Be Careful of Who is Providing Your Retirement Advice

I recently exchanged emails with a loyal reader who told me he had attended a couple of retirement seminars in which the presenter suggested that federal employees at least consider “something else” other than providing a spousal survivor benefit, with its 5% to 10%  reduction to a Federal Employees Retirement System benefit.

I’m not sure what the “something else” was, but I imagine it might have been a type of annuity product available through the presenter’s firm. It’s a tall order to replace the government spousal survivor annuity. Although there’s nothing wrong with offering alternatives to federal benefits, it’s important to understand the tradeoffs and consider the advantages government benefits like the spousal survivor election have to offer.

Let’s look at a hypothetical example of an employee who retires under FERS at age 60:

• Retirement benefit: $29,750 per year or $2,479 per month (assuming 35 years of service x 1% x $85,000 high-three average salary)
• Reduction to provide the maximum spousal survivor benefit: $2,975 a year or $247.92 a month (10% x $29,750)
• Surviving spouse would be entitled to: 50% of the unreduced FERS annuity at the time of the retiree’s death (50% x $29,750 = $14,875 per year or $1,239.58 per month for the life of the surviving spouse) 
• Reduction to provide a partial spousal survivor benefit: $1,487.49 per year or $123.95 per month (5% x $29,750)
• Surviving spouse would be entitled to: 25 percent of the unreduced FERS annuity at the time of the retiree’s death (25% x $29,750 = $7,437.50 per year or $619.79 per month for the life of the surviving spouse).

Consider the following benefits of this election:

• Providing a spousal survivor annuity ensures that the spouse can continue coverage under the Federal Employees Health Benefits Program, as long as they are covered on the date of the annuitant’s death. This coverage lasts for the life of the surviving spouse, regardless of their age, and the spouse can change plans during open season or as a result of a qualifying life event.
• The spousal survivor benefit is adjusted for inflation under the FERS rules for cost of living adjustments. 
• The reduction to provide the spousal survivor annuity also reduces the taxable annuity to the FERS retiree. 
• If the spouse dies before the retiree, the retiree’s FERS annuity is restored to its unreduced value.

All of this comes at a cost: Providing a survivor benefit involves a substantial reduction to the FERS retirement benefit. But the value of the benefit is difficult to replace, since it’s paid for the life of the surviving spouse. Also, an alternative annuity might not be protected by annual COLAs. 

If you need help making a decision about a survivor annuity or another financial planning question, be sure to find someone who is looking out for your best interests. Your agency’s retirement office or benefits division is a good place to start. They can’t provide advice on making retirement decisions, but they can provide information about the rules and laws that govern federal benefits.

If you’re going to engage with a professional financial adviser, here are some tips to keep in mind:

• It’s important to hire someone who is both qualified and will look out for what’s in your best interest. This is called a fiduciary responsibility. 
• There’s a clearinghouse of information at Investor.gov that can help you learn more about hiring a financial planning professional. 
• Don’t become a victim. Federal employees aren’t immune to scammers. For a real-life example, read the story of Kenneth Wayne McLeod, who was to federal employees what Bernie Madoff was to private sector investors.
• If you want to attend a retirement planning training event, check with your agency to find out what’s available through agency-sponsored training programs. 

I have recently partnered with Micah Shilanski, a certified financial planner who specializes in helping federal employees get the most out of their retirement benefits to host a podcast called Plan Your Federal Retirement, in which we discuss the issues that are important when planning your retirement from government service. You can find it on Stitcher, Apple podcasts or wherever you find your podcasts.