Among the many questions that folks who are approaching retirement are asking, are those that impact when and how they should apply for benefits. Of the 97 possible months available during which to apply, each month also includes as many as eight options to choose from, depending on your marital history, relative earnings history, disparity in respective ages, etc.
The difference between doing it to optimize the amount of money you will receive, assuming you live to normal life expectancy, and doing it wrong, can mean as much as several hundred thousand dollars over the next X years.
By Robert Powell February 18, 2014
If you’re considering or in the process of divorce, and you’re just shy of your 10th wedding anniversary, you might want to wait a bit and use the time to brush up on all things Social Security before you make the break official.
“Clearly, a lot of factors need to be taken into account when making divorce decisions,” said Marcus Dillender, an economist at the W.E. Upjohn Institute for Employment Research and author of a just-published paper, Social Security and Divorce Decisions. “However, people should be aware of the fact that Social Security provides spousal benefits to divorced people if their marriages lasted at least 10 years.”
For people planning on divorcing around the 10-year mark of a marriage, Dillender said waiting a few months may result in higher Social Security payments if their spouses’ earnings records are higher than their own.
Others provide similar advice. “So if your divorce will be final at the nine-year-and-10-months mark, you might delay signing for a couple months, just to keep the door open to Social Security’s former spouse benefits,” said Andy Landis, of the website Thinking Retirement and a contributor to the MarketWatch RetireMentor section.
Martha Shedden, a Social Security specialist with ClientFirst Financial, said the devil is in the details when it comes to Social Security and divorce. According to the Social Security Administration (SSA), if you are divorced, your ex-spouse can receive benefits based on your record (even if you have remarried) if:
• Your marriage lasted 10 years or longer;
• Your ex-spouse is unmarried;
• Your ex-spouse is age 62 or older;
• The benefit that your ex-spouse is entitled to receive based on his or her own work is less than the benefit he or she would receive based on your work; and
• You are entitled to Social Security retirement or disability benefits.
According to SSA, if you have not applied for retirement benefits, but can qualify for them, your ex-spouse can receive benefits on your record if you have been divorced for at least two years. If your divorced spouse remarries, he or she generally cannot collect benefits on your record unless their later marriage ends (whether by death, divorce or annulment).
Now, according to Dillender’s study, spouses (or perhaps their lawyers) are aware of Social Security’s rules regarding the 10-year rule. In fact, in his paper, Dillender found evidence looking at data from 1985-1995 and from 2008-2011 that the 10-year rule results in a small increase in divorces for the general population.
However, the effects vary greatly by age. In his paper, he noted that divorce decisions change very little for people under the age of 35. But for people 55 and older, divorces increase by about 20% around the 10-year cutoff, which leads to an increase in the likelihood of being divorced of 11.7% at 10 years of marriage.
And for people between the ages of 35 and 55, who account for more than half of divorces, Dillender noted that the likelihood of being divorced increases by almost 6% as marriages cross the 10-year mark.
“This heterogeneity across ages likely exists because older people are more focused on retirement and have less time to remarry,” Dillender wrote. “These results indicate many people delay divorcing because they need Social Security benefits. In addition, the results also indicate that younger people plan on remarrying, which means they would no longer be eligible for spousal benefits.”
Landis said the overall bump for those age 55 and older, at 11.7%, is rather small. “To me that means that finalizing the divorce is the priority motivator, and retaining the rights to Social Security former spouse benefits is smaller,” he said. “The bottom line is that couples may be willing to delay a few months to keep their Social Security options open, but they won’t wait for years.”
Others agree that it’s worth waiting to divorce, though perhaps not forever. “If I were counseling someone — especially a woman who had taken time off or worked part time to raise the couples’ children — I would definitely advise them of these rules,” said Shedden.
Few know how Social Security works
To be fair, not all agree that spouses are aware of how Social Security works with respect to marriage, divorce, death, and remarriage. But they should be.
“While many people may stay in a marriage for financial reasons, people are generally unaware of how Social Security retirement benefits are calculated and less are likely aware that you need 10 years of marriage to qualify for spousal benefits, regardless of whether the marriage ends in divorce,” said Jason Fichtner, a senior research fellow at the Mercatus Center at George Mason University.
As proof, Fichtner cited research conducted for the Social Security Administration in 2010 which found that only 13% of those surveyed were very knowledgeable about how Social Security benefits are calculated. (Read: What Do People Know About Social Security?)
Further, only 21% said they were very knowledgeable about how their spouse’s decision on when to claim Social Security retirement benefits might affect their own retirement benefit amount.
“This research suggests that many people aren’t likely to be aware of the technical details surrounding the spousal benefit and 10-year requirement,” said Fichtner. “Hence, I’m skeptical that people are delaying divorce past the 10 year mark just to qualify for Social Security spousal benefits.”
“My guess,” he said, “is that 10-year marriage mark is a milestone — just like two or five years — that people in a troubled marriage try to make it through hoping things get better before deciding to divorce.”
His advice: “Regardless of whether people are single, married or divorced, it’s important that they understand their Social Security retirement benefits and the important personal decision surrounding when to claim benefits. This is even more important for women.”
Others agree about the importance of understanding Social Security retirement benefits.
Elaine Floyd, the director of retirement and life planning at Horsesmouth, said Dillender’s paper serves as a good reminder that the 10-year length-of-marriage requirement to qualify for divorced-spouse benefits, and the disqualification for such benefits upon remarriage, are huge issues in Social Security planning and overall retirement income planning.
“Divorcing just shy of the 10 years can deny a person — man or woman — many thousands of dollars in divorced-spouse benefits,” Floyd said.
Like Fichtner, Floyd takes issue some of Dillender’s findings. For instance, she Dillender’s paper suggests that women are the biggest beneficiaries of divorced-spouse benefits, and that might be true. “But high-earning people of either gender can take advantage of such benefits by filing a restricted application for divorced-spouse benefits at full retirement age and switching to their own maximum retirement benefit at 70,” Floyd said.
In fact, Floyd said, unlike married couples, two divorced spouses can each receive spousal benefits on the other’s record at the same time, and the ex-spouse need not have filed for his own benefit as long as he is over 62 and they have been divorced more than two years.
As for remarriage, there are lots of reasons why a person might want to remarry — Social Security probably being far down on the list. “But anyone who plans to take advantage of divorced-spouse benefits may want to reconsider that decision in light of the thousands of dollars in Social Security benefits they may be giving up,” Floyd said.
To be sure, Floyd said remarriage may not affect a lower-earning spouse as much because she can always draw spousal benefits off her new spouse. “But high-earning spouses who are taking advantage of the restricted application to receive as much as $60,000 in spousal benefits between age 66 and 70 (if the ex-spouse is a high earner) may want to postpone any nuptials until after age 70,” she said.
Said Floyd: “Anyone considering divorce or remarriage should consider all the ramifications, including the impact on Social Security.”
Resources where you can gain further knowledge about divorce and Social Security:
When to Start Receiving Retirement Benefits, a well-written and informative two-page pamphlet available from the Social Security Administration;