The Most Important Retirement Decision

It’s the time of year again, when federal employees who are planning an end-of-year retirement begin to ask themselves a series of questions: What exact date should I choose? Should I downsize my living space? Should I move to a warmer climate? Should I enroll in Medicare Part B?

These are all significant considerations in preparing for retirement, but there’s another issue that is more important than any of them: whether or not to take reduced retirement benefit to provide a survivor annuity.

There are five options for federal employees. Let’s look at each of them as they apply to both the Civil Service Retirement System and the Federal Employees Retirement System.

1. Maximum survivor annuity for spouse

CSRS:

• 55 percent of unreduced annuity benefit to surviving spouse, adjusted by cost-of-living adjustments before and after the death of the annuitant.
• Almost 10 percent reduction to the annuity benefit (2.5 percent of the first $3,600 and 10 percent of the annuity over that amount).
• Paid for the life of the surviving spouse.
• Annuity can be restored if the spouse dies before the annuitant.

FERS:

• 50 percent of unreduced annuity benefit to the surviving spouse, adjusted by cost-of-living adjustments before and after death of the annuitant. (Note: FERS COLAs do not apply to most FERS annuitants who are under age 62, but survivor annuitants under 62 would receive annual COLAs. FERS COLAs are generally 1 percent less than the increase in the Consumer Price Index unless the increase is less than 3 percent.)
• Annuity benefit is reduced by 10 percent.
• Paid for the life of the surviving spouse.
• Annuity can be restored if the spouse dies before the annuitant.

2. Partial survivor annuity for spouse

CSRS:

• 55 percent of a specific dollar amount. (For example, 55 percent of $10,000 instead of 55 percent of the full retirement annuity.) Spouse must provide notarized consent to the election.
• Reduction is computed as 2.5 percent of the first $3,600 and then 10 percent of the amount selected over $3,600. For example, if the selected dollar amount is $10,000, then the reduction to the retirement benefit would be $730 per year.
• The dollar amount receives cost-of-living adjustments before and after the death of the annuitant.
• The annuity can be restored if the spouse dies before the annuitant.
• Protects health insurance for a surviving spouse who is not entitled to participate in the Federal Employees Health Benefits Program through their own federal benefit.

FERS:

• 25 percent of the annuity benefit paid to the surviving spouse.
• 5 percent reduction to the annuity benefit.
• Benefit receives cost-of-living adjustments before and after the death of the annuitant.
• Protects health insurance for a surviving spouse who is not entitled to FEHBP through their own federal benefit.

3. No survivor annuity

• No reduction to the CSRS or FERS retirement annuity benefit.
• CSRS or FERS retirement annuity stops upon the death of the annuitant.
• Requires spousal consent for married employees.

4. Reduced survivor annuity for a person who has an insurable interest in the CSRS or FERS annuitant.

• “Insurable interest” is a term used to describe someone who has a financial need for someone else’s life expectancy.
• An employee must provide a report of a medical examination to make this selection.
• The CSRS or FERS retirement benefit is reduced by 10 percent to as much as 40 percent, depending on the age difference between the retiree and the person named as the insurable interest. The younger the insurable interest is from the annuitant’s age, the bigger the reduction to the retirement benefit.
• The benefit paid to the survivor is 55 percent of the reduced CSRS or FERS retirement benefit.
• An employee may name only one person to be their insurable interest.
• This election can apply to a current spouse (when a former spouse has a court-ordered benefit to the spousal survivor annuity), a relative closer than a first cousin, a former spouse, a person who is engaged to be married to the employee, or a person who is living in a relationship that would be a common-law marriage in jurisdictions that recognize common-law marriages. It can also apply to someone who is not a close relative, but can be established by an affidavit showing the relationship, if any; the dependence of the person to the employee; and the financial need that the individual has on the life of the employee.

5. Reduced annuity to provide a former spouse a survivor annuity.

• An employee retiring under CSRS or FERS may voluntarily elect a fully reduced annuity or a partially reduced annuity to provide a former spouse survivor annuity.  (But this option is rarely used.)
• If the employee is married, he or she may make such an election only if the current spouse consents or the Office of Personnel Management waives the spousal consent requirement.
• A former spouse generally would have entitlement to a survivor annuity only if it is specifically spelled out in a divorce agreement or court order.

The choice of providing  a spousal survivor annuity is much like buying very expensive life insurance. In fact, some federal employees have considered getting additional life insurance instead of providing spousal survivor benefits.

Another dilemma arises when both spouses are entitled to their own retirement benefit. Do they really need to provide each other a survivor benefit? In many cases, this is the situation for two married federal employees who are planning their retirement. I’ll explore that issue in next week’s column.

(Image via Jerry Sliwowski/Shutterstock.com)