Divorced and Using Spousal Strategy Restricted Application

This is a comparison of three women, Betty, Nancy and Joyce.  They all turned 63 in 2017, and were married to their former husbands for over 10 years, but have been divorced now, for more than 2 years and have not remarried.  All these women are expected to live a long life, to age 95. For this illustration, we are not including any Cost of Living Adjustments (COLA) which are the yearly raises received by Social Security recipients.  Historically these have ranged from 0% - 14%.  Remember, adding COLAs will magnify these numbers, making them only bigger.

The only difference between each woman’s scenario is their Primary Insurance Amount (PIA). This is the estimated benefit that they would expect to receive at their Full Retirement Age (FRA).  It is based on the highest 35 years of earnings as applied to a formula.  Each ex-husband has the same PIA of $2,600.


Meet Betty

When Betty and Bob were married, they agreed that Betty would stay home to raise the kids and she only started to work part time jobs after the kids were grown.  As a result, her PIA is $500/mth.  

If she begins her own benefit at FRA it will be $500/mth for a total of $6,000/yr and her lifetime benefit is $180,000.  Because her PIA is low, Betty is entitled to what is called a spousal add on so that her benefit may be raised up to 50% of the PIA of her ex-husband if she files at FRA.

So at age 66 she files for her own benefit and because she was previously married, she will get that spousal add on.  Her monthly benefit is now $1300/mth, for a total of $15,600/yr and her lifetime benefit is $468,000.  But it is up to Betty to let the Social Security office know of this prior marriage or she may miss out.  $468,000 - $180,000 is $288,000 additional lifetime benefit. Now, that's not something to sneeze at.  

If Betty had a medical condition and wasn’t expected to live much past 75-78, or she really needed the income, she could start her benefit now, at age 63, and still get a spousal add-on.  Because she is starting earlier, her benefit is permanently reduced to $1,100/mth, $13,200/yr, the spousal add on is also reduced, for a lifetime benefit of $422,400, which is still $242,400 more than claiming only her own benefit.


Meet Nancy

Nancy’s scenario is similar to Betty’s but she was able to work a little more during her career and has a higher PIA of $1,200/mth. She and her ex-husband divorced in 2011 and she has never remarried, continuing to focus on her career as a Pharmacy Technician.

Since she plans to work until at least 66, and maybe longer, she is in no hurry to start her benefit.  The important thing to know about Nancy’s scenario is that after her FRA of 66, she can work and claim benefits without being subject to the earnings test.  

If she filed a restricted application for her spousal benefits at FRA, she would receive 50% of her ex-husband’s PIA for a total of $1,300/mth, $15,600/yr. She would do that until age 70 when she would switch to her own, now permanently increased benefit of $1,584/mth and $19,008/yr.  Remember her original PIA was $1,200/mth but with the 8% a year delayed credits she earned between age 66 and 70, her benefit is now $1,584/mth.  And because she continued working, that may have helped increase her benefit amount as well.  She now has the choice to continue to work as long as she wants and also know that she has maximized her Social Security benefit.

Without taking advantage of the restricted application spousal strategy, her lifetime total would be $432,000.  With it, it grew to $556,608 a difference of $124,608.


Meet Joyce

Next we'll meet Joyce who was also previously married to John for over 10 years and is eligible for divorced spousal benefits.  Joyce had a career as a physician and worked steady throughout her lifetime, earning almost the maximum benefit allowed.  

Her PIA is $2600/mth, same as her ex-husband's.  Joyce is 63, happy in her career, and doesn't intend to stop working any time soon.  If she were to start benefits at 63, while she is still working, she would be subject to the earnings test.

That means that because she is not yet full retirement age, she can make $17,040/yr or less in 2018 or else anything she makes above that will reduce her benefit by $1 for every $2 over that threshold.  She made $242,000 last year, so she would not receive any benefits. Benefits are not lost, however.  Rather, the withheld amount would be applied as a delayed retirement credit, and can permanently increase her benefit once she reaches full retirement age. It would be as if she hadn't started her benefit at all.  

So really, there is no good reason to start benefits early while working at a high paying job only to have them stopped due to the earnings test.  It is best to wait to claim.

If she wanted to stop working then her benefit would be permanently reduced to $2,253/mth, or $27,036/yr.  Her lifetime benefits would top out at $865,152.  That's a large drop in income from her salary as a physician.

Once Joyce turns full retirement age, however, she is no longer subject to the earnings test.  She could file a restricted application to claim her divorced spousal benefits of $1,300/mth, $15,600/yr until she is 70, then switch to her own benefit which grew by 8% for 4 years from $2,600 to $3,432/mth or $41,184/yr. Her lifetime benefit will add up to $1,133,184.  Again, we are assuming 0% COLAs so any cost of living increases will only make these numbers bigger.

If she decided to start her own benefit at 66, she can work or stop, either way, without consequence, and her benefit is equal to her PIA at $2,600/mth or $31,200/yr.  Over her lifetime she would earn $926,000 in benefits.  

So you decide; Lifetime totals of $1,133,184, by using the spousal strategy, $926,000 without using the spousal strategy or getting benefits early, $865,152.  Decisions on how and when you claim can mean more money in your pocket.

Moral of the Story Is - When talking to Social Security, don’t forget to disclose any prior marriages and be sure to maximize your lifetime benefits by using the spousal strategy called Filing a Restricted Application.