Notes on the Lump Sum, the Survivor Annuity, and Life Insurance
by Robert F. Benson |
Lump sum. One-time cash payment, shortly after retirement, based on accumulated annual leave.
How to Calculate. Divide the annual salary at retirement by 2,087 then multiply by the annual leave balance you will have on retire date. Example: Joe will retire on the last day of the next pay period – he is making it the last day so he will get the usual 8 hours of annual leave. Today he has 213 hours on the books; he will have (213 + 8) or 221 hours on retire date. His basic salary is $68,304. Divide 68,304 by 2,087 and his hourly rate is $32.73. Multiply the 221 hours by $32.73 and the lump sum for Joe is $7,233.
Note: the lump sum will be paid separately from the last salary paycheck; in most cases, about two pay periods after the retirement.
(Of course, if you already know your hourly rate, just multiply it by the annual leave hours you will have on your retire date.)
Survivor Annuity. Lifetime annuity paid to surviving spouse upon the death of retiree.
For FERS married employees, there are just three choices: 50% of full annuity, 25%, or -0-. If the employee opts for less than 50%, his spouse must sign a consent form. The cost for the full survivor annuity is 10% of the “unreduced” annuity, or 5% for the 25%. But the cost is deducted just one time, from the full, unreduced annuity. From then on, Joe’s unreduced annuity is a thing of the past.
Example: say Joe and his wife agree to 25% survivor annuity. She signs the form. His unreduced annuity is, say, $19,000. Multiply the 19,000 by 0.05 and his permanent reduction becomes $950 – subtract $950 from the $19,000 and his new annuity is $18,050, and the survivor annuity is $4,750.
The only way Joe’s unreduced annuity can be restored is if Joe’s wife predeceases him, or if they are divorced. Also, the survivor annuity amount increases each year by the same COLA percent applied to Joe’s annuity.
CSRS is similar. The two primary differences are the survivor annuity is 55% of whatever amount Joe chooses, up to the full annuity, and the cost is slightly less than 10%. Like FERS, if Joe opts for less than the full survivor annuity, his wife must sign. The cost to Joe is $90 + [(amount selected -3,600) * 0.10]. Say Joe opts for 55% of $40,000; the one-time reduction would be 90 + [($40,000 -$3,600) * 0.10], or $3,730, and the survivor annuity is $22,000. Joe’s annuity in this case is reduced by $3,730.
(Historical note. In 1920 – when CSRS started – $3,600 was a high salary; few people made this much. The deduction for the survivor annuity was 2.5% of the unreduced annuity. In the unusual case of an employee with a salary greater than $3,600, the reduction for salary above $3,600 was pegged at 10%, while the first $3,600 remained at 2.5%, or $90. This meant affluent employees paid proportionately more. It appears the 2.5% was so modest because life expectancy was not quite 65 years – the pension fund would not be paying for nearly as long as now, when lifetimes average about 80 years!)
Important caveat: with FERS or CSRS, consider carefully before opting out of the survivor option. If you die first, with no survivor option, your spouse will not be able to keep the FEHB insurance.
Life insurance. With basic life insurance, the Government pays one-third the cost. The cost to the employee/retiree is based strictly on face value of the insurance, with age having no effect until 65. Face value is basic salary rounded up to the next $1,000, + $2,000. Thus, an employee making, say, $69,621 would have $72,000 in face value for his basic life insurance.
For basic life, cost to the employee, $0.15 per thousand, is the same at all ages, up to 65, with younger employees receiving up to twice the face value (the “Extra Benefit”) , gradually reduced with age, and older employees receiving free coverage starting at age 65. The face value of the free coverage reduces with age: 2% per month until it becomes 25% of the beginning amount.
If employee opts for no reduction beginning at age 65, the employee must continue paying a premium. Also, new employees are automatically enrolled for basic life insurance, unless they sign a waiver.
Optional. There are three kinds of optional life insurance: option A standard, option B additional, and option C family. To enroll in any of the optional plans the employee must first be enrolled for the basic coverage. The optional choices are less costly at younger ages, thus more appropriate for younger employees, especially those with dependent children. Compared to basic, the premiums are high, because there is no Government subsidy, i.e., the employee pays 100% of the cost. You may want to shop around for a better value.
Above is just a summary, which may be helpful in planning. Detailed rates can be found at: http://www.opm.gov/insure/life/rates/index.asp .
In calculating annuities, the software at my website, fedbens.us , computes and displays the lump sum for annual leave, the survivor annuity and deduction, and the exact premium for basic life insurance.
© 2014 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.