Social Security Q&A: My higher Earning Spouse and I May Soon Divorce. How Does this Affect My Claiming Strategy?Commentary by Laurence Kotlikoff
August 14, 2014
Social Security may be your largest or one of your largest assets. How you manage it, by deciding which benefits to collect and when, can make an absolutely huge difference to your lifetime benefits. And those with the highest past covered earnings have the most to gain from maximizing their Social Security.
I’ve been answering questions and writing columns about Social Security each week for the past two years on PBS NEWSHOUR’s website. The editors at Forbes asked me to post a Q&A each day from those columns. To see all my columns, please go to my software company’s site, www.maximizemysocialsecurity.com, and click More Press below the WSJ quote.
Today’s question asks about the financial ramifications of potential divorce. It suggests a possible way to avoid a financial war between the perhaps soon-to-be ex-spouses..
Question: I will turn 62 in November. My wife has been the principal wage earner over the past 25 years while I raised our now adult children. I worked as a self-employed manufacturers’ representative from 1991 to 2007. From 1976 to 1990, I earned an average of about $50,000 per year at other regular jobs.
My wife is 57, still working, and has typical annual earnings in the $150,000 to $250,000 range. We each have IRAs with about $300,000 in them and a decent savings account. We owe no money on our house.
There is a possible separation or divorce on the horizon. What would your recommendations be for me? For her?
Answer: I’m sorry to hear about the pending separation or divorce. Your goal is to avoid going to financial war over this, which will only enrich lawyers. A fair way to resolve any financial conflict is to establish a division of resources that produces the same living standard for each of you going forward.
Economics-based financial planning software offered by my company or other companies that tells you about your future living standards can assist you with this. You can also use software to determine what divisions of assets and levels of alimony, if that’s needed to equalize living standards, will be most tax and Social Security efficient for maintaining the highest equal levels of your future living standards.
For purposes of this answer, I’m going to assume you are getting divorced in the near term. Regarding Social Security, your own best option is most likely to wait until your wife reaches 62 (and can start collecting retirement benefits), and you have been divorced for two years, at which point you will be eligible to apply for a spousal benefit.
When you reach age 70, apply for your full retirement benefit. This will give you half of her full retirement benefit from age 67 to 70 and your largest possible retirement benefit starting at 70. For your wife, the best strategy is to do the same, except she should start her full spousal benefit at age 66 when she reaches full retirement age.