by Bob Hill

When thinking about federal employee benefits, TSP and FEHB come to mind.  But, how often do you think about your disability retirement benefit?  Most feds don't, and that is why I refer to it as the forgotten employee benefit.

Federal employees unable to work due to injury or illness may be eligible for disability retirement.  Both CSRS and FERS employees are eligible for disability benefits, but they are computed differently, partly because CSRS feds do not contribute to Social Security.  CSRS feds qualify for disability income after five years of service while FERS employees need only 18 months of service to qualify for payments.  FERS benefits and Social Security are closely tied together, so a FERS employee is required to apply for Social Security disability benefits before FERS disability retirement benefits will be paid.  A fed -- whether a CSRS or FERS -- who is placed in disability retirement status will receive a monthly annuity.  Additionally, disability income beneficiaries receive annual cost-of-living adjustments.

The rules that cover disability retirement computations are complicated, but it is simple to see that if you are disabled during your working years, you will not have as much income.  And you will still have to pay your mortgage or rent and your family's daily living expenses. 

Let's take a look at an example. Tom is a FERS fed, under age 62, who has retired due to a disability, and we'll assume that he does not receive a disability income benefit from Social Security.  For the first year Tom is unable to work, he will receive 60 percent of his high-3 average salary.  If his disability continues for more than one year, that coverage drops down to 40 percent of his high-3 average salary.  A CSRS fed will receive a comparable annuity, although calculated differently.  Needless to say, having a paycheck even when you cannot work is vital.  However, you have to ask yourself, "Can I meet all of my obligations on only 40 percent of my salary?"  Because this disability benefit is provided to you without any employee contributions, the payments you receive will be taxed as income.  With that in mind, will you have enough money to pay your bills?

Do I have your attention yet?  The LIFE Foundation, a non-profit organization located in Arlington, Va., has studied the effects of disability on Americans and their ability to survive financially.  According to this research, 70 percent of Americans could not go more than one month before they experienced financial troubles.  Perhaps not surprisingly, one in four Americans couldn't meet their financial obligations after the first week of disability!

Many people think, "I don't have to worry.  I won't become disabled.  It is someone else's problem."  You may be shocked to learn that nearly three in 10 of us will suffer a disability lasting at least three months or more during our working years, according to research from the LIFE Foundation.  And nearly one in five Americans will become disabled for a year or more.  Think about a prolonged illness or being injured in an auto accident.  Do you still think it can't happen to you?

Disability Income Annuity Example

In the Washington, D.C. area, a GS-12, step one, earns $73,100 (in 2009).  If that FERS fed -- let's call her Susan -- has an accident and starts to receive a disability retirement check, she will receive $43,860.  That's an almost $30,000 annual pay cut.  Remember, after the first year Uncle Sam will only provide Susan with 40 percent of her high-3 average salary.  That's another $14,000 reduction in Susan's income.  Could you survive these huge cuts in your pay?

So, what is your plan when the unexpected happens?  When it comes to possible disability and the loss of income, the first step that a fed must take is to build up that rainy day fund of savings.  As a rule of thumb, you should set aside six to seven months of expenses for emergencies or unexpected bills.  If that seems like an impossible amount to save, just get started by setting aside 5 percent of your salary every pay period in a savings account.  You'll be surprised how quickly that cash can add up.  Using our example of a GS-12 earning $73,100, setting 5 percent aside from every paycheck will add up to more than $3,650 in a year.  That amount could help pay the mortgage or rent, buy groceries, and may help prevent financial disaster.

Saving is a start, and is always a good idea.  At the same time, a proven way to manage risk is to have insurance coverage, which helps mediate many of the financial problems created by the loss of income.  Long-term disability income insurance provides a source of replacement income if you are unable to work due to an illness or accident.  Typically, disability insurance coverage replaces up to 70 percent of your monthly income.  A number of insurance companies offer coverage, and since you pay the monthly premiums, any payments that the policy provides if you are disabled are received income-tax free.  Think about the difference additional tax-free income can have on your ability to survive financially.  Disability income policies can provide supplemental protection to age 65, by which time most feds will have retired and will continue to receive government benefits.

Make a Plan

Your insurance agent or financial advisor can talk with you about your options, including disability income coverage that will supplement your federal benefits, with premiums that fit within your budget.  And it may prove to be the difference between financial security and disaster.

Disability retirement income is the forgotten benefit, is not well understood and is seldom considered, but I think you'll agree that disability income insurance should be a part of every fed's financial plan.

About the Author

Bob Hill is a Registered Principal and District Advisor at First Command Financial Services, Inc., in Arlington, Va.  First Command Financial Services, Inc., parent of First Command Financial Planning, Inc. Investment products and services offered by First Command Financial Planning, Inc. (Member SIPC, FINRA).  A financial plan, by itself, cannot assure that retirement or other financial goals will be met.

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