Georgia Applewhite, left, and her husband Raymond Applewhite, right, depart their retirement ceremony at Naval Hospital Camp Lejeune in 2016. They retired after a combined federal service of more than 70 years.

Georgia Applewhite, left, and her husband Raymond Applewhite, right, depart their retirement ceremony at Naval Hospital Camp Lejeune in 2016. They retired after a combined federal service of more than 70 years. Photo by Cpl. Mark Watola, USMC

Life and Death Benefits Decisions

Thinking through your survivor benefit options.

If you’re married, planning for retirement can be more complicated than if you’re single. There are decisions such as whether you should retire at the same time as your spouse or stagger your retirements a few years apart. Married couples also need to consider their options for continuation of health insurance coverage to be sure they’re providing lifetime coverage for both spouses. It’s important to consider your financial needs, regardless of which one of you is older or your health situation today. Many of these considerations revolve around survivor benefits.

Let’s look at three hypothetical married couples to see some of the factors at play in deciding what to do.

One Breadwinner

Bob is planning to retire under the Federal Employees Retirement System. His wife, Lorraine, worked very little outside of the home, which makes it especially important that she have survivor benefits if she should outlive her husband. While both are alive, Bob will provide retirement income for them through his FERS benefit, earned Social Security benefits and withdrawals from his TSP account balance.

Bob can choose a 10% reduction in his FERS retirement benefit to provide the maximum survivor benefit of 50% of his unreduced benefit. (This also reduces the income that Bob will report to the IRS by 10%, so the cost is less than it appears.) This election will provide a lifetime stream of income for Lorraine if she becomes the surviving spouse. Her survivor benefit will be increased by cost of living adjustments before and after the death of her husband.

If Lorraine dies before Bob, his reduced retirement can be restored to the unreduced amount.

With Lorraine’s notarized consent, Bob can choose a 5% reduction to his FERS retirement to provide a smaller 25% survivor annuity. This will protect Lorraine’s ability to continue insurance under the Federal Employees Health Benefits Program if Bob dies first.

If Lorraine has other income sources, such as an inheritance or proceeds from Bob’s life insurance, then this might be a reasonable option. However, she should proceed with caution. Counting on an inheritance of someone who is still living can be risky. The person providing the inheritance might outlive his or her beneficiaries. And the amount of life insurance that will be adequate to replace a survivor’s benefit will depend on how long Lorraine outlives Bob, if at all. It will also depend on the rate of inflation over both of their lifetimes.

With Lorraine’s consent, Bob could also elect to have no reduction to his retirement under FERS. This option would end the payment of his retirement benefit (and his health insurance under FEHBP) if he dies before Lorraine. If Lorraine is depending on Bob’s benefit for income and health coverage, they probably should not make this choice.

When it comes to Thrift Savings Plan investments, the default election for a married participant is the joint annuity option with 50% survivor benefit, level payments and no cash refund. If Bob chooses any other withdrawal option, he is required to have Lorraine’s notarized consent.

If Bob purchased a TSP annuity with some or all of his TSP investment, then it would depend on whether he elected a joint annuity for Lorraine to continue to receive payments after his death.

If Bob was receiving a series of monthly payments from his TSP balance, or if he hadn’t started to withdraw from his TSP account at the time of his death, the balance of the account would be paid to his beneficiary.

Bob also is eligible for Social Security. It provides a special one-time death benefit lump sum payment of $255. (Yes, that’s right, $255—it’s been capped at this amount since 1954.) When Bob files for his Social Security retirement, Lorraine will be entitled to a spousal benefit based on his work record that may be higher than her own earned benefit. The spousal amount has a maximum value of 50% of Bob’s full benefit amount.

As a surviving spouse, Lorraine would receive Bob’s higher Social Security benefit. Her spousal benefit (or earned benefit, if higher) would cease. Lorraine can receive a reduced survivor benefit as early as age 60 if Bob dies young or a full survivor benefit if she becomes widowed at her full retirement age or later.

Federal Couple

Suppose John is retiring under the Civil Service Retirement System and Carol is retiring under FERS. They both have more than 30 years of federal service and are retiring with above average salaries. A good way to figure out the need for a survivor benefit election would be to create a table where the value of their retirement benefits while both are living are shown. The table should have two columns for each spouse and three rows for the three sources of retirement income: CSRS or FERS benefit, Social Security and TSP. Fill in the monthly amount of each benefit while both spouses are alive and add up the total income for the couple. Then make another table showing the difference in those benefits for the surviving spouse.

They may soon see that the total income while they are both living will vary greatly from the income payable to the surviving spouse. If so, they may choose to provide a survivor benefit. All the choices above for annuities are available to John and Carol.

As long as John and Carol were both entitled to an immediate retirement (one that begins within 30 days of separation from federal employment) they won’t have to worry about leaving a survivor benefit to each other in order to continue FEHBP coverage.

Remember that Social Security will pay the surviving spouse the higher of the two benefits payable while both spouses were alive. The result will be the loss of one Social Security benefit. In addition, if one spouse is retiring under CSRS, they may not receive a widow’s benefit from the Social Security of the FERS spouse due to the government pension offset.

John and Carol’s TSP income will vary depending on whether they choose to take monthly payments or a life annuity. One strategy would be to only take the required minimum distribution from their TSP accounts while they are both living, allowing the surviving spouse to take larger payments that could last a lifetime.

Dual Income Couple

In this example, Ryan is a federal employee who will retire under FERS and Erika works in the private sector. If she doesn’t have a pension benefit, more weight will be added to their retirement savings in thinking about her financial security if Ryan dies first.

In addition, assuming Ryan will be providing the couple’s health insurance, it will be imperative for him to to provide a survivor benefit in order for Erika to maintain FEHBP coverage.

As you can see, there are a lot of variables and unknowns when making important choices at retirement that can impact the financial security of a surviving spouse. Be sure to carefully consider the benefits payable after one spouse dies as much as you consider benefits while you’re both living to avoid the possibility of the surviving spouse not being able to meet his or her needs.

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