The 10-year rule
How divorce affects Social Security benefits

When it comes to retirement income, Social Security typically accounts for the lion’s share, so it makes sense to understand how to maximize your benefits. As you may know, marital status is an important decision factor when it comes to timing benefits. But, did you know divorce also comes into play? Many women see divorce as a chance to start over, a clean slate, if you will. But just because your former husband is out of the picture, doesn’t mean his Social Security benefits have to be, especially if he earns more money than you. In fact, your ex can actually mean extra when it comes to what you’re eligible to collect.

Here’s why. If you were married at least 10 years before your divorce, you may be eligible to receive Social Security benefits based on your ex-husband’s record, assuming he’s entitled to them. If he hasn’t applied for retirement benefits yet, you can still collect on his record if you’ve been divorced for at least two years. This holds true even if he has remarried. And, claiming benefits on his record has no effect on what he or his new spouse can claim. Of course, you have to qualify to do so.

To claim benefits on his record, you must be 62 or older and still single. In addition, your own work-based benefits must be less than the benefits you’d receive on your ex-spouse’s record. On the other hand, if you were the higher earner during your working years, be aware that your ex-husband can receive benefits based on your record. The same qualifying criteria apply to him as well, and your own benefits will not be affected.

How divorce benefits work

Once you have reached full retirement age, you’ll have a choice between your own benefits and your spouse’s. Now you’ve got some options. You can choose to receive your ex-husband’s benefits first, while delaying your own retirement benefits. Waiting longer could result in a higher benefit down the road based on the effect of delayed retirement credits. Keep in mind, though, that getting married again generally means you can’t collect on your former spouse’s benefits record, unless the subsequent marriage also ends, for whatever reason.

Prior to full retirement age, if you’re eligible for your own retirement benefits and ex-spouse benefits, you’ll receive a combination of benefits equal to whichever is higher. Basically your benefits will be paid first and then your ex-husband’s benefits will supplement the rest. Keep in mind, the amount you receive depends on the age you begin drawing benefits. Generally, the longer you wait to begin claiming Social Security, the higher your benefit.

There’s no one-size-fits-all solution when it comes to Social Security and when to start drawing benefits. However, it’s important to talk to your advisor and determine how to maximize the benefits coming to you, including whether it makes sense to apply for benefits on your ex-spouse’s work record.

On the same page

There’s hardly a working person today who doesn’t dream about retirement. Many envision a time of leisure and luxury with the freedom and the funds to do whatever they please. As you may have read before, achieving that vision takes hard work and planning with a financial advisor who understands where you want to go. Some couples, though, neglect to share their visions of retirement with each other. Probably because they presume they both want the same things. However, that’s not always the case. Your financial advisor can help you get on the same page, so the three of you are collectively working toward common goals.

Seems simple, right? That depends. Establishing your retirement priorities in concrete terms is an exercise in compromise and tradeoffs. Spend some time with your spouse to decide what your top priorities are as a couple. And, start the conversation early so neither of you is blindsided by fundamental differences as you get closer to retirement.

There are no easy answers to these questions. It’s human nature to want it all, but that may not be possible. The point is to decide which aspects are most important to you and your spouse. The priorities will differ for each couple, even each individual. But it’s important for you, your spouse and your advisor to thoroughly discuss – in concrete and realistic terms – what takes precedence when it comes to retirement. That way, if adjustments need to be made you’ll all understand what aspect of retirement you’re willing to sacrifice as a couple.

It’s also important to ensure you’re both involved in making decisions throughout the retirement income planning process. As you near retirement, your priorities may shift or you may need to account for unanticipated expenses. For example, given the current economic climate, increasing numbers of baby boomers find themselves contending with adult children moving back home (please see related story on the so-called “boomerang generation”). That scenario can divert retirement resources to pay for increased food and utilities costs, perhaps even car and health insurance. Regardless of what you face as you get closer to retirement, keep the conversation going between you and your spouse, then share any new insights or developments with your financial advisor.

The boomerang generation returns home

Given general economic weakness and a still-high unemployment rate, it’s becoming increasingly common to find empty nesters with a not-so-empty nest. These days, according to the census, 56% of men and 48% of women age 18 to 24 live under the same roof as their parents for a variety of reasons.

Many can’t afford to live independently, but others do so to help out older parents, physically and financially; attend grad school; save money; or pay off student loans.

The question is, are you ready if your child comes knocking?

Ask yourself ...

1. Are your home and bank account large enough to accommodate your returning child? And for how long? One report suggests that two out of every five parents are helping an adult child financially. These unexpected expenses may take the form of added premiums for healthcare and auto insurance, increased grocery and utility bills, and, in some cases, higher education to help their children become more competitive when it comes to employment.

2. Does your child respect your privacy and your needs? Will she or he follow mutually agreed upon rules?

3. Does your child still have close friends nearby? Depression and loneliness are, unfortunately, common problems for the boomerang generation. A social network, beyond supportive parents, is essential.

It’s also a good idea to communicate openly about house rules and responsibilities beforehand, so each person involved will know what to expect. After enjoying some independence, your children may bristle at being constrained by rules again. Taking the time to clearly define what’s expected should make the transition smoother for all parties.

Will your child contribute to family expenses?

Most families wrestle with this issue, especially when it comes to charging rent. You want your child to save so he or she can become financially independent. But, no rent could make life a little too comfortable for junior, who may just decide to stay indefinitely.

Options include:

Charge a low amount. Enough to help out with higher bills, but not so much there’s nothing left to contribute to a savings account or use to pay down student debt.

Collect rent, and then set it aside quietly to help out later with a large expense, like a down payment.

In lieu of rent, your child can pay a share of utilities, such as water, power and cable bills.

Perhaps you’d prefer if he or she pays you back through acts of service, such as lawn maintenance or housekeeping or by offering technical assistance with computers. Other options could include grocery shopping, running errands, handiwork and chauffeur duties. Many children welcome the chance to give back to their parents by helping out. Some even become caregivers to aging parents.

Once you’ve figured out what would work best for your family, think about who’s responsible for social expenses. Resentment can build quickly if you see your child spending more time and money on social activities than on job hunting, for example. Decide up front what’s acceptable and what isn’t to avoid creating tension in the relationship.

Now that we’re on the subject ...

What social activities are acceptable? Can friends come and go as they please? What about significant others? Will there be a curfew? Do you expect your adult child to check in more often now that he or she’s living at home again? Again, outline your expectations to avoid conflict later.

How long can your child stay at home?

In many cases, a child could easily wear out his or her welcome by becoming lax about job searching, saving and moving out. A University of New Hampshire study released last year found so-called millennials less hard-working and more money-hungry than baby boomers or the generation born between 1965 and 1980. Young adults who return home may lose the motivation to seek employment if they’re financially supported and comfortable.

The boomerang generation

Young adults between 20 and 34 who have chosen or been forced to cohabitate, usually due to economic reasons, with parents or relatives after living on their own. This generation began entering the workforce during times of economic weakness and high unemployment. Without a well-paying job, moving back home became an easy way to maintain their lifestyle. It also could allow them the option of taking an unpaid internship or going back to school.

Back to basics

In times of market volatility and economic uncertainty, it is very easy to be distracted by day-to-day headlines. But tuning into a financial news channel all day or constantly checking quotes on your phone isn’t aiding your long-term financial well-being.

Successful wealth management should be about making thoughtful, informed decisions with an emphasis on what you can actually control. It is way too easy in today’s environment to overlook some of the basic decisions that form the foundation of your financial plan.

Of course, one of the most important decisions within your control is working with a professional financial advisor to help you sift through the “noise” and offer advice specific to your situation. When the markets are erratic, individual investors tend to make decisions based on emotion, rather than logic, which doesn’t usually work in their favor. An advisor can provide guidance and help you take action on decisions within your control.

Neither of you have any control over the outcome of the next Federal Open Market Committee meeting, but you can be proactive about positioning your portfolio in a low-interest rate environment. It’s all about asking the right questions. For example, ask:

1. How will a low-interest rate environment impact my portfolio? What about when interest rates start to climb?

2. Is it time to refinance?

3. How should I be positioned for the next 12 months? Are my investments on track to meet my time frame and goals?

4. How should we rebalance my portfolio to ensure what I own aligns with my investment policy statement?

5. How can I make the most of my cash management options?

Working with your advisor to answer these questions and others can help ensure your financial plan stays on track as you move forward.

Investment myth: Set it and forget it? Not so fast.

Investing is not a one-time deal. You and your advisor likely spent some time deciding which investment vehicles and asset classes made the most sense for your long-term objectives and tolerance for risk. But it’s just as important to periodically review your investments in terms of your overall financial strategy. Meet with your advisor regularly with the goal of reviewing strategy as priorities and needs change.