No one would deny that Social Security is complicated. With about 2,700 rules governing benefits, it is no wonder that financial advisers and their clients are often confused by the best way to maximize benefits. When it comes to divorced clients, multiply that confusion times two.
As Social Security claiming strategies have become a standard part of retirement income planning over the past few years, many financial advisers now understand the basic Social Security rules for divorced spouses: As long as a couple was married for at least 10 years before divorcing, an ex-spouse who is currently single can collect Social Security benefits as if he or she were still married — even if the other ex-spouse has remarried.
It's the nuances of the Social Security divorce rules that are so tricky. In some ways, divorced spouses have more claiming opportunities than married couples, depending on their birth dates and how long they have been divorced. And it's those nuances that triggered some recent emails from InvestmentNews readers.
The Bipartisan Budget Act of 2015 changed two critical Social Security claiming strategies. It eliminated the ability to "file and suspend" benefits at full retirement age and it phased out the ability to claim only spousal benefits — worth 50% of the worker's benefit amount — while their own retirement benefit continued to grow.
The file-and-suspend strategy, which disappeared after April 29, 2016, allowed an eligible worker to file for his or her Social Security benefits at full retirement age and then immediately suspend them. That would trigger benefits for eligible family members while allowing the worker's own retirement benefits to continue to grow by 8% per year up to 70.
People who exercised the file-and-suspend strategy before the April 29, 2016, deadline were grandfathered under the old rules. After that, the new rules require one spouse to actually collect his or her Social Security benefits in order to trigger benefits for a spouse, minor dependent child or permanently disabled adult child.
But the rules are different for divorced spouses. As long as the couple was married for at least 10 years before divorcing and has been divorced for at least two years, they are considered "independently entitled" spouses. Assuming both exes are at least 62 years old, an independently entitled spouse can claim Social Security benefits on an ex's earnings record even if the ex has not yet claimed benefits.
The Bipartisan Act of 2015 also phased out the ability to file a "restricted claim for spousal benefits" at full retirement age. That strategy allows a spouse or eligible ex-spouse to claim only spousal benefits while their own retirement benefit continue to grow until 70. But that law limited the restricted claim strategy to people who were born on or before Jan. 1, 1954, which means the last group of people eligible to use this claiming strategy turn 66 this year. However, they can exercise this claiming option anytime until they turn 70.
This is another example of how divorced spouses have more claiming options than their married counterparts. Only one spouse in a married couple can file a restricted claim for spousal benefits, assuming that the person filing the claim was born on or before Jan. 1, 1954. But divorced spouses born on or before that date can each file a restricted claim for spousal benefits on their ex's earnings record and allow their own benefits to continue to grow. Younger people, whether married or divorced, no longer have this option.
One financial adviser from Waltham, Mass., emailed me recently to confirm a claiming strategy for a divorced client who turns 66 this year.
"The ex-spouses were both born in 1953 and divorced for several years," the adviser wrote. "They have not remarried or filed for benefits, which are comparable. At full retirement age, could both exes file a restricted application on each other and limit their benefit to their spousal amount while they accrue delayed retirement credits on their own benefit?"
Yes, they can both file a restricted claim on each other's earnings record, collect a spousal benefit for four years and then switch to their own maximum benefits at 70. Married couples can't do that.
Another adviser wrote to me about her divorced client, who also turns 66 this year. The client was married for more than 10 years, separated for a dozen more, and is in the process of getting divorced. In other words, she has not met the two-year test. Neither spouse has claimed Social Security yet.
"If he hasn't claimed benefits, does she have to wait two years after the divorce is finalized to file for his benefits?" the adviser asked.
Yes. Once he files for his benefits, she can collect spousal benefits on his earnings record. Otherwise, she has to wait two years after the divorce is finalized to qualify as an independently entitled spouse who can collect on her ex's earning record even if he has not yet claimed his benefits.