Should you elect the survivor benefit option for your spouse when you retire, or not? That’s a question that comes up frequently among married federal employees nearing retirement. It’s also a question that I find is frequently answered using misguided rule-of-thumb or seat-of-the-pants decision methods. Unfortunately, these methods sometimes support an employee’s bias against reducing his or her annuity income to provide insurance against financial hardship after he or she is gone. This can lead to unpleasant results for a dependent survivor.

There are some rules of thumb that are safe to use, and some that aren’t. A few good rules of thumb to keep in mind:

  • Elect a survivor benefit to preserve your eligible spouse’s access to Federal Employees Health Benefits Program and other benefits coverage after you’re gone. Electing, at least, the minimum survivor benefit of 1 percent of your annuity under the Civil Service Retirement System or 25 percent under the Federal Employees Retirement System will enable your survivor to continue coverage under FEHBP and other benefit programs for life if you die first. Without it, your survivor will be left to Medicare or private insurance, if eligible.
  • Elect the full survivor benefit if your survivor will, or probably will, rely on the income it provides to maintain his or her standard of living after you’re gone.
  • If you’re uncertain about the best choice to make, elect the full survivor benefit. In my experience, in analyzing the real-life scenarios presented by preretirement clients, the vast majority of retirees will be at least as financially secure, if not more financially secure, with the survivor benefit in place than without it.

This is true because of the risk and return characteristics of the survivor annuity benefit. The full survivor benefit for CSRS-covered annuitants is 55 percent of the base, unreduced annuity amount and costs a little less than 10 percent of the base annuity to purchase. The maximum FERS survivor annuity is 50 percent of the base amount at a cost of 10 percent. Like the base annuity, the survivor benefits are increased annually for inflation.

If your spouse dies before you, your annuity income will pop back up to the unreduced amount for the rest of your life.

The election decision hinges on the trade-off between the 10 percent cost of the benefit and the value of the potential benefit over the survivorship period — the years that will elapse between your death and the death of your spouse if he or she outlives you. You know the amount of the benefit, and that it is guaranteed to retain all or most of its value over time. What you don’t know is what the survivorship period may be. If your spouse is your age or younger and in reasonably good health, there is a good chance that there will be a significant survivorship period — one that will pay back some or all of the cost of the survivor benefit.

If your spouse is significantly older than you or in poor health, you are in a position to consider forgoing the survivor benefit, but only after careful consideration based on thorough and competent analysis. Even when your spouse is 10 years older, for example, there are many likely scenarios that will be better supported with a survivor benefit in place.

Some poor reasons for declining a survivor benefit for your spouse:

  • So you can put the savings into life insurance for the benefit of your spouse, instead of paying for the benefit. I have yet to see a situation in which this is a compelling strategy.
  • Because you think you can do better by investing the savings, instead of paying for the benefit. Whether you manage the investment yourself, or pay someone else to do it, the risk you take in this strategy makes it a poor choice.
  • Because you don’t want to sacrifice your current lifestyle to pay for the benefit. In most cases, the sacrifice involved in paying for the benefit is likely to be a tiny fraction of the sacrifice required to accommodate the loss of income during the survivorship period.

Every case is unique and a prudent survivor annuity decision will involve financial and probability analysis, as well as the influence of personal values — yours and your spouse’s. But, the characteristics of the CSRS and FERS survivor annuities make them the safe choice in all but the most extreme cases.

Written by Mike Miles
For the Federal Times
Publication September 26, 2005