Whenever I write about Social Security, I am inundated with follow up questions. It’s no wonder, since there are about 2,800 rules that govern the system and thousands of retirement claiming strategies. What is worrying about Social Security is NOT that it is going to run out of money (there are a number of ways to address shortfalls), but that there is so much confusion around an eighty-year-old entitlement program. According to a survey released by the Financial Planning Association and AARP, about half of Americans ages 45 to 64 expect that Social Security will be a major source of their household retirement income. But according to the Certified Financial Planners who provide advice to consumers, those numbers are way off: 94 percent of CFPs surveyed said that SS will provide 50 percent or less of clients’ retirement income.
What explains the gap between what the pros and consumers think? As the report notes, “Overall, Social Security knowledge is lacking for Americans.” Just 9 percent of consumers believe they are very knowledgeable about how Social Security benefits are determined and another 38 percent believe they are somewhat knowledgeable about how their benefits will be determined. CFP® professionals think those numbers are high—just one percent of the planners think that their clients are very knowledgeable and 31 percent said their clients are somewhat knowledgeable.
In fact, the survey revealed that most soon to be retirees did not know the nuts and bolts of claiming strategies, like waiting to claim benefits can result in a significantly higher benefit over the course of retirement. 67 percent underestimated the impact on waiting until full retirement age to claim benefits and there was great confusion about claiming benefits on a former spouse. In fact, the vast majority of questions that I fielded about Social Security centered on claiming benefits after a divorce.
To clarify the issue, I consulted with nationally recognized Social Security expert, Mary Beth Franklin. Mary Beth writes regularly about retirement income planning, including her valuable downloadable book, “Maximizing Your Social Security Benefits”. Franklin said “The basic rule about claiming benefits on a former spouse is that you must have been married for at least ten years before you got divorced and you must be currently single, (single or widowed from a subsequent spouse). Many were concerned that claiming benefits on an ex’s record would diminish the benefit for the ex, him or herself. Not so, says Franklin.
There were also a lot of questions about whether an ex can claim retirement benefits as early as age 62. “The answer is yes, with a caveat. You can claim on your ex, but the other Social Security rules apply. That means that you would have to claim a reduced benefit (usually about 25 percent and it is permanent) on your own record and then if one-half of your ex’s benefit is greater than your own, you could collect the difference.
Here’s an example: Jack (67) and Jill (62) were married for 20 years and then divorced. Jill is currently single and would be entitled to $1,000 per month on her own record, if she were to wait until her full retirement age (FRA) of 66. Instead, she wants to claim at 62, which reduces her monthly benefit to $750.
Jack claimed his $2,500/month benefit at his FRA. If Jill had waited until her own FRA, she would have been entitled to one-half of his benefit, which would have been $1,250/month. BUT, because she is claiming at 62, her share of his benefit would also be reduced, so she would only be entitled to $875/month. (From the perspective of SS, Jill would be entitled to two benefits at age 62: her $750 + $125 from her ex-husband, for a total of $875.)
Pretty confusing, right? And that’s just one example of the intricacies of the system.