Single Concerns

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:

• What happens to my retirement benefits when I die?
• How much life insurance should I carry into retirement?
• Is long-term care insurance necessary?

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.

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:

• CSRS: Mary had contributed $80,000 toward her retirement during her federal career. When she passed away, she had received only 11 payments of $2,800 each -- a total of $30,800. In addition, Mary had not received her retirement benefit for the month of May 2006 (it would have been payable on June 1). Mary had named her sister as her CSRS beneficiary. Mary's sister was entitled to the difference between Mary's $80,000 retirement contributions and the $30,800 she had received -- a lump sum payment of $49,200. If Mary would have died after receiving more than $80,000 in retirement benefits, her sister only would have been entitled to the retirement payment for the last month she was alive.
• FERS: Bill had $9,500 in FERS retirement contributions over the course of his career. When he died, he only had received 11 payments of $1,600 each, for a total of $17,600. Bill had named his brother as his FERS beneficiary. But since Bill already had received more than $9,500 in FERS retirement payments, his brother only was entitled to a lump sum payment of $1,493 -- the amount of retirement that Bill had earned during the 28 days of May that he lived but did not receive payment for.

• CSRS retirement.
• FERS retirement.
• FEGLI.
• Thrift Savings Plan.
• Unpaid compensation (includes last paycheck and unused annual leave).

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

• Widow or widower.
• Child or children in equal shares.
• Surviving parent or parents in equal shares.
• Legal representative of your estate or, if none, to the person or persons entitled by the laws of your state.

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:

• Your unmarried children who are under 18 (or up to 19 if they are attending elementary or secondary school full time). Your children can get benefits at any age if they were disabled before age 22 and remain disabled. Under certain circumstances, benefits also can be paid to your stepchildren, grandchildren or adopted children.
• Your dependent parents, if they are 62 or older. (For your parents to qualify as dependents, you must have been providing at least half of their support.)
• If you have been divorced, a former wife or husband aged 60 or older, if your marriage lasted at least 10 years.

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:

• The possibility of higher maintenance and administrative fees on your investment.
• The fact that investment decisions must be made among thousands of options instead of the simplicity of the TSP's C, F, G, S, I and Lifecycle Funds.
• The lack of an option to invest in the G Fund (government securities) outside the TSP. It is possible to find outside investments that will mirror the C, F, I and S Funds.

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:

• Cash for immediate needs (such as burial, taxes, or debt).
• Readjustment money (interim funds for family members who may need to move or find a job).
• Funds to help replace the deceased's paycheck.
• Income for retirement, college costs or other future financial needs.

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:

• FEGLI has a living benefit that only applies to basic coverage. This benefit allows employees or retirees who have a documented medical prognosis that life expectancy is nine months or less to receive a lump sum equivalent up to the full amount of their basic coverage.
• Retirees who carry Basic FEGLI into retirement with the 75 percent reduction option elected will maintain 25 percent of their basic coverage free of charge after age 65. This remaining balance of life insurance is often used to pay for funeral and burial expenses.

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

• As you plan your retirement, consider the needs of loved ones who may survive you. Will your death cause a financial hardship for anyone?
• Consider the range of factors that could affect your life after government. These could include a second career, health concerns, long-term care, unforeseen financial needs and relocation.

• Office of Personnel Management Retirement Services
• Social Security publications related to survivor benefits
• TSP Booklet 31: Death Benefits