#121 The Untold Story of Survivor Benefits: Protect What Matters Most

Micah Shilanski  00:00

Welcome to the Plan Your Federal Retirement podcast. I’m your host, Micah Shilanski, and today we want to talk about a really important benefit, and we want to talk about making sure you understand when the good Lord calls you home, we are light beams off this planet, what actually happens? It’s gonna be a little bit of a two part series. Now, don’t tune out just yet. We promise. We’re gonna try to try to make this exciting full of great information. In order to do that, we brought on with us a wonderful advisor, Christian Sakamoto, who works in our office. Christian, thanks for joining us, bud.

Christian Sakamoto  00:30

Hey, what’s going on? I am excited to talk about this. This is super duper important, especially as we talk to our clients about what benefits to select when it’s time to go to retirement, and I think there are several misconceptions there that I think it’d be good to educate our listeners on and to talk a little bit further, especially as it relates to those survivor benefits, you know which option to select, and do we even need them, so I think that’ll be fun to talk about today. 

Micah Shilanski  00:57

Yes, I think it’s gonna be really good to jump into, and we’re going to take this from a couple different approaches, right? Is, is number one, we give people a context that says, hey, look, appreciate you talking to all those married people, but I’m single, what do I do? Well, don’t worry, we got a little bit of information for you, so don’t tune out just yet. We also want to get into that says, okay, if you’re married but your kids are grown out of the house, what options do you have? What if you’re married and you have young kids, what options do you have as well? And then we want to talk about, you know, what if we want to make the world a little bit of a better place, and this is something I’m pretty passionate about as well. I like to chat with our clients about this is, if you could get every penny to go where you want to, but there was a little bit left over, and you add the opportunity to make the world a better place, what would you do, and should we include some charitable thoughts inside of our planning? This is something we should have a conversation about. It’s your money, it’s your call. Our job is to help you make educated and informed decisions. So, Christian with that, you want to start jumping into this?  

Christian Sakamoto  01:55

Yeah, let’s do it. Let’s do it.

Micah Shilanski  01:56

Let’s talk about the first one, right? So, so if we pass away, let’s talk about the people that we leave behind, right? Oh, I guess we should back up even before that leave behind question, we should say, when we talk about survivor benefits, like, what do we mean? What? What things are out there that have survivor in its don’t have survivor events? How does all that work come together?

Christian Sakamoto  02:14

Yeah? Yeah, absolutely. So for federal employees, the first would be the pension, and leaving a survivor pension to a spouse, or what we’ll talk about a little bit later on, would be an insurable interest, so the first benefit would be that pension that we can leave, the other would be what Social Security benefits, right? Talking through what benefits are available to a survivor, are we getting both benefits, if we’re married, what’s who can get a Social Security Survivor Benefit, thinking through how the life insurance plays into that as well, that’s a survivor benefit plan, right? It’s not going to be in the form of a pension, but it is a plan for our survivors as a form of a benefit, they’re really just anything else that’s left over between the bank accounts, right? That that can that get transferred over, or retirement accounts that can get transferred. I would still think that’s part of our survivor benefit planning, is our investments, our retirement accounts, our bank accounts, right?

Micah Shilanski  03:09

Now, I think today, what we’re going to focus on in our next episode, we’re going to dive into estate planning, right? What documents we need, why things are important, etc. But today we’re going to be talking about more like, what these things are, what the dollar amounts are. We’re not going to be focused on a planning aspect of it too much. That’s going to be in the next episode, and I want to get in that next episode really talking about how estate plannings get blown up, how we end up hurting our loved ones, both money, not helping them, and just some things we’ve seen from this side of the table. So that’s coming, but before we do that, Christian, you’re 100% right? We have to talk about what your options are. So what things do we have, right? So as you said, we have your first pension, we have Social Security, we have TSP, we have IRAs, bank accounts, etc, we have all of those things, and we need to look at it lens of saying, all right, if we pass away, where does that go? So let’s talk about with a single individual, right? Not married, no kids, what, what happens? Let’s talk about their pension first. So Christian, if they pass away and they haven’t they’re not married, then how many kids really, no beneficiary listed, what happens to their pension?

Christian Sakamoto  04:10

Well, they wouldn’t be able to leave the traditional survivor benefit to a spouse, as they’re not married. There would be the option to select for an insurable interest, and the insurable interest, there’s a whole list of who can be an insurable interest. So number one, would be a blood or adopted relative closer to than a first cousin. Number two, an ex spouse. Number three, a person who you’re engaged to be married, or four a person who you’re living in a relationship that would constitute a common law marriage if you live in a common law state. So those are the types of people that we can leave a survivor benefit to other than our spouse, and those are considered an insurable interest, and so we have to think through, okay, do they fit the description? Do we have anybody financially dependent on us that fits that description, that we might want to leave the full survivor benefit, which is half or the partial survivor benefit, which would be a 25% benefit, to that person. 

Micah Shilanski  05:12

Now, if you don’t have an insurable interest, don’t worry, because if you pass away, you’re going to help reduce the national deficit. Okay, sorry, it’s the bus joke, I have, guys, I’m sorry, yes, that means you cannot leave it to anyone, that means that it does kind of go away, because this is a a pension benefits based on a life expectancy, it’s not a lump sum payout that’s going to happen, right? So if we have an insurable interest. Now, you know us, we talk about all the time, beneficiaries, beneficiaries, right? These are things you have to specify. If it comes back later that says, oh, I was a fiance of someone and that passed away, and I should get their pensions, it’s going to be a heck of a lot harder in order to execute on that versus if you had this person listed from the beginning as a beneficiary, so really, really important.

Christian Sakamoto  06:00

And we’ve had also several clients that, before retirement they were either engaged or maybe they weren’t engaged, but were with someone significant other, and then after retirement, they got married, and then went backwards in time to then add that person as a survivor to their pension, as if, once they got married, they added that person, and so we’ve seen that get processed, and they have to back pay what they didn’t pay into survivor benefits for that entire period, but we’ve had several clients that, yeah, plus interest. So we’ve had several clients do that approach as well. Or, how does that look? How do you prove that someone would be an insurable interest, you have to, is there any sort of paperwork that they have to do?

Micah Shilanski  06:44

Just like everything else, right? There’s always paperwork, and so this is gonna be an affidavit that you’re gonna fill out. And again, you can do this with your retirement application. I’m also a fan of getting things in record before you die, and since we don’t know when that is, that’s a sooner rather than later, you wanna start putting this information on file. Now it comes down, like your TSP, right? So your first pension is, like one part of it, then you have your Thrift Savings Plan again, that’s a beneficiary designation that you guys can, you can choose and who you’re going to leave that money to. You guys are FEGLI, Federal Employee Group Life Insurance that, as well, has beneficiary designations, or you can leave this to, and sometimes people are going to come to me, and maybe this gets into a little bit our topic next week Christian about, you know, state about, you know, estate planning and how it’s going to be set up, which people say, My God, I don’t really have anyone to leave this money to. Says, Okay, well, that that could be true, but you do have the money and it will be left to someone, right? And so you could take the approaches as I’m not going to deal with it. I’m going to be dead anyways. That’s not an approach we’re going to recommend. That is approach some people do take. This is something we should be a little more proactive with, and be able to get these things in place, so all of these things, and if we don’t know who it goes to, and this is where we say, kind of that last option is charity, right? Do you want to make the world a little bit of a better place that’s going to be there? I know for my wife and I, this is something that’s really important to us in our state plan is just to making sure we’re given back to the community, it’s been so great to us, and so it’s something we’re intentional about, and maybe you’re intentional thinking about that one as well, and that should be included in here, charities can be beneficiaries, they can be added in your estate planning documents. So again, if you don’t think if you have anyone listed, you have a couple of options. Number one, you spell Micah, M I C kidding, right, all right, but you know, we have a couple options, which is adding charity to that. All right, Christian, let’s change gears just a little bit. Let’s talk about if someone is married but they have grown kids, what are their options?  Did you know that OPM has over a 20% error rate when processing retirement applications? Now, I’m not trying to throw them under the bus at all. There’s a lot of moving parts that come into retirement from your records. So what your HR has, what gets sent to OPM, and all of the process in between. But what I hate to see happen is when federal employees get caught up in little things that could have been avoided, and that’s why we created a free guide to help guide you through one of the biggest mistakes we see in calculating retirement pension, and that is figuring out what your RSCD is, your retirement service computation date. Now I think this is such a big area that that causes so much confusion, because it seems so simple. It’s Micah, when did I start working for the government, and when am I going to retire? And boom, you have how long I’ve worked for the government. If only it was that simple. There’s so many moving pieces to this. You need to know how much time you have that counts towards retirement. More importantly, you need to know how to check to make sure your HR, your agency, OPM, has that same information so you get the most out of your benefits. In order to figure out how to do that when download our free guide today at planyourfederal retirement.com/verifyrscd that again, is planyourfederalretirement.com/verifyrscd. That way you can get the facts about how to calculate your rscd for retirement and avoid one of the biggest mistakes that hamper federal employees retire. It till next time. Happy planning.

Christian Sakamoto  10:03

Yeah, so back to the pension. They would be able to leave that pension for their spouse, and it’s the full survivor benefit, which is half 50% would be left to them, or the partial survivor benefit, which would be 25% our default when we’re working with our clients is going to be to leave that full Survivor Benefit unless there’s a really unique reason or really good reason to leave the partial we have to think about the gross versus the net, and so that’s the biggest thing is we’re thinking about what our survivor benefits going to be, even what our own pension benefits are going to be, we have to think about it in what the net number is going to be after health insurance, after taxes, maybe state taxes, maybe even other deductions that come out of that, if we’re only leaving, let’s say a partial to a spouse, that might be not enough to even just cover the health insurance, and we’ve seen that. So we just want to be mindful about that we don’t have kids, or maybe our kids are grown, there’s different considerations when we’re thinking about the life insurance side. What are the dollars that we need now supporting if our kids are grown, and really it’s just for the most part, taking care of our spouse who would be then widowed, and what do they need as far as income, between the pension, between just what’s in the bank account at that time to support their lifestyle for the rest of their life, and once kids are grown and out of the picture, generally, the need for that goes down, we’re not spending quite as much possibly when the kids are grown and out of the house. So that’s another lens we have to look at it. But what about Social Security? 

Micah Shilanski  11:43

Well, I would say, before we jump to that, this is an area to be careful in, right? This is your aspect that a lot of times that we meet with people that say, Oh, well, when I die, you know, the my survivors will need less than me, great, live on it now. Well, we can’t live on it now. Well, why not? Because we spend more than that, okay, right? If, yeah, then that means you’re going to need more. So this is one that it’s not that complicated. We over complicate the heck out of this. So one of the things that I like to do in the Christian the same is I do a survivor income analysis, and basically it says, Great. What are all of the income sources and how much are you guys going to have coming in from pensions, from Social Security to Social Security checks, you know, one or two pensions, however, money, it’s going to be your TSP, all of your investments, what income you have coming in? Then Bob dies, and what happens? What income changes? Sue dies, what income changes, right? And this is a really important lesson. Now the second part of this is, I think, more important almost the first part, the first part is finding out what those numbers are. The second part is saying, Hey, I think that we can live on less awesome. Go do it for 6 to 12 months, 6 months, half a year to a full year, go really live on that and see what it’s like, right? If your income goes from 8000 to 6000 start saving two ground a month right now, and see if you can actually do that, and if you can, boy, two thumbs up, you probably don’t need life insurance. You maybe not meet these extra survivor benefits maybe, right? There’s some things that we can talk about, but if all of a sudden you’re like, holy crud, that $2,000 a month is painful to save, I don’t know how we’re going to do it. How is your spouse supposed to do that for the rest of their life?

Christian Sakamoto  13:16

Yeah, I’m really glad that you went through and explained that philosophy too, and try it before you buy it mentality there we have to really see if this is even doable now, and hear that often, like, oh, they’ll just spend less. It’s like, okay, let’s try that out now. Let’s see, can you can? Can that even work now? And if the answer that’s no, ooh, maybe we got to rethink that, we got to recount our benefits there, yeah.

Micah Shilanski  13:39

And then Social Security, you’re bringing that one up to Christian, right? Remember, with Social Security is that when you pass away, your spouse gets the higher of the two checks, not both of the checks. So if my spouse, I work, my wife stays at home, so my Social Security is going to be higher than hers. Let’s say my social security is going to be $4,000 a month, right? She is eligible for 50% of mine, so she gets $2,000 a month, so 6000 coming in, I die, she gets the higher of the two, which is the four. She gets the $4,000 a month coming in, but she doesn’t get both checks. That’s still a reduction to her in a lifestyle standpoint. So the question is, do I have enough other assets, investments, et cetera, to make up that difference. So it’s an important part of this, and then Christian the FERS Supplement comes into a portion of this one as well, right? God forbid if you retire, but you pass away and still receiving the FERS Supplement, what effect does that have? 

Christian Sakamoto  14:34

So your spouse would be able to keep the FERS Supplement up until age 60 instead of 62 because at age 60, that’s when they would be eligible for the widow Social Security benefits, right? Because normally the FERS Supplement lasts until 62 that’s the soonest that you would be able to sign up for Social Security, so being mindful of that FERS Supplement as well, you, and the unlikely event that you would pass away that or that young, I hope that wouldn’t happen, but just understand how that works, right?

Micah Shilanski  15:06

 Yeah, I think it’s really, really important, again, all this is the understanding side of what goes on. All right, then let’s talk about we’re married and we have young kids and we pass away right now, what happens? Now, we kind of already talked about married with no kids. That’s kind of the same thing with with the spouse that survives, but what happens if both spouses pass away, Christian? How do the survivor benefits work in that case? Maybe for like, Social Security, the pension benefits, health insurance, like, like, what happens in that case?

Christian Sakamoto  15:37

So there’s going to be some unique benefits there on the FERS pension side, even on Social Security side for minor children, and the rule would be up until age 18, there’s a benefit that’s available, and then if they’re going to school, it’s up to think 22 during school, yeah, and then if you have a child that’s has disabilities, then they would also then be eligible to receive a benefit as well, I don’t think that one has an age requirement to it.

Micah Shilanski  16:07

 If they’re disabled before 18, I think is the requirement, then they are eligible for lifetime benefits. 

Christian Sakamoto  16:13

The question I have is, are those benefits the full amount that the spouse would have received, or they add a reduced amount? 

Micah Shilanski  16:22

Oh, it’s a good question, so there’s a whole chart on it. We’re not going to quote the numbers, because it changes every single year, but basically there’s a per child amount that gets paid or pass away. But I think we’re only supposed to have 2.8 children, because that’s how the math comes out too. So if you have six kids, what you don’t get it for all of your children, but it’s just for there’s a maximum household amount, and that’s how it’s going to work until Christian, as you said, the kids are 18, it’s a 22 and again, one of the things that gets kind of missed inside of this is miners really can’t get money, so there has to be a guardian, there has to be a custodian set up in order to use this money for their benefit, which is a little sneak until next week’s episode, we should talk about that as well, and talking about, you know, how do you appoint somebody a guardian of their, how do you appoint somebody a conservator or the trustee of the child’s funds in order to use for their benefits? These are really important things, especially with your TSP accounts. All of those things as they get paid out, what happens to that money? Especially with Secure Act 2.0 there’s no longer what are called stretch IRAs, where you can stretch out an IRA over a child’s life expectancy, the money must be taken out 10 years after death. Now, if a minor inherits that minor under the age of 18, the 10 years clock doesn’t start until they turn 18, then at 18, then they have a 10 year clock, they have to start taking distributions. But this gets a little complicated as you go through this. So a mistake that I see happen is sometimes, and again, hinting a little bit more next week episode, sometimes what I see Christian come up is when a loved one dies, whoever the executor is the personal representative, right? The trustee, whoever sets up in that role, really feels it’s on them to make all of these decisions and to do all these things, which legally, I mean, yes, it’s a responsibility to make decisions, but there’s not a solo team here. They’re empowered to reach out to the financial professionals, attorneys, financial planners, CPAs, in order to help really put their arms around this and to make a good plan. So one of the things we recommend to our clients all the time was talking to one of my clients the other day, actually, and I said, Michael, your your name and numbers at the very top of my list, if something happens to me, to call you guys first, and you know it’s, it’s, I really appreciate that. Unfortunately, we have had to help in those situations. I hope it’s not for a very long time with all my clients, but your kids need to know who do they call first and what do they do? What are the steps they need to take place? And Christian, I know you need the same advice. The first thing I tell a family member is make no big decisions very, very few things we need to make big decisions on very, very few things we need to make big decisions on, right? There’s plenty. We need to make time to grieve, we need a time to work through this. There’s little things we need to set up to make sure they don’t get messed up, but there’s not any massive thing that has to get done right away, and why do we say that is generally when we pass away, especially mom and dad passed away. I just lost as a loved one. I’m not in a great cognitive mind, right? I’m not I’m not really go function in all cylinders, so to speak, and we need a little bit of that break in that space to create some time to really get enough information here to make good decisions, so in your survivorship plan, reason we’re talking about is you need to know what your survivor benefits are. You also need to know who do you direct your loved ones to when you pass away, and who’s going to give them that guidance?

Christian Sakamoto  19:37

I think that’s great, and I think also, would you recommend that be written down and easily available so that the you know the kids or whoever you’ve named, also know who that is on that list.

Micah Shilanski  19:50

Best place for it is if you write it down in a safety deposit box, that you hide the key and don’t tell your kids you have a safety deposit box for right? No, I’m just kidding. There’s one. Go with some kids. You know that in their 50s and 60s, parent passed away, and they found a safety deposit box key, and they had no idea what bank it was at or anything, because that information was not shared. So Christian, to your point, this needs to be shared with the kids, this needs to be in documents that they can see. Well, whoever’s in charge this doesn’t have to be the kids. Whoever in charge, they need to have copies of these documents, they need to know where the originals are, and they need to have access to them. A safety deposit box is generally not a good place for that, because it gets frozen upon death, and what’s the document that allows your personal representative to get in the safety deposit box? Don’t want in the safety deposit side of it, right? Yeah, it’s a little chicken and egg thing. Makes it really challenging here. So yes, they got to know what these documents are, they got to know the orders of operations and letters from loved ones are really powerful. You say, Hey, call these people, work through these things. These are the big steps you need to do with solid advice from the grave.

Christian Sakamoto  20:53

And then we’ll talk about that a little bit more in that next episode. The other thing about kids, if they’re minors or younger is on the health insurance side, right? So assuming we qualify for health insurance, right, we’ve met the eligibility rules to keep our health insurance in a retirement then our spouse can also be eligible for keeping the health insurance as well, and they have to be in a FEHB at the time of passing, and they also have to be left a survivor benefit, right? One of the two survivor benefits the kids also, if the primary federal employee passed away, then the survivor spouse would then still be able to keep the kids on that health insurance plan up until 26 right? So even the kids are able to keep health insurance up until 26 which is really, really good.

Micah Shilanski  21:39

Yeah. So these are some important things that you need to be thinking about with regards to your survivor benefits, right? It’s always fun to talk about retirement. It’s fun to talk about all these great things that you’re going to do, but this is kind of that housekeeping stuff that’s important to do, especially in the new year, which is why we’re talking about it. So let’s talk about a couple of action items for our listeners, Christian I would say number one is you need to write a letter that says, If I pass away, who do you call, even if you don’t have your estate planning done, which we’re going to talk about that later, right? And you guys know we’re not attorneys. Of course, this is an estate planning advice, but you need to have some letter to give guidance on where your assets are at, and who should they call if something happens. So I think this answer is your first homework assignment,

Christian Sakamoto  22:17

As you were talking about beneficiaries today as well. That’s super important. I would say, if we haven’t reviewed those beneficiaries, especially inside of the FERS system, really make sure that you’re reviewing those and seeing who’s listed there. If there’s been any changes or things that we need to update, maybe we want to add a contingent beneficiary, and we only have a primary listed right now. Those are good things to be thinking about. 

Micah Shilanski  22:40

Perfect and remember our goal is to help another 1 million federal employees with retirement, we can only do that with your help. So we appreciate you getting this information out. Christian thank you so much for being on the podcast with us today and until next time, Happy Planning!

Christian Sakamoto  22:54

Happy Planning!