Both CSRS and FERS have an option when they retire to choose a Survivor Benefit option which allows their spouse continued partial pension payments in the event of your death.
For CSRS, the Survivor Benefit option would provide a 55% annuity payout. For FERS, the Survivor Benefit has two options: a 25% or 50% continued benefit option. Both provide for lifetime income for the employee and a reduced payout for the surviving spouse. However, there are several other options that exist that may provide for a much great lifetime income stream and those alternatives are certainly worth consideration.
Here is an example for CSRS:
For CSRS the election of Survivor Benefits will reduce the retirement annuity payout by approximately 10% for life.
Alan, a CSRS employee, and his wife Jane decide to take the joint life option (electing the survivorship option) and while both are living, their monthly income is $4000 per month (which includes the 10% reduction of Alan’s Pension described above). If Alan dies first, then Jane will receive 55% of the $4000, or $2200 a month for the rest of her life. If Jane dies first, then Alan will still receive his full monthly income of $4000.
For FERS, the Survivor Benefit has two options: a 25% or 50% continued benefit option.
Here is an example:
For FERS, the election of Survivor Benefits will reduce the retirement annuity payout by either 5% or 10% depending on the Survivor Benefit option selected. Likewise, these choices are irrevocable, once chosen.
Carol, a FERS employee, and her husband Mike decide to take this joint life payout (survivor benefit) and while they are both alive, the monthly pension is $4000. If they choose the 25% option, and Carol passes away, Mike will receive $1000 monthly for her life. If they choose the 50% option, Mike would receive $2000 monthly for life.
Is there an alternative? For both FERS and CSRS employees often times a life insurance policy may be a reasonable option to consider. For FERS, the 5% or 10% employee Pension reduction and for CSRS the 10% reduction should all be considered an expense used to purchase the surviving spouse’s lifetime income. Therefore the logical question is to consider the amount that is being spent to ensure the future income and ask whether or not that money could be better spent somewhere else – in essence, Is There A Cheaper or Better Option?
A case for life insurance; Although this may not be for everyone and you should always discuss your individual circumstances with a knowledgeable financial professional before making any decisions, life insurance could provide a higher benefit for your spouse and give you more control over your pension.
Let’s consider the fact that your spouse could pre-decease you. In that event, if you had chosen the Survivor benefit, you would have spent 5-10% of yoru potential retirement income and received nothing for it. Not to mention, once your spouse has passed on, your pension reduction will continue – your elections are permanent, regardless of circumstances and how much longer you have in retirement.
What happens if you and your wife pass much earlier than expected. Life expectancy is no guarantee. Car accidents, slip and falls, and just poor health can all lead to pre-mature death. If you and your spouse pass much earlier than expected your CSRS and FERS annuity stops – there is no cash value or payout to your children or loved-ones. In this case, the government keeps whatever you haven’t taken and your heirs receive nothing.
Moreover, the cost for the Survivor Benefit Option is rather high when compared to many life private life insurance policies that could provide a guarantee of income either equal to or greater than the FERS or CSRS Survivor Benefit – not to mention numerous other reasons why the Survivor Benefit may not be the only option to consider. You may be able to use the costs associated with your Survivor Benefit and purchase a life insurance policy that provides your spouse and or your heirs with a much greater benefit.
Life is about knowing the options and choosing what is best for your situation.
About the Author
Todd Carmack
Financial Advisor
Bedrock Investment Advisors, LLC
Arizona
Other Todd Carmack Articles
Understanding The Thrift Savings Plan, by Todd Carmack
Social Security for FERS Employees, by Todd Carmack
Understanding Your FEGLI Coverage. by Todd Carmack
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