Pension Question

Parent Cafe
41

@bhs1978, yup, FERS requires that you take at least a 25% Joint & Survivor annuity plus requires a certain number of years on the health plan to qualify for post-retirement coverage. That’s a HUGE deal for us with my prescription expenses.

This is a quick-and-dirty general description of the cost of survivor benefits.

Pension benefit formulas are typically calculated as a Single Life Annuity (SLA) – average salary times years of service times a percentage of pay. So, for $5,000/mo average pay times 35 years of service times 1% of pay, the SLA benefit would be $1750/mo.

The typical “cost” of a Joint and 50% Survivor Annuity (50J&S) is about 10% of the SLA benefit, or $175/mo.
Employee receives $1575/mo (1750-175) for life, then the surviving spouse receives $875/mo – 50% of the unreduced SLA – for life.

This “cost” is how we make the 50J&S actuarially equivalent to the SLA – because with the J&S benefit, the plan is paying out over two lifetimes, not one. In theory, the income stream for a 50J&S should equal what is paid out under a SLA by the time the employee and spouse both pass. A 100% J&S would be about a 15% reduction – it depends on which tables the plan uses.

How those funding numbers get parsed, I leave to the actuaries. ^:)^

42

The interesting thing with the old CSRS plan that older fed workers had, as long as you had 5% survivor annuity to spouse, they could get medical benefits.

The larger the survivor annuity, the larger the reduction in current payout, up to 10% reduction for 55% survivor benefit.

It didn’t matter how much younger or older non employee spouse was, same calculation, so if non employee was significantly younger, it could be a good deal for the couple, especially since COLA is included.

Of course, the feds stopped offering CSRS in mid-80s, so most of the employees who have it are now pretty old at this point.