Break Free

Social security is complex and essential for retirement life. Due to the usual limitations of time, I present a handful of rules that most people should understand because they are most likely to be affected by them. Some of the less well-known rules regarding divorce that can nonetheless have a big impact on your benefits if they happen to apply to you.

When Social Security was first created, most married couples consisted of a “bread-winner” and a “home-maker.” Recognizing that a couple would be hard-pressed to get by on just one benefit—that of the bread-winner—the initial law provided for a “spouse” benefit for the home-maker.

The amount of the spouse benefit was pegged to 50% of the bread-winner’s benefit at Full Retirement Age (currently 66). Effectively the couple could receive 150% of the bread-winner’s benefit if they both retired at Full Retirement Age; when the first one passed away, the survivor would receive the bread-winner benefit amount for the rest of his or her life.

As divorce became more common in the latter half of the 20th century, these rules were adapted to apply to divorcees, so long as the couple was married at least 10 years. In fact, in certain ways the claiming rules are more generous for divorcees.

To better understand how this is so, let’s look at an example… Martin is 62 and Karen is 66. They have been married 35 years. Karen has a negligible work record of her own, having spent most of her adult life looking after their children. Suppose Martin’s Full Retirement Age benefit (at 66) is $2,000. Karen would be eligible for a spouse benefit of $1,000 (50% of Martin’s age 66 benefit) because she is 66. However, she cannot begin to collect until Martin starts his own benefit under the current rules. He doesn’t want to claim at 62 because his benefit would be reduced 25% to $1,500; in fact, he is probably well advised to wait to age 70 to collect his maximum benefit in order to maximize the potential benefit for the survivor. That’s a big dilemma for this and many couples.

Suppose, however, that Martin and Karen divorced several years ago when they were in their 50s. In this case, Karen could file for the spouse claim at age 66 when Martin is 62—whether or not he starts his own benefit. How big a deal is that? Well, if they were still married and Martin waited eight more years to file, when Karen is 74, she would forego eight years of the spouse benefit—that’s $96,000.

Moreover, if Martin waits to claim at age 70 in order to maximize his work-record benefit at around $2,640, that would also further benefit Karen should Martin pre-decease her. Why? She would be immediately eligible for a survivor benefit of $2,640 which would replace her spouse benefit. However, to qualify for this she must not be remarried before age 60.

But what if Martin remarries? How does that impact the benefits of Karen and the new spouse? Not a single penny. Both former and current spouse can be eligible for both a spouse benefit and the survivor benefit on Martin’s account. In fact, had Martin been married at least 10 years several times in his life, all the former spouses (and current one) could be eligible on his account for spouse and survivor benefits, so long as all the other requirements are met.

There’s a larger point to discussing these particular rules with you today: Whether we are single, married, or divorced, Social Security is complicated. If we don’t understand our options—whatever our current status—then we run a strong risk of leaving money on the table that could prove important to our long-term financial security.

Most of us don’t want to make simple yet costly mistakes, especially if we can avoid them. The problem is that we have to know a possible mistake is looming up ahead in order to make a better choice.

Unfortunately, when it comes to claiming our Social Security benefits, we too often lack the information we need to make a wise decision. The result is money left on the table: typically tens of thousands of dollars for singles and upwards of $100,000 for married couples—sometimes hundreds of thousands.

Let’s look at two common mistakes we make when claiming our benefits.

First, we claim too early. Why? Some believe that the program will run out of money so they try to get as much as they can while the money lasts. While we don’t have the space here to address this complex issue in full, you should note that Social Security has had looming shortfalls in the past and Congress has always solved the problem before any benefits were cut. These periodic “fixes” involve small changes to various elements of the program and are usually implemented so gradually that—after the legislation passes—no one notices. There is every reason to believe that Congress will step up to fix any new shortfall if and when it appears sometime in the future.

Others claim too early because they believe it doesn’t matter: Claim a smaller check at 62 for eight more years or claim a larger one at 70 for eight fewer years and you’ll get about the same total amount either way. However, those numbers don’t add up: if we merely live to our average life expectancy, we will collect considerably more by waiting to claim later—tens of thousands more typically for singles and commonly $100,000 or more for married couples. And if we are “unlucky” enough to live a very long time (it happens) those numbers can add up to hundreds of thousands of dollars.

So in general, we usually make a costly mistake if we claim our benefits early; it’s almost always better waiting to claim later if we can. (Like everything with Social Security, there are exceptions…)

The second common mistake is failing to know whether we are or will become eligible for certain elective benefits. While we mostly understand that we can start a claim based on our work record—when we paid taxes into the system—anytime between 62 and 70, there are other benefits we may be eligible for, but only if we apply in a timely and proper way. These include spouse and survivor benefits among others.

Consider this example: Carol is 66. Her age 66 benefit would be $2,000, but she plans to wait until age 70 to collect her maximum benefit of about $2,640. Tragically, her 64-year-old husband Carl dies suddenly. His age 66 benefit would have been $1,600 had he lived to that age. Carol is eligible to claim a survivor benefit immediately that will be based on Carl’s work record. In this case she would collect $1,600 monthly then switch to her own maximum work record claim of $2,640 when she turns 70.

Here’s the thing: she needs to know to file a “restricted” application for the survivor benefit. No one will contact her from Social Security to inform her of this important right. She needs to know what benefit(s) she is eligible for and when. Otherwise, she could end up leaving $76,800 in survivor benefits on the table. That’s costly.

You have worked hard to earn your Social Security benefits. So it’s all the more important to be certain that you claim all the benefits for which you are eligible and to understand the claiming age that will best serve you and your family for the remainder of your lives.