Social Security Planning and Divorce

Recently, there have been many articles in news media about an increase in divorce among older Americans. Perhaps my own age has something to do with this, but anecdotally I too have been noticing more clients who are at retirement age or older seeking divorces. The age difference in couples raises different financial considerations when divorcing.

A Different Financial Outlook for Older Couples

For most people, divorce brings its financial challenges. In younger years, before most people hit their prime income earning age, the focus on the financial difficulties tends to somewhat short- to mid-term. The task tends to be on ensuring that the available income streams allow for two functional households, until higher incomes become available in the future--whether through promotions, salary increases, or one of the spouses entering the work force. A classic example might the need to have a single salary support two households while one of the former spouses gets retrained to be able to re-enter the workforce. The concept is that there is time for each spouse to get on their feet financially.

For older persons getting divorced, the outlook is different. The opportunity for increased income, or for a spouse to become re-educated to re-enter the workforce, is limited or nonexistent. For the older couple, the question often becomes how to make existing resources last during retirement and the remainder of their lives. When considering that many have not saved enough for retirement as a couple (whether due to circumstance or choice), the task becomes more challenging.

Social Security Benefits as Part of Financial Divorce Planning

When finances are tight, Social Security benefits can make a material financial difference during retirement. Social Security financial planning--taking the time to learn and apply the most effective strategies to maximize Social Security benefits--can make a significant difference.

While most know that there is a financial difference based on when benefits start (the AARP Social Security Calculator  can illustrate some of the differences), but many of the more sophisticated techniques are still relatively unknown.As noted above, for divorcing couples finances are more likely to be tight and, for that reason, good Social Security planning can make a big difference. While some techniques are available only to married couples, there remain options for divorced spouses.

Some Social Security Considerations and Options

Taxation

Social Security benefits receive preferable tax treatment, but are not tax-free. Consider the tax implications in the decision whether and when to take Social Security.


Timing

If you take Social Security benefits early (as early as age 62), your monthly benefit will be lower than if you wait. The longer you wait (up to age 70), the higher the monthly benefit. For divorce planning purposes, you need to consider cash flow, resources available, and your possible life expectancy. Based on average mortality tables, many financial planners recommend delaying applying for benefits if possible.

Spousal Benefits

If you are at least 62 years old, were formerly married for at least ten years and your former spouse qualifies for social security benefits, and you do not qualify on your own for a higher benefit, then you can apply for spousal Social Security benefits based on 50% of your former spouse's benefits at full retirement age. The actual benefit amount will change based on age, so it is worth considering the timing in your divorce financial planning. If you survive your former-spouse, you may also be entitled to survivor's benefits (unless you remarried before age 60).

Because social security amounts will be different, some divorcing couples agree that the spouse receiving the higher benefit will pay spousal maintenance (alimony) to the other.

Another option sometimes used is to file a "restricted application" to provide one spouse with spousal benefits while the other spouse's benefits continue to grow.

Filing and Suspending for Income to One Spouse

Prior to a divorce being final, if one spouse continues to work past normal retirement age while the other wishes to claim spousal benefits, there is a "file and suspend" option. The working spouse applies for Social Security benefits, but immediately suspends receipt. That allows the working spouse's benefits to continue to grow while the spousal benefit is received.

There Is No Substitute for Careful Planning

Every situation is unique, and the financial choice will therefore be necessarily different depending on your circumstance. What is not unique, and common to all divorces, is that good financial divorce planning can make a big difference for the future of both spouses.

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