During a recent webinar on how to maximize Social Security benefits, I received a question from an attendee that perfectly summarizes the type of challenge that many financial advisers face when trying to help divorced clients create a secure retirement income plan.
The adviser said her client is divorced and will turn 64 in July. She began collecting her reduced Social Security benefits more than a year ago when she turned 62. Her ex-husband is 71 and collecting Social Security.
"Can she suspend her current Social Security benefits and file for spousal benefit until she turns 70?" the adviser asked.
No. Although divorced spouses who were married at least 10 years and who are currently single can claim Social Security benefits as if they were still married, other basic Social Security rules apply. In this case, the ex-wife cannot suspend her Social Security benefits and switch to spousal benefits while allowing her own benefits to continue to grow for several reasons.
Reason 1: When she claimed Social Security at the earliest possible age of 62, her benefits were permanently reduced by 25% for claiming four years before her full retirement age of 66. Anytime someone claims Social Security before FRA, Social Security must pay them their own benefits first. If her benefit as an ex-spouse was larger than her own retirement benefit, that excess spousal amount would have been layered on top of her own benefit, also reduced for claiming early.
Spousal benefits are worth up to 50% of the worker's full-retirement-age amount if collected at FRA or later, but only 35% of the worker's FRA amount if collected at age 62.
Reason 2: She missed the 12-month do-over window. Individuals have the right to change their mind within 12 months of first claiming Social Security benefits by withdrawing their application for benefits and repaying the benefits they have received. At a later date, they can claim a larger benefit based on their age at that time.
Reason 3: She must wait until her FRA of 66 to suspend her benefits. Although suspending her benefits at 66 would allow her to earn delayed retirement credits worth 8% per year for every year she postpones claiming them up to age 70, she would not be able to collect any benefits on her ex-husband's earning record during the suspension.
Reason 4: She's too young to collect only spousal benefits. Only people born on or before Jan. 1, 1954, have the right to file a "restricted claim to spousal benefits" when they turn 66 and collect half of their mate's or ex-mate's FRA benefits for up to four years while their own retirement benefits continue to grow up to age 70. At 70, they can switch to their own larger benefits.
People born after Jan. 1, 1954, like this adviser's client, will never have this option. Whenever they claim Social Security, they will be paid the largest benefits to which they are entitled at that age — whether on their own record or as a spouse or eligible ex-spouse. In other words, they would be "deemed" to file for all available benefits.
Another adviser at the same webinar asked: "What are the options for a couple, both 67 and still working, to file on each other's earnings record and delay their own benefits until age 70?" In this case, both the spouses were born before Jan. 1, 1954, but their options differ depending on whether they are currently married or divorced.
In the case of a currently married couple, only one spouse can claim spousal benefits. To do so, one spouse must file for Social Security benefits. Then the other can file "a restricted claim for spousal benefits" on the first spouse's record and collect half of the first spouse's FRA amount while their own benefit grows up to age 70, then switch to their own maximum benefit.
In the case of a divorced couple who were married at least 10 years, each ex-spouse (born on or before Jan. 1, 1954) can claim spousal benefits on their ex's earnings record for up to four years while their own retirement benefit continues to grow by 8% per year and then switch to their own maximum benefits at 70.
In either case, this 67-year-old couple has already missed out on a year of spousal benefits. Spousal benefits are worth the maximum when collected at 66 and do not grow larger by waiting to claim them. The spouse who files a restricted claim can request the maximum lump-sum payout of six months of retroactive benefits.
There is one silver lining for former spouses who missed out on the critical birth date. Even though they are not eligible to claim only spousal benefits while their ex is alive, they are eligible to claim survivor benefits if their ex-spouse predeceases them.