Selecting a Survivor Annuity: What Should You Do?

Married employees considering retirement have choices regarding the survivor annuity. Do they want/need it? If they do opt for the survivor annuity, how much do they want it to be? How much will it cost?

Married employees considering retirement have choices regarding the survivor annuity. Do they want/need it? If they do opt for the survivor annuity, how much do they want it to be? How much will it cost?

FERS

If you are married and do not want the maximum survivor annuity, your spouse must sign a form agreeing to this decision.

• 50% (full) = \$14,500 survivor annuity, with a \$2,900 reduction(10%)  in employee annuity – reduced annual annuity becomes \$26,100.
• 25% = \$7,250 for survivor, with \$1,450 reduction (5%) – reduced annual annuity  is \$27,550.

CSRS

In 1920, when CSRS was started, salaries were a great deal less than they are now. If a person made more than, say, \$5,000 annually, he was doing quite well. With this in mind, the architects of CSRS decided to have the employee pay 2.5% of whatever portion was designated to be “shared” with his survivor, up to \$3,600 or the full annuity, whichever was higher.

Example: an employee with an annuity of \$1,900 per year, opting for the max, would pay 2.5% of \$1,900, or \$47.50 annually. This would entitle his survivor to 55% of the \$1,900, or \$1,045. If the employee decided on designating \$1,300 to be shared, his full annuity would be reduced by 2.5% of \$1,300, or \$32.50, with 55% of \$1,300, or \$715, for the survivor,

It was possible for employees at the highest levels to earn an annuity of more than \$3,600. For these well-compensated individuals, it was decided that any designation of more than \$3,600 to be shared would pay a higher marginal rate: 10%.

Example: employee gets annuity of \$4,100, all of which he wants to share with his survivor. This would cost the employee \$90 on the first \$3,600 plus 10% of anything over \$3,600. In this case, the \$4,100 exceeded the threshold by \$500, so \$50 would be added to the \$90, making the total annual cost of the survivor annuity \$140. The survivor annuity would then be \$2,255 (55% of \$4,100), while the employee’s annuity would be reduced to \$3,960.

Although salaries have increased a great deal since then, the formula remains the same: 2.5% of the first \$3,600 and 10% thereafter. The CSRS employee can still designate any amount on which to base the survivor annuity, up to his full annuity.

For both CSRS and FERS, in addition to the income, there is another benefit to having a survivor annuity. When there is a survivor annuity, the survivor can continue having the (subsidized) federal health insurance. Even if the survivor income is not needed, continuing the health insurance is usually considered prudent. So, married employees generally opt for at least a small survivor benefit.

FERS employees are limited in their choice to half or one quarter of their annuity.

CSRS employees have the option of selecting any amount for the basis of their survivor annuity. This provides an opportunity for those who do not really need the income, but do want their survivor to be able to continue health insurance coverage. They can select \$3,600 or less as the basis, thus incurring a comparatively modest cost while preserving a valuable insurance benefit for their surviving spouse.

If the spouse pre-deceases the employee, the employee’s original annuity (with any increases) is restored.

Summary

Retirement System Survivor Annuity Reduction in Employee Annuity
CSRS 55% of amount designated by employee, up to full annuity \$90 + 10% of (designated annuity – 3600)
FERS 50% or 25% of full annuity 10% or 5%, of the full annuity