As time goes on, we’re hearing from more and more people who are planning retirement and getting conflicting advice. As well as the classic tips, they say that seminars and instructors are trying to tempt them towards specific products with not much evidence supporting the efficacy of this product. In all likelihood, this is because the person running the seminar is getting a commission for every person who invests.
Some people in the industry suggest alternative products to clients, and there’s nothing wrong with this. However, perhaps the most important factor in preventing mistakes is understanding. If somebody suggests an alternative to a spousal survivor benefit, you first need to understand the tradeoffs. What does this mean for your broader retirement plan?
Example
Let’s say that we have a 60-year-old retiree under FERS who built 35 years of experience. If they have a high-three average salary of $85,000, retirement benefits will sit at nearly $2,480 per month ($29,750 per year). How much will it cost to add the maximum spousal survivor benefit? Well, it’s 10% of the benefit, so $2,975 per year.
If the retiree passed away, the spouse would get 50% of unreduced FERS annuity, and this means half of $29,750, or $14,875. Another option is a partial spousal survivor benefit, which is 5% rather than 10% ($1,487.50 instead of $2,975). With the spouse entitled to 25% this time, it would be just under $7,440 per year.
This system’s biggest benefit is that retirees provide their spouses with an annual benefit should they pass away first. Coverage continues under the FERS program, and the spouse can even make changes after a qualifying life event or during an open season. Additionally, the benefit a spouse receives is subject to COLAs (cost of living adjustments).
Elsewhere, the retiree has less of a tax burden because the reduction decreases the taxable annuity. If the spouse passes before the retiree does, the latter will get the unreduced value for the remainder of their life. With this in mind, it’s the most sensible option for many retirees across the country.
Getting the Right Help
Despite all the benefits, there are certain problems with a survivor benefit. For example, it reduces the FERS retirement benefit by a significant chunk. Does this mean that you should seek alternatives? It all depends on your situation because not many alternatives will offer annual COLAs or replace your income for a spouse quite as well as a survivor benefit.
With everything we’ve considered in this guide, you can see that making a decision is difficult. While a survivor benefit will help most couples, there are situations where an alternative will add value to a portfolio. The best way to proceed is with a financial advisor who has your best interests at heart. To start, we recommend heading to the retirement office of your agency. Although they can’t provide specific advice, they can offer the right information and resources on existing laws and rules around federal benefits.
As we said initially, some advisors and planners will work with specific companies to earn commission after selling products. In our opinion, you will never get impartial advice from a service like this. Instead, choose somebody who provides tailored advice for YOUR position.
Finally, don’t be afraid to have conversations with potential professionals. You should feel comfortable with a financial planner and as though they are considering your needs above all else.
