Over the holidays, a financial adviser contacted me with questions about how to help one of his newly divorced clients, a classic example of the growing trend of gray divorce, which occurs when a long-time marriage dissolves in or near retirement.
The adviser was certain that the former wife, who is collecting a Social Security benefit worth less than half of her ex-husband's benefit amount based on their joint claiming strategy, would receive some sort of increase to equalize their benefits after the divorce. He was sorely disappointed.
Both former spouses were born in 1950, which means they had access to a Social Security claiming strategy no longer available to people born after that date. The husband filed and suspended his Social Security benefit when he turned 66, a few months before the April 29, 2016, deadline that eliminated the strategy forever. It allowed him to trigger spousal benefits for his wife while his own retirement benefit continued to grow by 8% per year up until age 70.
If his wife had waited until her full retirement age of 66 to claim Social Security, she could have taken advantage of another claiming strategy. Because she was born before Jan. 2, 1954, she had the option of filing a restricted claim for spousal benefits, which would have allowed her to collect half of her husband's full retirement age benefit while her own retirement benefit continued to grow by 8% per year up until age 70.
But she decided not to wait and forfeited her ability to use that claiming strategy.
Instead, she claimed her Social Security benefits as soon as her husband filed and suspend his benefits. She was 65 at the time and received a benefit worth about 46.5% of her husband's benefit — about 3.5% lower than what she would have received if she had waited until age 66 to claim.
Fast forward to 2018, when the couple decided to divorce in their late 60s. The husband decided to go ahead and claim his Social Security benefit, now worth nearly $3,000 per month, including 2½ years of delayed retirement credits. The wife's benefit remains at $1,115 a month, slightly less than half of his full retirement age amount, because she claimed Social Security early.
"It seems like she gets the short end because she gets stuck with 50% of a lower amount, while he keeps the higher amount for life," the adviser said in an email. That's the sad truth.
While I often recommend that married couples coordinate their Social Security claiming strategies to maximize their benefits during their lifetime, as well as to create the largest possible survivor benefit for the spouse who is left behind, this case demonstrates how such a coordinated strategy can backfire in a late-in-life divorce.
Normally it makes sense for the higher-earning spouse — the husband in this case — to delay his benefit as long as possible to create the largest possible retirement benefit while both spouses are alive, as well as the largest possible survivor benefit for his widow should he die first. A survivor benefit is worth 100% of what the deceased working spouse was collecting (or entitled to collect) at the time of his death — assuming the surviving spouse was at least full retirement age at the time.
In the meantime, it often makes sense for the lower-earning spouse — the wife in this case — to collect reduced benefits early as a way of increasing cash flow to the household while the other spouse waits to collect benefits.
It's a cautionary tale to advisers who are working with older clients who may be inclined to divorce. An optimal Social Security claiming strategy for a married couple may not work as well for two ex-spouses.
Earlier this year, the Center for Retirement Research at Boston College issued a report quantifying how divorce affects retirement readiness. In 2006, the CRR developed the National Retirement Risk Index to measure the percentage of working-age households at risk of being unable to maintain their preretirement standard of living in retirement. The risk is worse — 7 percentage points higher — for household that have been through a divorce.
In this case, the newly divorced wife would still be entitled to full survivor benefits if her former husband predeceases her because they were married for at least 10 years before divorcing. But because he decided to claim his Social Security at 68, rather than waiting until 70 as the couple had originally intended, her survivor benefit would be smaller than originally planned. In the meantime, she is stuck with a smaller retirement benefit.
For more information, check out the Social Security Administration's summary of rules that affect divorced spouses.