The GMV & Associates team at Waddell & Reed aims to assist clients with all things divorce. We know that divorce can bring a barrage of financial headache and stress, and that's why we're here.
Post-separation, here's some of what you may experience:
- The Need to Create a Financial Plan
- Decision Making Regarding the Division of Assets
- Managing Your Assets
- Analyzing Health Care Needs/Costs
- Coordinating with Attorneys
- Income Planning (including potential child support and alimony)
- Changes to Your Tax Planning
- Changes to Your Estate Planning
For those of you who part ways a bit later in life (50-60's) there's one more thing that can affect the majority of these planning areas, Social Security. Social Security is a big question mark for most because of the many rules and qualifications. Not to mention, the rules can and do change. If you are a divorcee, you may be eligible for benefits based on your ex-spouse's earnings. Therefore, Social Security will be one of the more important concepts you will want to fully understand because you only get one shot at making your decision.
Are You Eligible?
First, you have to determine if you are eligible to receive any benefits from Social Security. If you have worked enough throughout your lifetime (40 credits/10 years) you will be eligible for your own retirement benefit. However if your ex-spouse is eligible for their own benefits as well, you may be eligible for an amount based on their benefit (aka: ex-spousal benefit). This is beneficial to you if your ex-spouse had significantly higher earnings over their working lifetime, or if you did not accumulate enough lifetime credits to be eligible for your own benefits. Yes you read that correctly; if you didn't work, or at least not long enough to earn 40 credits, you may still be able to collect a benefit based on your ex-spouse's Social Security benefit.
The maximum amount of Social Security benefits you can receive based on an ex-spouse's record is 50% of what your ex-spouse would get at their "Full Retirement Age (FRA)". You will often hear or see the term "Full Retirement Age (FRA)", which refers to the age you become eligible to receive your full (unreduced) retirement benefit from Social Security. It is imperative to know what your FRA is in order to make decisions regarding Social Security. You will also want to know your ex-spouse's FRA as well.1
Your FRA depends on the year you were born:
*Those born prior to 1943 have different FRAs. Please visit the Social Security website for more information.
If you are divorced, but your marriage lasted 10 years or longer, you can receive benefits based on your ex-spouse's record (even if they have remarried) if you meet the following requirements:
If eligible for both, you cannot double-dip and collect your own retirement benefits and an ex-spouse's benefits. You can receive whichever benefit is higher; unless you are eligible to file a restricted application which we will discuss later in the article. If you do end up receiving a benefit based on your ex's record, it will not affect amounts they can receive or are currently receiving from Social Security. Sorry, no revenge!
Your max benefit as a divorced spouse is equal to 50% of your ex-spouse's full retirement amount if you start receiving benefits at your full retirement age.2 If you decide you want to take ex-spousal benefits before your FRA, remember your ex-spouse must also be at least age 62 (eligible). The earliest you can take the benefits is age 62, but the benefits will be reduced.*
You are eligible for ex-spousal benefits and you decide to take them at age 62 (ex is also at least 62). You will receive a reduced benefit (even less than the 50% of your ex's full benefit). Let's say the benefit equals 35% instead of the 50%. Once you reach ages 63, 64, and so on, the percentage will not increase up to the 50% max. This is a common misconception. Once you decide to take a reduced benefit that's it, therefore in this case it would permanently remain at 35%.
The benefits do not include any delayed retirement credits your ex-spouse may receive. Delayed retirement credits are credited for each year an individual delays taking benefits past their full retirement age, and the credits stop at age 70. The percentage credited depends on the year you were born, it is an 8% increase per year for most and ends at age 70.
What if you or your ex-spouse were to get remarried?
One exception to the chart above: If you remarry, your ex-spousal benefit will end unless your new spouse is also receiving either an ex-spousal benefit or survivor benefit. On the contrary if the new spouse is already collecting their own benefit, you can switch to a spousal benefit based on their record (if higher) once you have been married to them for at least one year. If your second marriage ends via divorce or death, you may become re-eligible for benefits based off of your first marriage if necessary.
If your second spouse passes and you were married for at least 9 months, you will be eligible to receive a survivor benefit on their record which can include any applicable delayed credits!
NOTE: If you are planning to remarry, you may want to wait until after age 60. The reason is that if your ex-spouse predeceases you, you can still be entitled to a survivor benefit based on their record. This would only be beneficial if that survivor benefit was larger than all others you are eligible for. Remember you can only collect one benefit, whichever is largest.
If you were born before January 2, 1954, and have already reached full retirement age, you can choose to receive only the ex-spouse's benefit and delay receiving your own retirement benefit until a later date (widows and widowers may continue to use a restricted application at any claiming age). This allows you to accumulate delayed credits on your own benefit and switch to it later (up to age 70). This is only possible if you have not already begun taking your own benefits.
If your birthday is on January 2, 1954 or later, you cannot file a restricted application. As a result of the Bipartisan Budget Act of 2015, once you file for either your own benefit or a spousal/ex-spousal benefit it is now called “deemed filing”; This means that when you apply for one benefit you are “deemed” to have also applied for the other (cannot take ex-spousal now and delay your own benefit for later years). This is why you can no longer file a restricted application if born on or after 1/2/1954.3
NOTE: If you are considering filing for a restricted application with the Social Security Administration over the phone or in person, it is a good idea to ask for a supervisor of some sort. Turnover in Social Security offices is high and you want to make sure you are speaking with someone that understands exactly what are trying to do. If you are doing it yourself online, it is crucial you answer certain questions correctly and note that you wish to file a restricted application. It can also benefit you to mention that you currently only want to take spousal/ex-spousal benefits and wish to accumulate delayed credits on your own benefit as well.**
What If You Are Still Working?
If you continue to work while receiving Social Security benefits, there is a retirement benefit earnings limit that will apply.
If you are younger than full retirement age, taking benefits, and make more than the yearly earnings limit, your earnings may reduce your benefit amount as follows:
If you are under full retirement age for the entire year: Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640.
In the year you reach full retirement age: Social Security deducts $1 in benefits for every $3 you earn above a different limit. In 2019, the limit on your earnings is $46,920 but they only count earnings before the month you reach your full retirement age.
When you reach full retirement age: Beginning with the month you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn.
Once you reach full retirement age, your payments will be adjusted and you will start to receive the money back that was withheld previously. Not all is lost! Also note that income from other pensions, interest/investment earnings, annuities, and capital gains are not counted towards the earnings limits. W-2 wages and net earnings (from self-employment) ARE counted.
There's many doors to Social Security and the right one to enter depends on your specific situation. For help making an official decision, contact us and we will gladly offer our expertise and tools to you.
*If you will also receive a pension based on work not covered by Social Security, such as government work, your Social Security benefit on your ex-spouse's record may be affected.
**A surviving divorced spouse cannot apply online for survivors benefits. You should contact Social Security at 1-800-772-1213 to request an appointment.
Cameron Valadez is a CFP® Practitioner located in Riverside, CA.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
This is meant for educational purposes only. It should not be considered financial advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. Waddell & Reed does not offer tax or legal advice. 01/19