In our last article, we took a simplified approach to Social Security (SS) survivor benefits. In most cases, if both spouses are past age 70, survivor benefits are relatively simple: The survivor gets the higher of the two benefits. But if someone dies at a younger age, it can get very, very complicated. Today, we go into an often overlooked area: the divorced spouse’s retirement benefits. In our experience, many divorced spouses are completely unaware of the benefits they’re entitled to.
If you take nothing else away from this column, understand this: A divorced spouse may qualify for the same spousal benefits as a married spouse. This includes both retirement and survivor benefits. In fact, not only is a divorced spouse entitled to the same benefits, but also, he has some significant advantages over a married spouse. We’ll cover that later in this column.
To qualify, the former spouse must be at least age 62 and “fully insured.” This essentially means that he must have at least 10 years of SS earnings. In addition, the divorced spouse must have been married for at least 10 years. Just like with a married spouse, the divorced spouse who’s filing for the benefit must also be at least age 62. He must also have been divorced for at least two years and can’t be remarried. Of course, if the divorced spouse has remarried, he may be eligible for a spousal benefit from the new spouse.
Also, for a divorced spouse to qualify for a spousal benefit, his personal retirement or disability benefit must not be greater than the other spouse’s benefit. But there’s an exception to this: If the filing spouse has reached his full retirement age (FRA), he may be eligible for a “Spousal Only” (Restricted Application) benefit. We covered this in considerable detail in “Social Security Spousal Benefits Simplified?”
Note that it’s the age of the divorced spouse filing for benefits that determines if benefits are being paid early (resulting in an actuarial reduction of benefits) or at FRA (no reduction). The actuarial reduction is the same as it is for a married spouse. But the former spouse’s benefit prior to any actuarial reduction is used to determine the divorced spouse’s benefit.
So as long the restrictions above are met, a divorced spouse is entitled to the act same spousal benefit as a married spouse. But the qualified divorced spouse has three distinct advantages.
The first advantage involves File and Suspend. In “Social Security Spousal Benefits Simplified?”, we covered this strategy. Basically, when your client reaches FRA, he can go to SS, file for his personal benefit and then immediately suspend it. Doing this allows your client’s spouse to collect a spousal benefit, without affecting his ability to collect deferred retirement credits.
A divorced spouse has no need to worry about any of this. There’s no requirement that the ex-spouse must be receiving, or have filed to receive, benefits. The only requirement is that both the divorced spouse and ex-spouse must have reached age 62. This can be a good thing if there’s any sort of contentious relationship between the two ex-spouses. In fact, the ex-spouse isn’t even notified when someone collects a divorced spouse’s benefit.
The second advantage involves the excess earnings test (EET). This is a bit complicated. The EET applies to anyone who’s collecting a SS benefit before FRA. Your client may end up losing part of your benefit if he continues to work. If the worker has earnings in excess of the earnings limit ($15,480 in 2014), there will be a benefit reduction of $1 for every $2 of excess earnings. If your client makes too much money, he could lose his entire SS benefit. Note that if your client loses a benefit by starting early, he should be able to get some of that back because his benefit will be adjusted when he reaches FRA. And the rules are not quite as onerous in the year your client reaches FRA. Once he’s beyond FRA, the EET doesn’t apply at all, so he earn as much as he wants without affecting his SS retirement benefit.
For a married spouse, if he’s collecting benefits before FRA and he’s getting a spousal benefit, he must consider the earnings of both spouses in the EET. With a divorced spouse, even if the ex-spouse has earnings above the earnings limit and hasn’t reached FRA, the EET won’t reduce the divorced spouse’s benefit.
The third advantage is particularly notable. With a married couple, only one spouse can qualify for a spousal benefit at a time. Your client can’t collect a spousal benefit based on his spouse’s SS record if his spouse is already doing so based on his record.
This limitation doesn’t apply to a divorced spouse. So if the couple is divorced, both spouses can qualify to receive spousal benefits at the same time. This means that either or both spouses could file to receive spousal benefits based on each other’s SS record. In fact, not only can both spouses collect at the same time, but also, it’s possible to have multiple ex-spouses collecting at the same time based on the SS record of one individual.
If the divorced spouse remarries, he must terminate existing spousal retirement benefits if the marriage was to a worker who’s disabled or retired. But of course, at that point, the divorced spouse may be eligible to file for spousal benefits based on the new spouse’s SS record.
There’s an exception if the new spouse is receiving benefits as a beneficiary. An example of this would be a widow’s or widower’s benefit. If the new marriage is to someone who’s receiving benefits based on his previous spouse’s SS record, those benefits won’t be available to the new spouse. Therefore, the existing benefits payable to the divorced spouse may continue.
For a surviving divorced spouse, it’s generally easier to qualify for benefits. To qualify, instead of 10 years, the surviving divorced spouse must have been married for at least nine months. Also, as with a surviving married spouse, the surviving divorced spouse can begin collecting two years earlier. He must be at least age 60 (rather than 62) and not have remarried prior to age 60 (unless that marriage ends). His personal retirement benefit must not be greater than the surviving spouse’s benefit.
When a divorced spouse has existing survivor benefits, if he then remarries, there’s no requirement that he terminate his existing survivor benefit, even though those benefits are based on the previously deceased spouse’s SS record. In other words, he can keep on collecting the same benefit even after he remarries.
In our next column, we’ll give detailed coverage to an often overlooked area: taxation of SS benefits. This is a critical issue when you look at your client’s retirement budget.
William F. Rainaldi and Frank Rainaldi co-founded The Kugler Company and are co-author and editors of the bulk of the company’s training materials and planning software (kuglersystem.com).