousal survivor benefit election at retirement, the “death deemed accidental” and “birth of a child” does NOT apply to annuitants during the first 9 months of marriage if they get married AFTER they retire from federal service. The reduction to the CSRS or FERS benefit to provide a survivor benefit cannot begin until the retiree has been married for nine months when the marriage occurs post-retirement.

Thanks for the clarification, James. This comment pertains to item No. 2 from last week’s column regarding a post-retirement marriage.

As you can see, even after studying this for the past 30 plus years, I learn new things every day. One thing I can tell you with certainty: Ask questions when you don’t understand something before you sign the form. It’s also always a good idea to get a reference to a resource or policy when you ask a question, and get the answer in writing. Documentation is very important in any government work, including your retirement.