The saying that “two can live as cheaply as one”—at one time seriously suggested to couples hesitant to marry because of financial concerns—would produce only eye-rolls and possibly derisive laughter if voiced today.
It should follow that neither can two retire as cheaply as one. Yet too many couples approaching retirement are behaving as if they expect they can.
That was the conclusion of a recent study looking at retirement savings patterns of three types of couples: where only one has earnings, where both have earnings and both save for retirement, and where both have earnings and only one saves for retirement. While the study was not specific to federal employees, its lessons apply equally as well there because it focused on 401(k)s, savings vehicles that are essentially the same as the Thrift Savings Plan.
As the Center for Retirement Research put it in its study, “Saving is an individual decision, but the adequacy of retirement income is a household affair.”
It said that if only one person is saving to prepare for retirement of two, it would seem logical that the saver should be setting aside more than if both are saving. Yet it found that savings rates don’t reflect that.
For a couple with only one earner, it found an average household savings rate of 8.6 percent. If both are working, that rate increases to 9.4 percent of household income if both are saving, but actually falls to 8.4 percent if only one is saving.
“The individuals who should have the highest saving rate – those with an earning, non-saving spouse – actually have somewhat lower saving rates than the other groups. In other words, these individual savers do not seem to realize that they need to pick up the slack for their spouse,” it said.
“Dual-earner households with just one saver save too little. This result is discouraging because these households should have a leg up for saving for retirement; after all, they have two earners . . . until something is done, dual-earner couples are likely to end up less prepared for retirement than they could be,” it said.
It found that factors such as the employer matching formula are more strongly linked to savings rates than whether an account will have to support just one or two people.
One quick thing to check if you’re a two-earner household and both with access to the TSP or other 401(k) type programs: are you getting the most out of the available matching contributions from your employer?
In the federal employment realm, about 95 percent of active employees fall under the FERS system, which has employer contributions equal to an automatic 1 percent of salary plus an additional maximum of 4 percent if the individual saves at least 5 percent personally. Above 5 percent, while the tax advantages continue to apply, there is no further government contribution.
So, if only one of you is investing, and is investing beyond the level of the maximum match—as the data suggests is common—you could be leaving money on the table. Better to put the additional into an account for the other and capture matching contributions there as well.
Is that a problem for federal employees? Data from the TSP suggest that it is. Its most recent report on the topic, from 2017, shows that 53 percent of FERS participants are investing more than the 5 percent of pay needed to capture the maximum match. However, another 19 percent are investing less than what they need to get the maximum, including 7 percent who are not investing any personal money and therefore are getting only the automatic government contribution. (Those under CSRS do not get matching contributions but they do get the same tax advantages.)
A second federal benefit also needs to be taken into account: survivor benefits on your federal annuity. In that way, federal employees have an advantage over many—not all, certainly—private sector employees, where defined benefit programs comparable to CSRS and FERS have withered in recent years. But you still have to be sure to understand what the benefit will do, and more importantly what it won’t do, for your spouse should you be the first to die after your retirement.
Right up front, you have to provide for a survivor benefit in the first place. Providing a full survivor benefit is the default choice, so that makes it easier. But don’t confuse “full survivor benefit” with “full benefit.” The full survivor benefit is 55 percent of your annuity if you’re retired under CSRS and 50 percent under FERS; for that there is a reduction in your annuity as you receive it of 10 percent in the latter case, almost 10 percent in the former.
Both systems also offer the choice of reduced benefits. Under FERS, the only option is a 25 percent benefit, which costs a 5 percent reduction in your annuity as you’re receiving it. Under CSRS, it’s more complicated because you can choose any amount below 55 percent, with a corresponding reduction in the cost.
Or—danger alert—you can, with your spouse’s written consent, provide no survivor benefit. Some who enter retirement do that, arguing that they can do better by taking their own full benefit and using the money the survivor benefit would have cost in some other way. Just be very careful about this and remember one important fact: the government is paying a share of the value of a civil service survivor benefit—your contributions toward retirement while actively employed are/were your share—and by going it on your own you are forfeiting the government share.
One other important fact: to keep your spouse eligible for FEHB benefits—and the share the government pays toward its premiums—after your death, you must provide for a survivor annuity, unless your spouse would be eligible on his or her own account, such as through his or her own federal employment. Continued eligibility for employer-sponsored health insurance after retirement, with the same employer contribution toward premiums as for active employees and continued eligibility for spouses, is another benefit that is now rare in the private sector but that the government still provides its own employees.
Putting food on the table for both of you in retirement should start with not leaving any of your benefits on the table.