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Divorce as a Social Security Strategy?

As we recently discussed, it’s only possible for one spouse in a married couple to use the “restricted application” Social Security strategy, in which, upon reaching your full retirement age, you file a restricted application for just spousal benefits, thereby allowing you to collect some cash while your own retirement benefit continues to grow until age 70.

The rule that gets in the way of both spouses using this strategy is the rule that says that you cannot claim a spousal benefit if you’re claiming a retirement benefit that is based on a primary insurance amount* that’s greater than 50% of your spouse’s primary insurance amount.

The reason this rule is a problem is that, in order for you to claim a benefit as a husband/wife, your spouse must have already filed for his/her retirement benefit. And if both of you have filed for your retirement benefits (in order for each of you to allow the other person to claim spousal benefits), one of you will be ineligible for a spousal benefit due the rule above.

A few clever readers noted that the rules are different for divorced spouses. For people who have been divorced for at least two years (after having been married for at least ten years), in order to claim a spousal benefit on your ex-spouse’s work record, there’s no requirement that your ex-spouse have filed for benefits (only that he/she could file for benefits).

The question these readers asked: Would it be possible to get divorced two years prior to full retirement age, so that each spouse could get spousal benefits (as an ex-spouse), while allowing his/her own retirement benefit to grow until 70?

In short, yes.

But You Have to Get Divorced.

While this strategy could be used in many cases to achieve more Social Security benefits for a few years, the negative ramifications (financial and otherwise) are likely to outweigh the additional benefits received.

For example, there’s the cost and hassle of the actual divorce process, including the creation of all the documents you would need (e.g., durable power of attorney for medical care and for finances) in order to come as close as possible to replicating the rights that you have in a legally recognized marriage.

Then there’s the fact that you’d both be filing taxes as single rather than married filing jointly. In many cases (if one of you has significantly more taxable income than the other, for example), that’s likely to result in a higher total tax bill.

And if one of you dies while you’re divorced, the other would inherit any IRAs or other retirement accounts as a non-spouse beneficiary, for whom the rules are not as advantageous as for a spouse beneficiary.

And finally (and probably most obviously), you would want to consider the possibility that a divorce — even a purely financial one — could have a detrimental impact on the relationship itself.

*For those new to Social Security discussions, “primary insurance amount” refers to the size of a person’s retirement benefit if he/she were to claim it at his/her full retirement age.

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Comments

  1. States sometimes make divorce very difficult too. Maryland, for instance, requires that a couple remain separated for one year before granting divorce, during which time they cannot sleep under the same roof (the court asks a witness to attest to this, to the best of their knowledge). So now you need two residences. I agree this does not sound like a sane retirement strategy for most people (maybe for a couple already divorced and considering remarrying)

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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