Should you elect a survivor benefit for your spouse? Believe it or not, there was a time when that decision was entirely up to you. Not anymore. These days you have to elect a full survivor annuity for your spouse, unless he or she agrees in writing to a lesser amount or none at all.
The downside of electing a survivor annuity is that it will reduce the amount of your own annuity. How much that reduction will be depends on whether you elect a full annuity or a reduced one. Under CSRS you may elect any amount from $1 per year up to 55 percent of your base annuity. Under FERS there are only two choices: 50 percent of your base annuity or 25 percent. The reduction for a CSRS full survivor annuity amounts to around 10 percent; under FERS it’s exactly 10 percent. A reduced survivor annuity will cost you proportionately less—on a proportionate scale under CSRS, a flat 5 percent under FERS. Whatever level of survivor annuity you elect, the reduction is made in your base annuity, i.e., the amount you are entitled to before any deductions are made for such things as health benefits premiums, taxes, etc.
The advantage of electing a survivor annuity is that it will provide an income to your spouse for as long as he or she lives, unless he or she remarries before age 55. The amount he or she would be entitled to will be determined by your base annuity, increased by all COLAs that were added to your annuity since you retired.
For example, if you were a FERS employee whose base annuity was $80,000 and you elected a full survivor annuity, your own annuity would have been reduced by 10 percent, leaving you with a base annuity of $72,000. However, if you died the next day, your spouse wouldn’t receive an annuity of $36,000 ($72,000 x .50); instead, he or she would receive $40,000 ($80,000 x .50). Assuming that you lived a long time after retiring, your annuity would have been increased by COLAs, and those COLAs would be applied to the survivor annuity.
While it may be tempting to turn down the offer of a survivor annuity and either invest the extra money or purchase an insurance policy to make up the difference, few retiring employees do it. That’s because the government’s deal is so hard to beat.