As federal employees approach retirement, there are usually several decisions competing for attention at the same time. Some of those items are reviewing their TSP balance, comparing FEHB options, considering Social Security, deciding how much income they will need each month, and trying to make sure the retirement application is completed correctly. In the middle of all of that, the survivor benefit election can appear to be one more item on a form. It is not.
For married FERS employees, the survivor benefit election is one of the decisions that can have a significant long-term effect on the surviving spouse. It affects the amount of pension income the household receives while both spouses are alive, but it can also affect what income and health insurance remain after the death of the retired federal worker. Federal retirees need to understand more than “How much does this survivor benefit reduce my pension?” Another, perhaps even more important question is, “If I die first, will my spouse still have a retirement plan that works?”
Survivor Benefit Plan
Under FERS, a retiree may generally elect a full survivor benefit, a partial survivor benefit, or no survivor benefit for a spouse. A full survivor benefit costs the retiree 10% of their pension and provides the surviving spouse with 50% of the retiree’s pension. Yes, the government calls providing 50% of your pension to your surviving spouse a “full survivor benefit.” Be sure you understand that language. A partial survivor benefit costs 5% of your pension and provides your surviving spouse with 25% of your pension. And, of course, choosing no survivor benefit means the surviving spouse would not receive any monthly FERS pension after the federal retiree’s death.
For many couples, the reduction caused by that 5% or 10% cost can feel significant. For example, if a retiree’s FERS pension is $4,000 per month, a full survivor benefit reduces that amount by $400 per month. And that cost grows proportionately as the pension increases for cost of living adjustments. This is not an insignificant cost. It may affect how much room there is in the budget for travel, home improvements, giving, helping family members, or simply enjoying retirement with less financial pressure. But there is more to consider.
TSP To the Rescue?
A couple may look at a $400 reduction and conclude that the full survivor benefit is too expensive, especially if they have a substantial TSP balance. That is understandable. After all, if there is $750,000 or $1 million in the TSP, it may seem reasonable to assume the surviving spouse will have enough resources. The problem is that a TSP account and a survivor pension are not the same thing. They are both money, but they are different kinds of money.
Depending on the amount, the TSP often provides retirees financial flexibility. It can be used for travel, emergencies, large purchases, health-care expenses, taxes, home repairs, and a wide range of other retirement needs. It can also help supplement income, but it is still an investment account. This must be remembered. Its value can rise or fall with the market. And if you go real conservative with your TSP funds to avoid that market risk you must face the reality of risks such as inflation and diminished purchasing power. On top of that, withdrawals from the TSP are likely taxable (but not ROTH withdrawals) further reducing how much is actually available to the retiree for retirement spending. The reality is TSP funds may be needed by the surviving spouse for many years.
This is why the survivor benefit can offer peace of mind because it is an annuity with the federal government that can provide a predictable stream of income that would continue for the life of the surviving spouse. This lifetime predictability can reduce the stress of not knowing how TSP funds might fare during a downturn or after an unexpected expense.
What About FEHB?
Another other issue many couples must consider carefully is FEHB. In most cases, a surviving spouse must be entitled to a survivor annuity in order to continue FEHB coverage after the retiree dies. That means a decision to elect no survivor benefit may do more than eliminate a future pension payment. It may also eliminate the spouse’s ability to remain covered under FEHB.
For some households, that may not be a major issue. A spouse may have access to employer-sponsored coverage, TRICARE, or another dependable health-insurance option. But that needs to be clear before retirement. It should not be based on the assumption that another option will be easy to find later. The survivor benefit decision becomes much clearer when couples stop thinking about it as a pension reduction and begin testing what their financial picture would look like after the first death.
Before filing for retirement, it is worth working through three questions.
- First, what will your income look like while both of you are alive? This is the question most people answer. They compare the full pension to the pension after a full or partial survivor election and decide whether the reduction fits within their budget.
- Second, what will happen if the federal employee dies first? At that point, in addition to a reduced pension income, the surviving spouse may also lose part of the household’s Social Security income. In many cases, the survivor receives the larger Social Security benefit rather than both checks. At the same time, many expenses remain. Housing expenses, property taxes, insurance, utilities, vehicle costs, home maintenance, and medical expenses do not simply disappear.
- Third, what happens if the spouse dies first? In some households, the federal employee may be financially secure without needing a survivor benefit. In others, the surviving spouse may have been providing income, insurance coverage, or other financial stability that would need to be replaced. The right decision depends on both sides of the picture.
What Can You Do?
This does not require complicated software or a forty-page retirement plan. It requires honest numbers. First, take the pension under each election option and add it to the spouse’s estimated Social Security benefit after the first death. Include any pension income, investment income, TSP withdrawals, life insurance, and other dependable resources that are part of the retirement portfolio. Then compare that income to the expenses that would remain for the surviving spouse.
The goal is not to prove that the full survivor benefit is always best. Sometimes there are ways to fund a private survivor benefit that offer a greater value with the additional enhancement of beneficiary flexibility. Some couples may find that the full benefit is worth keeping because it protects income and preserves FEHB eligibility. Others may decide that a partial benefit is sufficient because FEHB is protected and they provide a survivor benefit by putting TSP or other funds to work in strategic ways. In some cases, no survivor benefit may be a reasonable option because the spouse has substantial independent income, strong retirement assets, and dependable health coverage of their own.
Don’t Guess
The important thing is that the decision should be intentional. For federal couples in Littleton, Highlands Ranch, and throughout the Denver area, the FERS rules are the same as they are anywhere else. What changes is the rest of the household picture: housing costs, taxes, Social Security timing, TSP withdrawals, life insurance, Medicare planning, age differences, and the income each spouse would have after the first death.
Before signing paperwork, a couple should be able to answer three questions with confidence:
- What does retirement look like while both of us are alive?
- What happens if I die first?
- What happens if my spouse dies first?
Once those questions are answered, the survivor benefit election becomes much easier to evaluate. Until then, the focus should not be on what the pension reduction costs today, but on what the surviving spouse may need tomorrow.
This article is for educational purposes and should not be considered individualized legal, tax, insurance, investment, or retirement-benefit advice. FERS survivor-benefit elections should be evaluated as part of a broader retirement, health-insurance, Social Security, estate-planning, and income strategy.