FERS Survivor Benefit: To Take or Not To Take?

Imagine this: someone emails you and asks, “What should I wear today?” They don’t elaborate on where they are, what the weather is, what sort of activity they will be engaged in, how old they are, what clothes they even have to choose from, etc. What sort of response could you possibly offer them that would be anything less than a wild guess?

Frequently, I get the FERS-equivalent of this same email from a complete stranger: “Hey Chris— should I take the survivor benefit? What do you think? Thanks!”

Pretty impossible for me to even begin to think about good advice—there are just too many variables that I don’t know a thing about. Do they have life insurance? Does the spouse generate any income on their own? Are there still kids that need support? Does the spouse qualify for government health insurance (FEHB) on their own? Or, do they even have someone eligible for the survivor benefit in the first place? It’s not like you can just pick anyone.

I’ve received the question enough to feel like I should write about it and clear up some myths floating around out there. All too often, about halfway through my discussion of this topic with someone, they’ll say, “Ohhhhh, I didn’t know THAT. That changes everything.” So I’ll attempt to include whatever “that” is in this paper to help you make a more knowledgeable decision.

What Is It?

First of all, what am I even talking about? Because part of OPM’s mission statement seems to include “baffling the average employee”, they almost always have more than one official name for the same thing. The survivor benefit is no different. It is sometimes called the Spousal Benefit Survivor Annuity (SBSA), the Spousal Survivor Benefit Election (SSBE), or a Spouse Survivor Annuity. Most often in normal conversation, it is simply called the survivor benefit. Regardless, it is all the same thing—the monthly annuity benefit your spouse (or former spouse) will receive after a.) you retire, b.) are receiving an annuity, and c.) pass away.

What Does It Cost and What Do They Get?

Hopefully if you’ve thought about retirement in any way, this is starting to ring a bell. At the time of your retirement, one of the forms you fill out will be the SF-3107 “Application for Immediate Retirement-FERS”. Among other choices facing you at retirement, you’ll have to elect whether or not your current spouse (or perhaps a former spouse, or even former spouses) will continue to receive any of your FERS annuity if you kick the bucket in retirement. Or more accurately, when you kick the bucket in retirement. This election will determine what portion, if any, your spouse gets of your pension. You basically have 3 options (with variations on a couple of the options):

1. “Maximum” or “Unreduced Annuity”. This is well, the maximum benefit your spouse receives. Maximum in this instance means 50% of your annuity. Let’s assume for this example, you receive $3,000 a month as a FERS annuitant (not counting the Supplement, just the annuity portion). If you make the 50% election, your spouse will continue to receive, upon your death, $1,500 a month. ($3,000 x 50%). This will continue for the remainder of their life. It doesn’t matter if you live 1 year or 20 years in retirement, upon your death, your surviving spouse will receive 50% of your annuity for the rest of their lives.

   Is this free? HA! Good one. If you make this election, your annuity will be reduced by 10%. If we stick with our example above, that’s a $300 a month hit you take ($3,000 x 10%). So that initial $3,000 a month annuity has turned into $2,700. You will receive that amount for life, and when you croak, your spouse will receive $1,500. These amounts will be adjusted for COLAs, I’m just keeping the math simple so you understand the principle.

   One caveat—if your spouse dies before you do and you had elected the survivor annuity, that reduction to your annuity will stop upon presentation of the death certificate to OPM.. Your $2,700 will become $3,000 again and continue at that rate forever (unless you get married again). That’s only fair, right? Why pay a survivor benefit if there is no longer a survivor?

2. Reduced survivor benefit. Reduced is by definition less than the maximum. In FERS survivor speak, this translates into 25% spousal benefit. If your pension is $3,000, your spouse gets $750 upon your demise. If you’re thinking that a reduced benefit should come with a reduced cost, you’re correct! Instead of paying 10%, you only get hit for 5%. In our example, that would be $150. Meaning, your $3,000 paycheck turned into $2,850 so that your spouse could get their own paycheck of $750 a month.

   Same rule as before—the spouse dies before the annuitant, and the deduction stops coming out. The paycheck is restored to the full $3k for the retiree.

3. Self-Only. Hopefully you can figure that one out yourself, but if not, it means you are taking no reduction in benefits since you either don’t have a spouse, or don’t have one you want to help out. In other words, no reduction for you, no benefit for them. Zero.

Some Details

There are a couple of very important items that fall under the heading of “fine print.” Perhaps OPM cares about spouses, or maybe they just got tired of getting hate mail from irate widows that were stiffed, but if you choose a reduced or self-only election, your spouse will have to notarize the document. Basically, they need to recognize that they are eligible to receive 50% of your annuity, and consent to giving that up, either in whole or in part.

Later on in this document, we’ll discuss some strategy that may help in making your decision whether to take a survivor benefit, and if so, which one—the 25% or 50%. This generally requires some comparison into how much life insurance would cost. Please understand this one point; it is important: the reduction of your annuity (i.e. the cost of the survivor benefit), is made with pre-tax dollars. You are not taxed on your annuity until AFTER the survivor benefit has been deducted. This means that the cost is not as high as it first appears. For example, if you’re in the 22% tax bracket, the $300 deduction is really costing you $234 ($300 – 22%). When comparing the cost of a life insurance policy, remember that a life insurance policy is paid with after-tax dollars. In order to have enough money to purchase a $300 policy, you’d have to make $385 pre-tax. ($385-22% = $300).

Now, if that were the full extent of the survivor benefit, deciding whether or not to take it would be a fairly simple calculation, right? It would be a matter of determining if paying $300 a month for life would be worth the potential for receiving $1,500 a month for life.

Example: Fred and Wilma are married and Fred is retiring. He elects the 10% survivor benefit and has $300 deducted from his check each month so that when he dies, Wilma can receive $1,500. Fred lives another 25 years and then Wilma lives another 5 years after that. Was it a good decision? Let’s do the math: Fred paid $90,000 ($300 x 12 months x 25 years) for this benefit. Wilma received $90,000 ($1,500 x 12 months x 5 years). In this case, with these numbers, Wilma basically just got the money back that Fred put in. This would be what is called in the finance world as the “break-even point”. Were Fred to die sooner or Wilma to live longer, they would come out ahead. Were Fred to live longer or Wilma to die sooner, they would’ve been better off not purchasing the survivor annuity. (One could argue that Fred should’ve elected to skip the survivor benefit, put $300 into a mutual fund for 25 years and then let Wilma inherit that, which would be somewhere around $200,000).

As I have said before many times, life is not just a math problem, however. There are a lot of other variables and knowing exactly when we are going to die is pretty much one of the biggest ones. Providing for your loved ones imparts a certain peace of mind that cannot be quantitatively calculated. And, yes, you may “lose” money, but that may not mean you shouldn’t do it. If you’re a good driver, you will probably pay more in car insurance in your life- time than you’ll ever get back, but does that mean you should drive around uninsured? Of course not. The same with survivor benefits/life insurance. I’m not arguing that not taking care of a survivor is an option, I’m simply showing different ways to take care of a survivor. Whether it’s the FERS survivor benefit, a life insurance policy, or some other option, that’s for you and your spouse to work out.

The Other (Very Important!) PartAs I just wrote, if getting money was the only component of the survivor benefit, deciding whether or not to choose it, and how much, would be a fairly easy exercise. But there is another very important part looming out there that many potential retirees are unaware of.

The survivor benefit is actually comprised of two parts: money and insurance. Health insurance to be precise. If a retiree does not elect ANY survivor benefit, (in other words, they go with 0% instead of 25% or 50%), upon their death, not only does their spouse not receive any future annuity payments, they are no longer eligible to be covered under our federal health care program, FEHB. This is a substantial hit. Because FEHB is subsidized nearly 75% by the government, the cost impact to us is negligible compared to the vast majority of medical plans out there. Just talk to a few non-federal retirees that are working part-time jobs simply to cover the cost of health insurance, or some sort of Medicare supplement plan. Health insurance is expensive. Federal health insurance is not. A 70-year old FERS retiree is paying the same premium as a 21-year old FERS employee. Do NOT take lightly the decision to make your surviving spouse ineligible for FEHB upon your death.

Going into detail about FEHB, how it works with Medicare, and the value of it are all topics for a stand-alone paper, so I won’t go into detail here. But suffice it to say, it is one of the most valuable benefits we get as federal employees, and leaving your spouse without health coverage in this environment would probably be a substantial financial hardship for them. Please think twice (or 3 or 4 times) before you make that decision.

I have spoken to some retirees whose spouses are closing in on Medicare eligibility and they opted to go with a larger life insurance policy to cover the replacement of not only survivor benefits, but also the cost of future health insurance. They elected zero survivor benefit. Their logic was that if they got a large enough policy, it would not only provide a nest egg for the survivor to draw from for the rest of their life, but it would also be enough money to purchase health coverage from one of the exchanges that would carry them over until Medicare eligibility. They had worked through the numbers, knew the risks, and were very comfortable with that strategy. They were able to take 0% survivor benefit, thereby increasing their monthly check, and provide for their family with a life insurance policy that they felt was cheaper overall than electing the 5% or 10%. Of course, there is a cost benefit factor here. The life insurance may be far more expensive than the survivor benefit, so it has to be carefully weighed.

If you’re considering this, please at least get a second opinion from someone who fully understands this stuff so that you don’t regret your decision if it doesn’t work out exactly like you think it might. It would be best to speak with a retirement planner who sees the impact of healthcare costs on retirees daily so that he can explain all of the ramifications of this decision.

There Is Always An Exception

For those of us married to federal employees, FEHB works a little bit differently with the survivor benefit. While it is true that electing the 0% survivor benefit means that FEHB coverage for your spouse stops upon your death, they may still be eligible for FEHB on their own. Since they were a FERS employee, as long as they meet the criteria (covered for the last 5 years of federal employment), they can get FEHB themselves, rather than having to rely on coverage from their spouse.

Example: Chris and Charmaine are both FERS retirees. They are both covered under Chris’ FEHB in retirement. They have both elected 0% survivor benefit, which would normally mean no FEHB coverage for Charmaine upon Chris’ death. However, because Charmaine was covered by FEHB for the last 5 years of her FERS employment (under either Chris’s or her own FEHB—it doesn’t matter which one), upon Chris’ death, she can elect to now be covered under her own FEHB. In this instance, whether or not to elect the survivor benefit is simply one regarding future annuity payments; ability to receive health insurance does not factor in, since they are both eligible regardless.

True story: I personally know a retired couple that elected no survivor benefit since they were both covered by FERS. He died unexpectedly. OPM cut off her FEHB immediately (and her kids were still on the policy). Among everything else she was dealing with, she had to spend time explaining to OPM that she was, in fact, still eligible for her own FEHB. It was eventually turned back on and everything is fine now, but I provide that example as yet another reason to have paperwork ready for your spouse in the event you pass away unexpectedly. Particularly if you are the spouse that always handled the finances and understand this stuff better than they do.

Complications

There are a number of complications that can arise in the realm of survivor benefits, and they almost all revolve around one theme: former spouses. As with a lot of aspects of life, former spouses can create complex issues. The survivor benefit is no exception. If you have an ex- wife/ex-husband, several things can happen related to the survivor benefit of your FERS annuity. And frankly, if you find yourself in this situation, you really need to reach out to someone who specializes in this, or at least do your homework on the OPM site. I will only provide the basic outline of the options.

Involuntary: you may have a court order awarding a survivor benefit to a former spouse. In this case, you do not elect a former spouse annuity—the former spouse survivor annuity is put in place by the court order. No action is required on the SF-3107.

Voluntary: you can elect to have part or all of your survivor annuity benefit go to a former spouse. If you are remarried, then the current spouse must sign off on the benefit going to the former spouse. Just to be clear, your current spouse has to approve the former spouse’sbenefit.

For example, Tommy and Gina get divorced. Then Tommy marries Pam. Pam has to consent in writing for Tommy to give a survivor benefit to Gina. The reason Pam has to consent is that any benefit Gina gets reduces Pam’s benefit. (By the way, if any of you find yourself in this position and are pursuing this option, I would LOVE to hear the details of how that conversation went!)

Do you have multiple former spouses and want to cut them all in for a little? It may be possible, subject to some limitations.

In either one of these cases (voluntary or involuntary), the maximum survivor benefit is limited to 50%, just like in a standard survivor election. For example, if there is a court order that states that a former spouse is to receive a 25% survivor benefit, then the only benefit left for the current spouse would be 25%. There is no way to have 50% go to former spouse and 50% go to the current spouse. However, in that scenario, you would still elect a full survivor annuity for your current spouse and OPM will know how to allocate it.

Again, there are many different variables in these situations, based on the terms of a court order, if the former spouse has remarried, how long the original marriage lasted, etc. Each situation is unique. If you find yourself in a complicated circumstance like this that you don’t fully understand, you really need to seek some assistance from a professional. Dan Jamison of the FERSGUIDE is one of the foremost experts in this area. His entire CPA practice centers around divorce and the OPM-related consequences of that divorce.

Strategy

So, what do you do with this information? Well first, hopefully you are better informed. That alone should provide some help with making your decision. Maybe your decision is already made for you based on something you read—most people get to the FEHB part and realize taking a survivor benefit is a must.

Perhaps the first step is to determine your needs. This would be similar to the approach you took when determining how much life insurance you need. (You do have life insurance, don’t you?!?!) For example, if you were to pass away in the early years of retirement, would your spouse have a large mortgage, young kids, or college payments? Is your spouse a stay-at-home mom? Do they have adequate medical coverage? Are they close to Medicare eligibility age (65)? On the flip side are these questions: Are they receiving their own pension? Are college and mortgage payments a thing of the past? Do they stand to inherit a 7-figure TSP from you? And a large insurance policy? Do they qualify for their own FEHB? Do they have their own 401(k)?

All those questions (and more) would go into determining how much pension replacement coverage your survivor would need. And, it should go without saying, but please include your spouse in these discussions! They are the ones that will be living with the decision you make, so take their concerns and worries into account. Also, the better educated they are on this stuff, the better they will be able to understand if OPM is making a mistake like in my example above.

Once the amount your survivor will need is calculated , the next step would be to evaluate whether to take the survivor benefit (either 5% or 10%), or perhaps an additional life insurance policy. This can be done by obtaining various quotes for life insurance and comparing the cost/benefit to that of the FERS survivor options. Remember when comparing the cost of life insurance to the cost of the survivor benefit, the insurance is paid with after-tax dollars, while the survivor benefit is paid pre-tax. Don’t let that skew your decision unnecessarily in favor of life insurance. It may be the cheaper option but make sure you are comparing apples to apples. Or in this case, what it would cost pre-tax for both (see my earlier example). A $300 pre-tax FERS survivor benefit would be the equivalent cost of $385 of pre-tax life insurance cost (assuming you’re in the 22% bracket).

My Advice

Coming full circle to the question, “Hey Chris, should I take the survivor benefit?”, my advice is that for most people, this is probably the best answer. Most times (although not always), the simplest financial decision is the best. The FERS survivor benefit is straight forward and it provides lifelong income and health insurance for your spouse. For the majority of you, the only decision to make will probably be choosing between the 5% or 10% election. However, there may be some of you for whom it would be financially beneficial to go with life insurance in lieu of a survivor election. If so, I would still encourage you to make sure that the health insurance portion is covered in some form or fashion.

Summary

Maybe I have gone into more detail than is needed, but when I sit down with potential retirees over dinner or coffee, and they have questions, the survivor benefit is always one that generates confusion and protracted explanations (the only thing generating more confusion is taking FEGLI into retirement-what a mess that is). As a result, I wanted to create a paper I could just give to them to better prepare them for the conversation.

If you forget everything else, just remember this: 5 gets you 25; 10 gets you 50. And they both get you health insurance. Zero gets you just that—zero. Zero survivor benefit and zero health insurance.