Single Concerns

By Tammy Flanagan

July 21, 2006

Two weeks ago, we looked at benefits issues for federal couples. So it's only fair that singles get their turn this week.

Here are some of the questions single people face in planning for retirement:

Sometimes the answers depend on whether you are a single parent, a widow or widower, or simply an independent adult. Annuity Choices

The retirement applications for CSRS and FERS provide the following choices for retirement annuities:

  1. Reduced annuity with maximum survivor annuity for a spouse.
  2. Reduced annuity with partial survivor annuity for a spouse.
  3. Annuity payable during your lifetime.
  4. Reduced annuity with survivor benefit to a person who has an insurable interest in you.
  5. Reduced annuity with survivor annuity for your former spouse or combination of spouses.
For singles, the third choice is the most obvious. While your annuity will end when you die, the good news is that while you are living, there will be no reduction to your benefit. The survivor benefit choices involve a 10 percent reduction (a little less under CSRS and sometimes more for insurable interest elections) in the annuity. Choosing a survivor annuity is almost like buying life insurance. Just as you have to pay premiums for life insurance, you must "pay" for a survivor annuity by taking a reduced retirement benefit.

If you have a former spouse who has a divorce decree awarding them a survivor benefit, the Office of Personnel Management will honor the court order if the former spouse is eligible. If you have a former spouse who does not have a court-awarded survivor benefit, and you wish to provide such a benefit for him or her, you can pick choice five on the list above. This will result in your CSRS or FERS retirement being reduced.

Choice four, the "insurable interest" selection, also is available for singles. An insurable interest exists if the person named may reasonably expect to derive financial benefit from your continued life (such as someone you live with, but who isn't a spouse or close relative).

To choose this type of annuity, you must provide medical documentation showing that you are in good health -- and you have to arrange and pay for the medical examination. If you are filing for disability retirement, you are not eligible to choose this kind of annuity. An insurable interest survivor annuity will cause a reduction to your retirement of a minimum of 10 percent.

The eligibility of your children for a survivor annuity after your death does not depend on your marital status or the type of annuity you elect. Your unmarried dependent children may qualify for a survivor annuity until age 18. Benefits may be payable to an unmarried child after 18 if the child is a full-time student at a recognized educational institution or is incapable of self-support due to a disability incurred before 18. Benefits for a student generally are not payable after the child turns 22. For single employees who die before retirement, a refund of retirement contributions is payable to your designated beneficiary. In addition, children's benefits also may be payable if you are survived by dependent children. If a retiree dies before receiving benefits equal to his or her contribution to retirement (7 percent of basic pay for most employees and 0.8 percent for most of those under FERS), the remainder is paid in a lump sum to the beneficiary if no survivor annuity is payable. Let's look at a couple of hypothetical examples of employees who retired on May 31, 2005, and died a little less than a year later, on May 28, 2006:

In both examples, Bill and Mary may have had money left in their TSP accounts and may have been covered under the Federal Employees Group Life Insurance Program. These benefits would have been paid in lump sums to their beneficiaries. Remember, there are separate beneficiary designations for: Employees who are single should be aware that designation of beneficiary forms take precedence over the standard order of precedence for the payment of federal benefits. The beneficiary form and your immediate survivors also take precedence over your will. FEGLI benefits can be assigned to someone else. In that case, the assignee or the assignee's beneficiary takes precedence over the standard order.

If there is no beneficiary named, here's the standard order under which benefits are paid:

Social Security

Social Security is a form of insurance financed by taxes on wages. There are many occasions when a worker with Social Security coverage dies before receiving any benefits. And in many of those cases, no one is eligible for a survivor's benefit. Unfortunately, that's the nature of insurance.

If you are entitled to Social Security benefits, you may receive monthly payments in retirement or in the event of a disability that prevents you from working. Upon your death, survivors' benefits may be available. Besides a spouse, these benefits may also be paid to:

Also, there is a one-time payment of $255 that your spouse or minor children can receive if you worked long enough and they meet certain requirements.

Thrift Savings Plan

The money left in your Thrift Savings Plan is paid according to your beneficiary designation upon your death. If there is no valid beneficiary designation on file, then the money is paid according to the standard order of precedence.

One thing to keep in mind is that if a nonspouse beneficiary inherits your TSP account, they will be required to report the entire amount as taxable income in the year they receive it. One way to avoid this is to move all or part of your TSP to an Individual Retirement Arrangement. This can be done after you leave federal service using TSP forms requesting either a full or partial withdrawal of your funds.

When a nonspouse beneficiary inherits an IRA account, they have the option to transfer it to their own "beneficiary IRA" or "inherited IRA" so the proceeds can be paid out based on their age and life expectancy. These accounts allow the beneficiary to spread the tax burden as well as the payout over many years.

Employees who continue to work past age 59½ also may choose to make a one-time partial or full distribution of their TSP account using TSP Form 75.

Keep in mind that there are disadvantages to moving your money out of the TSP. They include:

Life Insurance

The main reason you need life insurance is that you want to be sure that, in the event of your untimely death, the loved ones who depend on you for support will have adequate financial protection. Some of the factors that influence how much of this protection you need include your medical history, net worth, family plans and long-term financial goals. One question for singles to ask is: Would your death cause economic hardship for your children, parents or someone else you want to protect?

Most people buy life insurance with four things in mind:

Consider these factors as you decide how much Federal Employees Group Life Insurance you need while employed and as you transition into retirement.

For singles who have Basic FEGLI coverage (valued at your salary rounded up to the next thousand + $2,000), there are two other factors to consider:

Long-Term Care Insurance

Long-term care insurance provides a resource to pay for your care if you should need substantial assistance with normal activities of daily living. If you don't have such insurance, and your spouse or children are unable or unwilling to help with your care, you'll have to pay for it. It's possible you'd have to sell your home to pay the costs of care in a facility. Consider the benefits of being able to receive care in your own home without having to use your retirement savings to pay for it. Long-term care insurance is available to pay for care in the home as well as in a facility.

Some people believe that long-term care is covered by other programs, such as Medicare, Medicaid and the Federal Employee Health Benefits Program. But Medicare only pays limited amounts for skilled care following a hospital stay and is not intended to cover assistance with daily living for long periods of time. Medicaid only covers you if you meet your state's poverty criteria and receive care that meets your state's guidelines. FEHBP and other health insurance programs rarely cover ongoing chronic care needs.

To Do

Resources 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.

By Tammy Flanagan

July 21, 2006