Today’s column illustrates yet another example of a situation I had never encountered in my 45-year career of working on Social Security issues. And this time it’s the story of two very different Social Security rules intersecting and leading to a bizarre circumstance that allows some lucky people to milk the Social Security system out of unintended benefits. It all started with this email I got from a reader.
Q: My ex-wife and I are both about to turn 66. We were married for about 35 years before getting divorced. Neither of us has remarried. We each have worked most of our lives and are due similar Social Security retirement benefits.
We have remained friends and would like to maximize our benefits. I am planning to continue working indefinitely. Can my ex-wife “file and restrict” on my account even though I am not yet receiving benefits?
A: At first, I was going to simply respond, “Yes, she can,” and be done with my answer. But then I got to thinking through your situation and realized that you guys have hit the Social Security jackpot. Each of you will be able to claim spousal benefits off of the other’s record and save your own Social Security benefits until 70 and get the 32 percent bonus that comes from that delayed retirement maneuver. And in order to show you how this all works out, I’ve got to explain the mechanics behind two different Social Security rules and how they come together in a weird way to help each of you.
First, I will discuss the “file and restrict” rule. The law normally says that if you file for any kind of Social Security, you must take your own benefits first. Only after your own retirement is paid, can you look to a spouse’s record to see if you are due any additional benefits on his or her account.
But if you wait until age 66 to claim benefits, you can ignore that law. You could file for dependent benefits on your spouse’s record and claim 50 percent of his or her full retirement age rate for the next four years and then, at age 70, switch to your own full benefit plus the 32 percent bonus that goes along with delaying your retirement benefits until 70. (I also must remind my readers that the file and restrict strategy is going away. It only applies to people turning 66 before 2020.)
The only stipulation to employing the file and restrict tactic is that your spouse must be collecting Social Security before you can claim dependent benefits on his or her record. And this is where a second unrelated law comes into play in your case.
The second rule I need to explain is what is called the independently entitled divorced spouse law. As alluded to in the prior paragraph, a husband or wife can’t get any benefits off of his or her spouse’s record until that spouse is collecting benefits. But the law has always been different for divorced spouses.
For example, a wife can get benefits on her ex-husband’s record even if he hasn’t filed for benefits himself yet. He must be old enough for Social Security (meaning he has to be over age 62), but again, he doesn’t have to be collecting benefits.
Here is the reason that law was passed. The law assumes that a married dependent wife can rely on the husband’s income for support until he actually retires and files for Social Security himself.
But the law can’t make that same assumption for a divorced wife. She is no longer “dependent” on her ex-husband’s income. She is “independent.” So the law allows an independently entitled divorced wife to get her husband’s Social Security even though he might not yet be getting benefits. (The same rules would apply to a divorced husband.)
Now here is how these two laws come together to help you. The “restricted application rule” allows one of you to file for benefits as a spouse and save your own benefits until age 70. And again, normally the other spouse must apply for benefits first.
But the independently entitled divorced spouse law says the first spouse does not have to be getting Social Security in order for the other spouse to file. That means you can both file for divorced spouse benefits on the other’s account and then you both can save your own retirement benefits until age 70.
To further explain this, let’s use some actual numbers. You said you had similar retirement benefits. Let’s say your age 66 retirement rate is $2,200 and that your wife’s age 66 retirement rate is $2,500. Here is what you could do.
At age 66, you could file for one half of your ex-wife’s benefit and get $1,250 per month. Also at age 66, your ex-wife could file for one half of your age 66 benefit and get $1,100 per month. You each would continue to get those divorced spouse benefits until you each reach age 70. At that point, your divorced husband’s benefits would stop, but you would file for your own retirement benefits, with the 32 percent bonus, and receive $2,904 each month from then on. And when she is 70, your ex would stop getting divorced wife’s benefits and she would file for her retirement and start getting $3,300 monthly, again, with the 32 percent bonus.
I hope you realize how bizarre it is that you are able to do this. A whole lot of stars had to line up just right. In addition to those two aforementioned laws being in place, you each had to be pushing 66 at the same time (and before the 2020 cutoff date), you each had to have not remarried, and you each had to have your own fairly substantial retirement benefit rate.
Just like anyone else employing the file and restrict strategy, you would have to compare the above option with your normal course of action — which would be for each of you to simply file for your own full benefits at age 66.
In other words, instead of getting just $1,250 per month between age 66 and 70, you could be getting your own $2,200 full retirement rate. So you would be giving up $950 per month for 48 months, or $45,600 in order to reap that 32 percent bonus at 70. And your ex could be getting $2,500 per month between 66 and 70 instead of the $1,100 divorced wife’s rate, meaning she is giving up $1,400 per month for 48 months or $67,200 to get the age 70 bonus.
You need to run the numbers for yourselves, make some educated guesses about how long you think you will live, and then decide what to do.
