October 1, 2014
Most likely, as you work out a settlement for your divorce clients, you are making an attempt to figure out whether the assets and income your client will have post-divorce is sufficient for his or her needs. Depending on the age of the client this exercise might have you looking just a few years ahead (for young clients) or right through retirement (for older clients.) For your clients who are approaching retirement age, factoring their Social Security benefit into the picture is important.
The Social Security Administration offers divorced individuals several opportunities to maximize their benefit. The first step is to get a current estimate of both parties benefits at 3 different ages: age 62 (the earliest age benefits are available), age 65-67 (“normal retirement age”, which differs depending on the year you were born), and age 70 (the last year your benefit stops accruing.) All three figures are easy to obtain through the Social Security website, www.ssa.gov. Any individual can create an account and access their up-to-date benefit estimate.
Divorced individuals are entitled to the greater of their own benefit or a benefit equal to one-half of their divorced spouse as long as a few provisions are met. To simplify the explanation, let’s say the husband’s estimated Social Security benefit is $2,400 per month and the wife’s estimated benefit is $1,000. The wife is entitled to $1,200 (the greater of her own or ½ her ex-spouse) if they both meet these provisions:
1. The husband is entitled to receive Social Security benefits
2. They had been married for 10 years before the divorce became final
3. They have been divorced for at least 2 years
4. The wife is not re-married
5. The wife is age 62 or over
6. The wife is not entitled to a social security benefit which
equals or exceeds one-half the husband’s benefits
There is another provision in the Social Security rules that can be particularly beneficial to divorcees. It’s called “File and Suspend.” It allows each spouse to begin collecting on the other spouse’s benefit, while allowing their own benefit time to grow. Let’s look at an example:
Howard and Faye, both age 66, were married for 35 years and were divorced two years ago. To take advantage of the File and Suspend rule Howard files for his full retirement benefit, then immediately suspends it which means he collects nothing, allowing his benefit to grow with time. This allows Faye to begin collecting her spousal benefit based on Howard’s record, which is ½ of Howard’s benefit. She does this for 4 years, allowing her own benefit to grow to the maximum amount at her age 70, at which time she ends the spousal benefit and collects her own.
At the same time the couple does the same thing in reverse – Faye files for her own benefit and suspends it so that Howard can collect his spousal benefit equal to ½ of Faye’s monthly amount. When he turns 70 he drops the spousal benefit and collects his own.
This unique strategy is normally allowed to be used for only one spouse in a married couple, but because Howard and Faye are divorced they can both use it! And they are not required to wait until age 70 to drop the File and Suspend strategy, they can revert to their own monthly benefit at any time.
It’s important to note that the File and Suspend spouse must be at full retirement age, and the couple must have been divorced for 2 years.
Social Security rules can be tricky, and are certainly not as simple as most people presume. It is beneficial for many divorcing couples to seek financial advice in this area when Social Security income is important to their financial future.
