For Richer or Poorer, Part Two

Last week, we looked at spousal survivor annuity options for those under the Civil Service Retirement System. This week, let's look at the situation for those more recently hired, who are covered by the Federal Employees Retirement System.

The big difference for those under FERS is that they need to factor Social Security and Thrift Savings Plan investments into their thinking. FERS is not just a single-benefit retirement plan, but a three-tiered system in which participants are expected to use a combination of a basic retirement benefit, Social Security and TSP investments to meet their retirement needs.

Let's look, hypothetically, at "Mabel" and "Marvin," assuming they are both federal employees retiring under FERS.

Mabel is entitled to an unreduced FERS basic benefit of $20,000. If she chooses to provide Marvin with the maximum spousal annuity, then her retirement will be reduced by $2,000 (10 percent) to $18,000. This also reduces her taxable retirement income, so the net difference is less than $2,000 when you factor that in. This is a permanent reduction to her benefit, but if Marvin dies first, she can have the full annuity amount restored to $20,000. If Mabel dies first, then Marvin will be entitled to 50 percent of $20,000, or $10,000 per year for life. Cost-of-living adjustments would be applied to the benefit both before and after their death, regardless of which spouse dies first.

Marvin is entitled to a larger basic FERS annuity benefit than Mabel, because he worked longer and had a slightly higher salary. His unreduced retirement is $35,000. If he decides to provide Mabel with the maximum spousal annuity, then his retirement will be reduced by $3,500, to $31,500. Like Mabel, this reduces his taxable income and is considered a permanent reduction unless the marriage ends by death or divorce. Mabel would be entitled to 50 percent of $35,000 if Marvin dies first, which would provide her with a lifetime survivor annuity of $17,500 a year.

Each spouse is entitled to the maximum survivor annuity of the other. In order to provide a partial or no survivor annuity, Marvin or Mabel would have to get the notarized consent of the other spouse.

Here's what their situation looks like if neither chooses a survivor annuity:

*Based on the assumption that the account balance earns 6 percent interest and withdrawals equal 4 percent per year.
**As a widow, Mabel can receive the higher of her own or Marvin's Social Security, but not both. If she dies first, then he would continue receiving his own Social Security and her benefit would end.
***As the beneficiary, Mabel would inherit Marvin's TSP account and be able to receive income from the full account balance. The same situation would occur if Mabel dies first.

Here's how it looks if both Mabel and Marvin choose the survivor annuity option:

*As a widow, Mabel can receive the higher of her own or Marvin's Social Security, but not both. If she dies first, then he would continue receiving his own Social Security and her benefit would end.
**As the beneficiary, Mabel would inherit Marvin's TSP account and be able to receive income from the full account balance. The same situation would occur if Mabel dies first.

Which Is Better?

Keep in mind that these scenarios are not the only options. Federal retirees also can choose partial survivor annuities for their spouses. Under FERS, either spouse could leave 25 percent of their basic retirement benefit as a partial survivor annuity. So Marvin could elect to leave Mabel 25 percent of $35,000 rather than 50 percent of his full annuity.

And of course, there are myriad other variations on couples' retirement situations. One spouse could be under CSRS and the other under FERS. Or one spouse could be covered under a private industry retirement benefit.

In considering any of the scenarios, there are two very basic questions couples should consider:

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

The important thing is to run the numbers, do the math, and use common sense to decide how you and your spouse will be protected financially if one of you dies before the other. This might require the help of a financial planner if you are not sure how to evaluate the benefits and drawbacks of your choices.

Correction: The original version of this column contained incorrect figures for "Total Income" at the bottom of the top chart, and for "Social Security Retirement" and "Thrift Savings Plan" in the middle section of the second chart. Both charts have been updated to correct the errors.

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.