As the end of the year approaches, many federal employees are preparing to submit their paperwork to officially retire. There’s a significant number of boxes to check to do that correctly, and prospective retirees may want to consider speaking with a retirement consultant who specializes in federal employees to ensure they don’t miss anything. But one detail they’ll need to work out ahead of time with their loved ones is the matter of survivor benefits.

Federal retirees’ pensions, Thrift Savings Plan and Federal Employees’ Group Life Insurance accounts all offer options for retirees to provide for their loved ones in the event that they pass away first. That’s important, because a surviving spouse may not be able to continue the lifestyle they’re accustomed if half their fixed income suddenly ceases. That could have impacts on, among other things, their housing and health insurance.

Federal employees will need to make some decisions about survivor’s benefits on their retirement application, so it’s helpful to have a discussion with potential beneficiaries ahead of time so they’re prepared.

Pension

The pension is the main place where retirees need to consider their options along with their potential beneficiaries — these will primarily be spouses, except in a few special circumstances. Retirees under the Federal Employees Retirement System and the Civil Service Retirement System have similar options, but each of these options comes with a cost, along with one big caveat.

FERS — FERS employees have three set options:

• The first is the max survivor benefit: Survivors get 50% of the retiree’s pension, continuing on a monthly basis. That comes at a cost of a 10% monthly deduction from the overall pension.
• The second option is the reduced survivor benefit: Survivors receive 25% of the retiree’s pension, continuing on a monthly basis. That comes at a cost of a 5% monthly deduction from the overall pension.
• The third option is no survivor benefit: Survivors receive no further payments after the retiree passes away.

It’s important to note that according to the Office of Personnel Management, spouses must also sign off on the second or third option; max survivor benefit requires no approval from the spouse.

CSRS — CSRS employees also have three set options:

• The first is the max survivor benefit: Survivors get 55% of the retiree’s pension, continuing on a monthly basis. That comes at a cost of a 10% monthly deduction from the overall pension. However, it’s important to note that CSRS pensions are much larger than FERS. That makes this option more expensive over the course of retirement, though it also means a larger benefit for survivors.
• The second option is the adjusted benefit: Survivors can receive any amount between $1 per month and the full 55%, at an accordingly adjusted cost.
• The third option is no survivor benefit: Survivors receive no further payments after the retiree passes away.

Like with FERS, spouses must also sign off on the second or third option; max survivor benefit requires no approval from the spouse.

But the big caveat for both is the continuation of health insurance: If survivors were on the federal retiree’s health insurance plan, that health insurance will cease if there is no survivor’s benefit. Any amount of survivor’s benefit will continue the health insurance plan; for CSRS, that means $1 per month is enough to guarantee its continuation.

This can be one of the most complicated decisions when it comes to federal retirement. Prospective retirees and their spouses should speak with a federal retirement consultant, and consider the holistic picture of their assets, the spouse’s income, their needs and budget, life insurance, and whether they have any additional financial obligations, like debt or a child in college.

FEGLI and TSP

FEGLI and TSP are generally much easier decisions to make. They’re both separate benefit forms to designate survivor benefits, and anyone can be named as beneficiary. Because of this, each should be revisited every two years or so, as major life events happen. Marriages, divorces, births and deaths can all affect the determination of a beneficiary.

For TSP, retirees can name any percentage they want for their beneficiary.

The thing to consider about FEGLI, however, is that there’s there’s no cost-effective way to carry any substantial amount of FEGLI into retirement; the cost increases significantly with age, and is not advantageous by the end of a federal employee’s career. It is a good benefit while employed, but federal employees looking to use life insurance as an estate planning tool are much better served getting into a private plan as soon as possible.

Federal employees may also be paying for benefits within FEGLI that they don’t need. Federal employees with FEGLI Option C could be paying for something no one is qualified for, and could be eligible for a refund.

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