For Richer, For Poorer

I recently received an e-mail from a reader named Melanie. She and her husband are both federal employees, and they're planning to retire later this year. They want to know if it makes sense to provide each other with spousal survivor annuities, or if it would be better for each of them to take their own full annuity with no reduction. Let's look at their situation and see if you can help me decide what I should tell them.

Melanie is entitled to an unreduced Civil Service Retirement System benefit of $40,000 a year. If she provides Matthew with the maximum spousal annuity, her retirement will be reduced by $3,730, to $36,270. (This also reduces her taxable income, so the net difference is less than $3,730 when you take taxes into consideration.) The reduction is permanent, but if Matthew dies first, she can have the full annuity amount restored to $40,000. If Melanie dies first, Matthew will be entitled to 55 percent of $40,000 or $22,000 a year for life. Cost-of-living adjustments would be applied to the benefit both before and after death, regardless of which spouse dies first.

Matthew, who has been working longer than Melanie and has a higher salary, has an unreduced CSRS benefit of $65,000 a year. If he decides to provide Melanie with the maximum spousal annuity, his retirement will be reduced by $6,230, to $58,770. Melanie would be entitled to 55 percent of Matthew's unreduced CSRS benefit if he dies first, for a lifetime survivor annuity of $35,750 a year.

Each spouse is entitled to the maximum survivor annuity of the other. In order to provide only a partial survivor annuity or none at all, a retiree has to get the notarized consent of his or her spouse. Let's look at some of the options Melanie and Matthew could consider:

Of course, these aren't Melanie and Matthew's only choices. They could provide partial survivor annuities for each other. Under CSRS, one spouse can leave 55 percent of any base amount up to the full retirement benefit. For example, Matthew could elect to leave Melanie 55 percent of $30,000 rather than 55 percent of his full annuity. This would reduce his retirement by $2,730 instead of $6,230, and would leave Melanie $16,500 a year rather than $35,750.

From the information we have so far, it's hard to tell what to do. There are two very basic questions couples should consider when thinking about survivor benefits:

• If I die first, how much money will you need?
• If you die first, how much money will I need?

In reaching an answer to those questions, here are some other things to consider:

• How much money do you need to maintain your current lifestyle so you won't have to sell the house, stop buying groceries, or move in with your kids?
• Do you have other money that would be inherited by the surviving spouse that could be another source of income? (This could be Thrift Savings Plan investments, or funds in an individual retirement account).
• Is either spouse entitled to other retirement benefits, such as Social Security, military retirement, or other vested pension benefits from previous employers?
• Do you have long-term care insurance? If you used some of your money for insurance premiums rather than choosing a survivor annuity, then other investments could be preserved if one spouse were to need care.
• Is life insurance an option instead of survivor benefits? A term insurance policy on one or both spouses could be used to cover a mortgage and other debt. A whole life policy also could work, but be sure to check with an insurance agent about exactly how it would work.

Popular Demand

In fiscal 2009, for every three former federal employees on the retirement rolls, there was one survivor annuitant. Spousal survivor annuities remain popular for several reasons:

• There's no need to worry about stock market performance, or the need to manage an investment. The annuity is paid for the life of the surviving spouse, no matter how long she or he outlives you.
• Cost-of-living allowances are applied to the annuity both before and after the death of the annuitant.
• If your spouse dies first, the reduction to your annuity will end and your full annuity will be restored. If you remarry, you can choose an annuity for your new spouse.

Another important reason annuities are popular is that federal health insurance passes to a nonfederal spouse through these vehicles. If you leave no survivor annuity to your spouse and if he or she is not entitled to the insurance through their own federal salary or retirement benefit, then they lose you, your retirement and your health insurance if you die first. This isn't an issue for Matthew and Melanie, since they are both going to receive federal annuity benefits, but it can be a major concern for others. It pays to have at least a partial survivor annuity to protect your spouse's right to maintain health insurance coverage.

Next week, we'll look at annuity considerations for those under the Federal Employees Retirement System.

Clarification: The third paragraph of this article has been updated to clarify how much of Matthew's CSRS benefit Melanie would be entitled to if he dies first.

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.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.