There is no doubt that there is an enormous appetite for information about strategies for claiming Social Security benefits, and I am happy to shed some light on these often confusing issues.
Russell, a financial adviser in Pennsylvania, had questions about claiming strategies for divorced spouses and noted that there is very little information available for this large demographic.
His question was triggered by a column I wrote about married couples. In it, I explained how one man could file and suspend his benefits at 66, allowing his wife to collect spousal benefits on his earnings record.
His own benefit would continue to accrue delayed retirement credits worth 8% per year until 70. At 70, he could collect his maximum benefit.
Although his wife could collect retirement benefits as early as 62, if she earned benefits on her own work history, it is likely she would be better off waiting until 66, when she could restrict her claim to spousal benefits only.
That means she could collect half her husband's full benefit (not including delayed retirement credits) and allow her own benefits to continue to grow by 8% per year until 70. At 70, she, too, would switch to her maximum benefit.
In this scenario for married couples, one spouse must file for benefits — or file and suspend benefits — in order to trigger spousal benefits for the other mate. Each can't file for spousal benefits based on the other's work record.
Russell wondered how the rules apply to divorced spouses. Is it possible for a divorced spouse to wait until 66 and then restrict his or her claim to spousal benefits?
Yes, but the claiming rules are somewhat different.
The exes don't have to coordinate their claiming strategies or even communicate with each other. They can collect benefits independently as long as the ex-spouse is eligible for benefits, even if he or she hasn't yet filed for benefits.
First, let's review the basic rules. To collect on an ex, a person must have been married at least 10 years and divorced at least two years, and not be remarried.
A divorced spouse can collect his or her own reduced benefits as early as 62 but is subject to the earnings cap if working while collecting benefits. This year, $1 in Social Security benefits is lost for every $2 earned over this year's limit of $14.640.
But divorced people who wait until 66 can restrict their claims to spousal benefits. That means they can collect half the full benefit to which the ex is entitled at the normal retirement age (not including delayed retirement credits) and delay collecting their own benefits until 70, when they will be worth the maximum amount.
The divorced spouses can claim spousal benefits, based on the other's earnings record, at the same time.
People have to crunch the numbers to see if this strategy makes sense for them.
Let's say the exes have similar earnings records and each would be entitled to $2,000 per month at their normal retirement age of 66. In that case, it might make sense to restrict a claim to spousal benefits only. Each could collect $1,000 per month for four years and at 70 switch to the larger individual benefit — $2,640 per month after four years of delayed retirement credits worth 8% per year.
But if one spouse's benefit is rather small — $500 per month, say, based on intermittent or low-paying jobs — this might not be the best option.
Let's say the higher-paid ex-spouse's benefit is worth $2,000 per month at 66, compared with the other's meager $500. The latter would be better off filing an unrestricted claim.
That person would receive $1,000 per month — half the ex's $2,000 monthly benefit — which is more than the smaller benefit would ever be worth. Even if the smaller claim were restricted to spousal benefits only and earned delayed retirement credits, the benefit would be worth only $660 a month at 70. So that doesn't make sense.
REDUCED BENEFITS
In fact, with such a disparity in benefits, the lower-earning spouse may be better off claiming reduced benefits early at 62, assuming he or she is no longer working or not earning more than the earnings cap. That way, needed benefits can be collected as early as possible.
Using the example above, the 50% spousal benefit worth $1,000 a month at 66 would be reduced by 30%, to $700, if collected at 62.
The reason collecting a reduced benefit early might make sense is that the individual still would be eligible for a much larger survivor benefit if the ex-spouse died first. As long as he or she is at least normal retirement age, the individual would receive an unreduced survivor benefit worth 100% of what the ex-spouse received during his or her lifetime, including any delayed retirement credits.
And, the individual can collect survivor benefits even if the ex-spouse remarried. It won't affect the survivor benefits of the ex's last spouse.
mbfranklin@investmentnews.comTwitter: @mbfretirepro
