What Divorced Individuals Approaching Retirement Need to Know
Life doesn’t always go as planned. A divorce may not only result in financial hardship in the short term, but also have lasting effects on retirement security over the long term. Fortunately, Social Security is in place to help. Even after a divorce, an individual may be entitled to receive Social Security spousal and survivor benefits based on the work record of his or her former spouse.
A divorced individual who has reached age 62 can file for Social Security spousal benefits provided that the marriage lasted 10 years, and that the individual filing for the benefits is currently unmarried. One unique twist that differs from the rules for a married individual filing for spousal benefits is that, if the divorce occurred more than two years before, a divorced individual can apply for spousal benefits even if the ex-spouse has not yet filed for his or her own Social Security benefits—the former spouse merely has to be eligible for benefits (i.e., age 62 and one month). What’s more, it does not matter if the ex-spouse has remarried—both current and former spouses have rights to a “full” spousal benefit.
The spousal benefit is calculated as the greater of the benefit the divorced individual is entitled to receive based upon his or her own work record (the worker benefit) at Full Retirement Age,1 or one-half of the former spouse’s worker benefit at Full Retirement Age.
To illustrate, let’s assume that Ken and Mary were married for 12 years, but divorced three years ago. They are both age 62 and are, therefore, eligible to file for Social Security benefits, but will not reach Full Retirement Age until age 66. At Full Retirement Age, Ken will be eligible for a worker benefit of $2,000 per month and Mary will be eligible for her own worker benefit of $600 per month. One-half of Ken’s benefit ($1,000) minus Mary’s benefit ($600) leaves Mary eligible for an additional $400 in the form of a spousal benefit even though she and Ken are no longer married. Mary’s $1,000 might be thought of as a spousal benefit, but it really is made up of two parts, her own worker benefit ($600) and her spousal benefit ($400).
There are two important things Mary should keep in mind regarding her benefits. First, she cannot file for only one type of benefit—if she files for a worker benefit or a spousal benefit, she is deemed to be filing for both. An exception to this rule exists if Mary was born on or before January 1, 1953. If she was, she can choose to file for only the spousal benefit after she reaches Full Retirement Age and let her worker benefit accrue Delayed Retirement Credits.2 Second, if she takes her benefits prior to her Full Retirement Age, they will be subject to an actuarial reduction. For example, if Mary decides to start her benefits at age 65, the $400 potential spousal benefit will be permanently reduced to $366 and the $600 potential worker benefit will be permanently reduced to $560 because Mary is starting the benefits 12 months early.
A divorced individual is also entitled to Social Security survivor benefits based on the work record of a former spouse who is deceased. The marriage must have lasted 10 years, and the individual filing for the benefits must be unmarried when initially becoming eligible for survivor benefits at age 60. For survivor benefits, the divorced individual can “step into” the benefit amount that a former spouse was receiving if it is higher than the individual’s own Social Security benefit amount at the time the former spouse passes away. As a result, if a divorced individual was a lesser lifetime earner than a former spouse, it would likely behoove him or her to ascertain when the former spouse filed, or will file, for benefits. This is important because it may impact the divorced individual’s decision about when to begin taking his or her own worker benefit. When an individual waits beyond Full Retirement Age to claim his or her own worker benefit, the benefit amount increases via Delayed Retirement Credits and Cost of Living Adjustments.3 However, given that a divorced individual can step into a higher survivor benefit amount when an ex-spouse passes away, the value of delaying Social Security may be lessened.
For example, let’s assume Kathy was married to Christopher, who is eight years her senior. They were married for 12 years and are now divorced. Christopher filed for his benefits at age 67 and is currently receiving $2,000 per month in Social Security benefits. In addition, Christopher has developed some health problems during the last year. When Kathy turns 62 next year and stops working, she will be faced with a decision as to when to claim benefits. She could wait to file for benefits at her Full Retirement Age and receive $1,200 per month, or start her benefit at age 62 and earn a reduced amount of $900. She could also delay claiming past her Full Retirement Age, which would result in her monthly worker benefit of $1,200 increasing due to Cost of Living Adjustments and Delayed Retirement Credits. While the reduced amount at age 62 is actuarially equal to the amount she would receive if she claimed at age 66, Kathy’s decision about when to claim benefits should also consider the fact that there is a high likelihood that she will receive a survivor benefit in the future based on Christopher’s then-current benefit. This survivor benefit would replace her own worker benefit. Weighing the possibilities, Kathy should likely choose to file for her own worker benefits at age 62.
Social Security may provide similar spousal and survivor benefits to divorced individuals as it does to married couples. A well thought-out approach to claiming these benefits can be the cornerstone of a retirement income strategy.
THE EARNINGS TEST
Individuals who start either a worker benefit, spousal benefit, or survivor benefit prior to his or her Full Retirement Age (age 66 for those born prior to 1955), will be subject to the Earnings Test. In every year leading up to the year Full Retirement Age is reached, $1 in benefits will be withheld for every $2 earned above the limit for that year ($15,720 in 2016). During the year Full Retirement Age is reached, benefits will be reduced $1 for every $3 earned above a higher limit ($41,880 in 2016), until the month Full Retirement Age is reached. At that point, the Earnings Test no longer applies.
For example, assume Jennifer is entitled to a survivor benefit of $1,500 per month ($18,000 annually), but has not yet reached Full Retirement Age. If she earns $50,000 in 2016, her $18,000 annual benefit would be reduced to $860 since she has $34,280 of earnings above the $15,720 limit.
IF YOU ARE DIVORCED - KEY POINTS TO REMEMBER
- A divorced individual has the same rights to a spousal benefit as a married spouse, if married for at least 10 years and not currently remarried.
- Unlike a married spouse, a divorced individual is entitled to a spousal benefit as soon as the former spouse reaches eligibility age, regardless of whether the former spouse has filed for benefits. The divorce must have occurred at least two years ago.
- Individuals who file for benefits prior to Full Retirement Age will be deemed to be filing for both worker and spousal benefits.
- A divorced individual may step into a survivor benefit based on the former spouse’s benefit if it is higher than his or her own at the time the former spouse passes away.
For further information on Social Security Survivor Benefits visit: https://www.ssa.gov/survivors
1 Full Retirement Age is the age at which an individual first becomes entitled to unreduced benefits.
2 Delayed Retirement Credits apply after the Full Retirement Age and increase worker benefits by 8% per year. Delayed Retirement Credits do not apply to the spousal benefit.
3 Cost of Living Adjustments are annual adjustments made to benefits to help preserve the purchasing power of Social Security so that they are not eroded by inflation.
This information has been provided for your benefit and is not intended or designed to be tax advice. Prudential Financial, its affiliates, and their financial professionals do not render tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances.