By: Nick Black
As a federal employee planning for retirement under the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS), one critical decision is whether to elect a survivor benefit for your spouse. This choice reduces your pension during your lifetime but ensures your spouse receives a portion of your pension after your death. To decide if electing a survivor benefit is right for you, you need to weigh the costs, benefits, and your personal circumstances. This article provides a step-by-step guide to help you calculate and evaluate this decision.
What is a Survivor Benefit?
A survivor benefit is a monthly annuity paid to your surviving spouse after your death, based on a portion of your federal pension. Electing this benefit reduces your pension while you’re alive but provides financial security for your spouse, including continued eligibility for Federal Employees Health Benefits (FEHB) coverage. Without a survivor benefit, your spouse loses FEHB coverage and receives no pension payments after your death.
Survivor Benefit Options
- FERS:
- Full Benefit: 50% of your unreduced annual pension; costs a 10% reduction in your pension.
- Reduced Benefit: 25% of your unreduced annual pension; costs a 5% reduction in your pension.
- None: No survivor benefit; no pension reduction, but spouse loses FEHB eligibility.
- CSRS:
- Full Benefit: Up to 55% of your unreduced annual pension; costs approximately a 10% reduction (varies based on amount elected).
- Reduced Benefit: Any amount from 55% of $22 (resulting in $1/month) up to 55% of your pension; reduction depends on the amount chosen.
- None: No survivor benefit; no reduction, but spouse loses FEHB eligibility.
If you’re married, your spouse must consent to a partial or no survivor benefit by signing a waiver (e.g., Form SF 3107-2 for FERS).
Step-by-Step Calculation Process
To determine if electing a survivor benefit makes financial sense, follow these steps:
1. Estimate Your Unreduced Pension
Your unreduced pension is the annual amount you’d receive without reductions for early retirement or survivor benefits. Use your agency’s retirement calculator or contact your HR office to get this figure. For example:
- FERS Example: $40,000/year unreduced pension.
- CSRS Example: $50,000/year unreduced pension.
2. Calculate the Pension Reduction
Determine how much your pension will decrease if you elect a survivor benefit:
- FERS Full Benefit: 10% reduction.
- Example: $40,000 × 10% = $4,000 reduction; your pension = $36,000/year ($3,000/month).
- FERS Partial Benefit: 5% reduction.
- Example: $40,000 × 5% = $2,000 reduction; your pension = $38,000/year ($3,167/month).
- CSRS Full Benefit: Approximately 10% reduction for 55% survivor annuity.
- Example: $50,000 × 10% = $5,000 reduction; your pension = $45,000/year ($3,750/month).
- CSRS Partial Benefit: Reduction varies; use OPM’s calculator or consult HR for precise figures.
3. Calculate the Survivor Benefit Amount
Determine the monthly or annual amount your spouse would receive:
- FERS Full Benefit: 50% of unreduced pension.
- Example: $40,000 × 50% = $20,000/year ($1,667/month).
- FERS Partial Benefit: 25% of unreduced pension.
- Example: $40,000 × 25% = $10,000/year ($833/month).
- CSRS Full Benefit: 55% of unreduced pension.
- Example: $50,000 × 55% = $27,500/year ($2,292/month).
- CSRS Partial Benefit: Varies based on elected amount (e.g., 55% of $22 = $1/month minimum).
The survivor benefit is adjusted annually for cost-of-living adjustments (COLAs).
4. Assess Your Spouse’s Financial Needs
Evaluate whether your spouse needs the survivor benefit to maintain their lifestyle:
- Other Income Sources: Does your spouse have their own pension, Social Security, or savings (e.g., Thrift Savings Plan)? If they have substantial income, a survivor benefit may be less critical.
- FEHB Eligibility: A survivor benefit is required for your spouse to continue FEHB coverage after your death. If health insurance is a priority, elect at least a partial benefit.
- Expenses: Estimate your spouse’s annual expenses (housing, healthcare, etc.). Compare this to their income, including the survivor benefit.
Example: If your spouse’s expenses are $30,000/year and they receive $15,000/year from Social Security, a $20,000/year FERS full survivor benefit covers the gap.
5. Perform a Break-Even Analysis
Calculate how long it takes for the survivor benefit to “pay off” compared to the pension reduction you pay during your lifetime:
- Formula: Total pension reduction ÷ annual survivor benefit = break-even years.
- FERS Example (Full Benefit):
- Annual reduction: $4,000.
- Survivor benefit: $20,000/year.
- Break-even: $4,000 ÷ $20,000 = 0.2 years (2.4 months).
- If your spouse lives at least 2.4 months after your death, the benefit exceeds the cost.
- CSRS Example (Full Benefit):
- Annual reduction: $5,000.
- Survivor benefit: $27,500/year.
- Break-even: $5,000 ÷ $27,500 ≈ 0.18 years (2.2 months).
This assumes you die immediately after retirement. If you live longer, the break-even point extends (e.g., after 10 years of reductions, you’d pay $40,000 for FERS, requiring 2 years of survivor benefits to break even).
6. Consider Life Expectancy
Estimate how long you and your spouse might live:
- If you’re in poor health or expect a shorter lifespan, the survivor benefit may be more valuable, as your spouse may receive it sooner.
- If your spouse is significantly younger or in good health, the benefit could pay out for decades, increasing its value.
- Use life expectancy calculators (e.g., SSA’s Life Expectancy Calculator) or assume average lifespans (mid-80s for men, late-80s for women).
7. Compare Alternatives
Consider other ways to provide for your spouse:
- Life Insurance: A term or whole life policy could replace the survivor benefit at a lower cost. For example, a $250,000 policy payout could generate $10,000–$12,000/year at a 4–5% withdrawal rate. However, insurance isn’t backed by the federal government, unlike the survivor annuity, and doesn’t preserve FEHB eligibility.
- TSP or Savings: Your spouse can inherit your Thrift Savings Plan (TSP) balance or other savings. Calculate if this, combined with other income, meets their needs.
- Pension Maximization: Some advisors suggest declining the survivor benefit and investing the unreduced pension to fund insurance or savings. This “Pension Max” strategy is risky and often fails due to poor investment returns or mismanagement.
8. Account for Special Circumstances
- Remarriage or Divorce: If you remarry after retirement, you can elect a survivor benefit for your new spouse, but it requires two reductions: one for the benefit and an actuarial reduction for the deposit cost. If divorced, a court order may mandate a survivor benefit for a former spouse, reducing the amount available for your current spouse.
- Spouse’s Own Benefits: If your spouse is a federal employee or retiree, they may have their own pension or FEHB coverage, reducing the need for a survivor benefit.
- Children or Dependents: Survivor benefits for children are limited and typically end at age 18 (or 22 if in school), but consider their needs if applicable.
Practical Example
Scenario: FERS retiree, 62, with a $48,000/year unreduced pension; spouse, 60, has $18,000/year Social Security and no pension. Spouse’s expenses: $36,000/year.
- Full Benefit:
- Pension reduction: $48,000 × 10% = $4,800; retiree’s pension = $43,200/year.
- Survivor benefit: $48,000 × 50% = $24,000/year.
- Spouse’s income after retiree’s death: $24,000 (survivor) + $18,000 (Social Security) = $42,000/year (covers $36,000 expenses).
- Break-even: $4,800 ÷ $24,000 = 0.2 years (2.4 months).
- Partial Benefit:
- Pension reduction: $48,000 × 5% = $2,400; retiree’s pension = $45,600/year.
- Survivor benefit: $48,000 × 25% = $12,000/year.
- Spouse’s income after retiree’s death: $12,000 (survivor) + $18,000 = $30,000/year (short $6,000/year).
- No Benefit:
- Pension: $48,000/year.
- Spouse’s income after retiree’s death: $18,000/year (short $18,000/year; no FEHB).
Decision: The full benefit ensures the spouse’s expenses are covered and preserves FEHB, with a minimal break-even period. The partial benefit leaves a shortfall, and no benefit risks financial strain.
Key Considerations
- FEHB is Critical: If your spouse relies on your FEHB coverage, elect at least a partial benefit to maintain their health insurance.
- Irreversible Decision: You have 30 days after your first pension payment to adjust your survivor election. After that, it’s permanent unless your spouse dies first (reductions stop) or you remarry post-retirement.
- Tax Implications: Survivor benefits are taxable, but your reduced pension may lower your tax bracket during retirement.
- Inflation Protection: Survivor benefits receive COLAs, increasing their long-term value.
Steps to Finalize Your Decision
- Run the Numbers: Use OPM’s retirement calculator or consult your HR office to get precise pension and survivor benefit figures.
- Discuss with Your Spouse: Ensure your spouse understands the trade-offs, as their consent is required for less than the maximum benefit.
- Consult a Financial Advisor: A federal benefits expert can model scenarios, including taxes, inflation, and alternatives like insurance.
- Review Beneficiary Forms: Update TSP (Form TSP-3) and life insurance (SF 2823) designations to align with your plan.
- Check Divorce Decrees: Ensure no court-ordered survivor benefits affect your current spouse’s entitlement.
Bottom Line
Electing a survivor benefit reduces your pension but provides your spouse with income and FEHB eligibility after your death. Calculate your pension reduction, survivor benefit amount, and break-even point. Assess your spouse’s income needs, life expectancy, and alternatives like insurance or savings. For most federal employees, the full survivor benefit is a safe choice due to its government-backed security and FEHB preservation, especially if your spouse has limited income. Run the numbers, discuss with your spouse, and consult a professional to make an informed decision that secures your family’s future.
For more information, visit http://www.opm.gov or contact your agency’s HR office.
