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.