5 Not-So-Fun Facts About Federal Retirement
A word to the wise about survivor benefits, taxes, insurance and more.
A couple of years ago, I provided 8 Fun Facts About Federal Retirement. This week, I thought I’d go in a different direction and present five not-so-fun facts that you should be aware of. I think it's a safe bet you'll be glad to know these important, sometimes elusive facts about your retirement benefits.
Survivor elections are considered permanent. If you’re married at retirement, you must obtain your spouse's consent to choose less than the maximum survivor benefit under both the Civil Service Retirement System and the Federal Employees Retirement System. If it is less than 30 days from the date of your first regular monthly payment, you can cancel or reduce the survivor benefit. After the 30-day period has passed but less than 18 months from the beginning date of your annuity, you can change your election only to increase or add a survivor benefit if you elected a single life annuity.
You must also pay a whopping one-time payment of 24.5% of your annual retirement benefit if you change from no survivor benefit to a full survivor benefit, or 12.25% percent if you change from no survivor benefit to a partial one under FERS. For example, if your retirement benefit is $40,000 per year and you want to add a survivor benefit that your spouse waived at retirement, the penalty would be $9,800 (plus interest). And this can only be done up to 18 months from your annuity start date. A similar penalty and interest is charged under CSRS. After 18 months, the survivor election will continue until the marriage ends through death or divorce.
It’s important to consider the cost and value of this important benefit choice before you file your retirement application. There will be financial consequences for your spouse if you die first. That could happen even if your spouse is in poor health and older than you. If losing your retirement income means your surviving spouse would have to move, you should probably elect a survivor benefit. The reduction to your retirement to provide this valuable benefit also reduces your taxable income. If your spouse dies before you, your unreduced annuity can be restored.
You’ll probably have to pay federal income tax on your Social Security retirement benefit. If you file an individual tax return and your combined income is less than $25,000, or if you file a joint return and your combined income is less than $32,000, then your Social Security benefit will be tax-free. But if your income exceeds this amount, you will pay tax on either 50% or 85% of your benefit, depending on your combined income. Your combined income is your adjusted gross income plus any nontaxable interest and half of your Social Security benefit.
You can ask Social Security to withhold federal taxes from your benefit payment when you first apply. If you’re already receiving benefits or if you want to change or stop your withholding, you'll need a Form W-4V from the IRS.
The good news? Most states don’t tax Social Security benefits.
Your retirement estimate may be way off. It’s not really anyone’s fault. Sometimes the estimates simply don’t estimate what you think they’re estimating.
First of all, you may owe state income tax on your CSRS or FERS benefit. The estimates generally only provide a withholding of federal tax. And even that is generally low, since the program doing the estimating doesn’t know if you also have income from:
- Part-time or full-time work
- Social Security retirement
- Thrift Savings Plan withdrawals or other retirement savings
- A spouse’s income
The IRS has a tax withholding estimator to help you compute a more accurate estimate of your federal tax withholding. The Office of Personnel Management provides retirees online access to change their tax withholding.
Second, if you have a service credit issue that might impact your length of service, this might not be reflected on the estimate. Such issues can include:
- Service that may not be creditable
- Changes in work schedule
- Undocumented service
- Changes in retirement coverage
- Unpaid deposits or redeposits
Finally, a FERS supplement, former spouse entitlements and your survivor benefit election could be missing from the estimate. CSRS Offset estimates might not clearly explain the “offset” that will occur either at retirement or when you qualify for Social Security.
Agency retirement estimates can be a useful tool. But if there’s something you don’t understand or that doesn’t make sense to you in your estimate, be sure to get clarification before you retire with less money than you expected.
Your life insurance coverage may change when you retire. Do you remember the “once in a blue moon” Federal Employees Group Life Insurance open enrollment in 2016? To refresh your memory, here is one of the open season FAQ’s:
Can employees continue new Open Season coverage if they retire or become insured as compensationers?
It depends. All regular rules still apply for continuing FEGLI into retirement. This includes the requirement that for any types or multiples of coverage you wish to bring into retirement, you must have that coverage throughout your last five years of Federal service, or your entire period or periods of service if you retire with less than five years. Because coverage elected during the Open Season will be effective no sooner than October 2017, this means that if you want to bring your Open Season coverage into retirement, you must retire in October 2022 or later, five years after the coverage becomes effective.
When it comes to deciding about continuing your life insurance benefit into retirement, you have a variety of choices regarding future coverage amounts. Continuing coverage once you are past age 65 comes at a considerable cost. It’s important to evaluate whether you need to continue life insurance at the time you retire.
Basic FEGLI and Option A can continue at no further premium once you’re 65 and retired, but the coverage will reduce by 2% per month until it goes down to 25 percent of its original value. OPM provides a life insurance calculator for employees and retirees that can be used to estimate your cost.
If you were born in 1960, your Social Security benefits could take a hit. More than 4 million Americans were born in 1960. They’ll turn 60 this year and be eligible for Social Security two years from now. Social Security indexes an individual's earnings to the average wage level two years prior to the year of first eligibility.
The Social Security Trustees Report released earlier this year shows the national average wage index for 2019 at $53,864. It will be used to determine benefits for people born in 1959. The report includes an intermediate forecast of $55,642 for 2020. But the Congressional Budget Office predicts the actual average wage index for this year will be much lower due to high unemployment related to the COVID-19 pandemic.
This could result in benefits for people born in 1960 being almost 6% less than for people born in 1959. Congress could pass legislation that would fix this problem—at a cost, of course.
OK, enough of the not-fun facts. Let’s end with a few genuinely fun ones, courtesy of Global Animal:
- A wolf can eat up to 20 pounds of meat in one sitting.
- Most elephants weigh less than the tongue of a blue whale.
- Bats always turn left when exiting a cave.
- Alligators have been around for 150 million years.