What if Your Income Dropped by 40%?

By on February 19, 2013 in Current Events, Retirement with 28 Comments

Imagine you’re retired, and things are going well. You’re used to living on $5,200/month of fixed income, but out of the blue – your fixed income dropped to $3,000/month.

Could you still make it?

What changes would you have to make? Would you have to sell your house? Would you have to move to a place with lower cost of living? Would you have to move in with family?

Would you have enough personal money saved up to cover the gap? Or would pulling out the extra money from your accounts mean that you might risk running out of money?

These might be the choices your spouse has to deal with if you pass away.

Over the years of teaching federal retirement classes, and helping my clients – I find that many federal employees are surprised when they realize how dramatically their fixed income would change if they pass away.

It’s not that they don’t care about their spouse, it’s that they just never really thought things through.

But I believe we have a responsibility to the ones we love to make sure they are taken care of after we pass away. So let’s take some time now to look at how your fixed income might change if you were to pass away, and how your spouse’s expenses might change as well.

How Much Will Your Spouse Receive If You Pass Away?

Unfortunately, it’s less than you think.

In this article, we’re going to be using a FERS example, looking at your FERS Pension and Social Security. But if you’re a CSRS, it’s important to know that your CSRS survivor annuity choices are different. And Social Security benefits are also different for CSRS.

Would Your Spouse Continue to Get Your FERS Pension?

At retirement, you have three choices when it comes to a survivor annuity:

Option #1) 50% – ‘Full’ FERS Survivor Annuity

The maximum benefit you can leave your spouse is 50% of your pension.

This choice is usually called the ‘Full’ survivor annuity. So in the FERS classes I teach, many people are surprised to learn that the ‘Full’ benefit is really only ‘Half’ of their pension.

This means that if your FERS pension was $2,000/month – your spouse would receive $1,000/month if you pass away.

Option #2) 25% – ‘Reduced’ FERS Survivor Annuity

If you choose the ‘reduced’ benefit, your spouse would receive 25% of your pension if you pass away. So if your FERS pension was $2,000/month, your spouse would receive $500/month.

Option #3) 0% – NO FERS Survivor Annuity

If you elect this option, your spouse would not receive any survivor annuity after you pass away.

But it’s not just your pension that will stop. FEHB stops too.

If you don’t leave your spouse a survivor annuity – they can not continue FEHB coverage. (Unless they were also a federal employee, or other unique situations)

I think that being able to keep FEHB into retirement is one of your *BEST* benefits as a federal employee.

And it’s also an important benefit for your survivors to be able to stay on FEHB after you pass away. But if you don’t leave them some type of survivor annuity (either the 50% or the 25%) – they can’t stay on FEHB.

So even if you think your spouse won’t need the money – there is still a BIG reason to consider leaving some type of survivor annuity benefit.

How Much FERS Pension Income Will Your Spouse Receive?

At best, if you choose the ‘full’ survivor annuity, your spouse will receive *half* of your pension.

This is the option most federal employees choose, so we’ll continue with this option in our example later on.

Would Your Spouse Continue to Get Social Security?

With Social Security, you don’t really have a choice when it comes to survivor benefits.

If both you and your spouse are receiving Social Security, if you pass away – your spouse would continue to receive the higher of of the two benefits – but the other benefit stops.

Let’s say your Social Security is $2,000/month, and your spouse’s is $1,200/month. If you die, your spouse will continue to receive $2,000/month after you pass away – but the $1,200/month stops.

Let’s Go Back to Our Example…

You were receiving…

$2,000/month for your FERS pension
$2,000/month for your Social Security Benefit
$1,200/month for your spouse’s Social Security Benefit
Total: $5,200/month in gross fixed income

But if you pass away, your spouse would receive…

$1,000/month for the ‘Full’ FERS Survivor Annuity
$2,000/month for Social Security Benefit
Total: $3,000/month in gross fixed income

So they went from being used to living on $5,200/month of fixed income to $3,000/month. That’s a $2,200/month reduction – or a 42% drop in income.

“But Won’t Their Expenses Go Down?”

Sometimes people will say that it’s okay that their spouse’s income goes down, because their expenses will go down too.

That’s the common thought – but I can tell you from my experience working with widows – their expenses don’t go down as much as you think.

Think of what you spend your money on now? What would change if you passed away? This will be unique for you and your spouse – but it’s worth it to walk through your current expenses and really see what would change.

Most widows’ expenses do go down a bit, but typically not by the same amount their fixed income goes down.

So this brings us to a problem…

The Survivor Benefit ‘Gap’

Your spouse’s expenses went down by a small amount, but their fixed income takes a dramatic drop.

This means their ‘gap’ between what they need to live and what they’ll be receiving in fixed income is bigger than it was before.

 

 

Ideally, you fill that gap with your personal investments. But there are other ways to address it as well.

There’s only so much we can cover in one article. But if you’d like to learn more, visit our page on FERS Survivor Benefits and Social Security Survivor Benefits.

 

How Much Will *Your* Spouse Receive?

We’ve been talking about some broad examples here to highlight concepts. But everyone’s situation is unique.

It’s important to take a look at your own personal situation. Look at your current lifestyle, and what expenses might really change for your spouse. And look at your retirement income. How would that change for you and your spouse if you passed away?

Once you have a good handle on how your income and expenses would change – then you’ll have the starting point to make a plan to fill the Survivor Benefit gap.

It’s not the most pleasant project, but I believe we owe it to the ones we love to make sure they’re taken care of if we pass away.

Survivor Benefits are Part of Retirement Planning

I’ve taken my experience as a financial planner for federal employees, and created a special online program that you can use to learn about your benefits and create your own financial plan. I designed it from the ground up to help FERS federal employees, and FERS survivor benefits are just one of the topics we cover in the program.  Learn more about FERS Route to Retirement

© 2016 Micah Shilanski, CFP®. All rights reserved. This article may not be reproduced without express written consent from Micah Shilanski, CFP®.

About the Author

Micah Shilanski is a Certified Financial Planner™ professional who specializes in helping federal employees get the most out of their retirement benefits. Micah helps his clients with tax planning, retirement planning, federal retirement planning, estate planning, and investment advice.

Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.

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