Retirement Income Strategies

Social Security Planning for Divorcees

 Today’s longer life expectancies, especially for women have increased the importance and complexity of retirement income planning.  What used to be a 20-year retirement period has progressed to 30+ years for many baby boomers.  One common concern I hear expressed from women thinking about leaving the workforce and transitioning into retirement is "can I enjoy my desired lifestyle and have enough money to last through my retirement years."  Discussing retirement income and what part Social Security will play often leads to this question, “If I continue working, can I draw on my ex-husband's earning record at my full retirement age and defer my own Social Security benefit until age 70?"

The answer is “yes” and “it depends!”  In a special rule that applies only to divorced spouses, you can claim benefits on your ex even if he has not yet filed for retirement benefits.  The key is he must be at least 62 years old with sufficient Social Security credits.

Here is how this strategy works:

  • At your Full Retirement Age (FRA) file a restricted claim for spousal benefits only
  • You begin to collect 50% of your ex-husbands FRA benefit from age 66 to 70
  • The Social Security benefit based on your earnings record increases by 8% per year with the delayed benefit credit from age 66 to age 70

Additional requirements:

  • You are single and were married for more than 10 years
  • You have been divorced more than 2 years (If divorced less than 2 and your ex-spouse is not collecting you must wait for the 2 year mark to receive benefit) 

Crunching the numbers:

  • If you are less than FRA, drawing an ex-spouse benefit to delay yours may not be allowed because the decision is impacted by the amount of your own benefit.  If your benefit is greater (prior to reaching FRA) than ex-spouse you must take your own benefit.
  • This strategy makes sense if your retirement benefit at full retirement age, plus a 32% increase due to delayed retirement credits would be worth more than the spousal benefit.

Settling on a Social Security strategy is one piece of the retirement income puzzle.  This strategy is not meant to be a one size fits all solution; rather an example of how Social Security planning can be customized to meet your individual income needs.

Laurie Renchik, CFP®, MBA is a Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

Three Legged Stool Strategy

Generating income in retirement is one of the most common financial goals for retirees and soon to be retirees.  The good news is that there are a variety of ways to “recreate your paycheck”. Retirement income might be visualized using a “Three Legged Stool”.  The first two sources or legs of retirement income are generally social security and pensions (although fewer and fewer retirees are covered by a pension these days). The third leg for most retirees will come from personal investments (there is a potential fourth leg – part time work – but that’s for another day).  It is this leg of the stool, the investment leg, that requires preparation, planning and analysis. The most effective plan for you depends on your individual circumstances, but here are some common methods for your consideration:  

  1. Dividends and Interest
  2. 3 – 5 Year Income Cushion or Bucket
  3. The Annuity Cushion
  4. Systematic Withdrawal or Total Return Approach 

Dividends & Interest:

Usually a balanced portfolio is constructed so your investment income – dividends and interest – is sufficient to meet your living expenses.  Principal is used only for major discretionary capital purchases.  This method is used only when there is sufficient investment capital available to meet your income need after social security and pension, if any. 

3-5   Year Income Cushion or Bucket Approach:

This method might be appropriate when your investment portfolio is not large enough to generate sufficient dividends and interest. Preferably 5 (but no less than 3) years of your income shortfall is held in lower risk fixed income investments and are available as needed. The balance of the portfolio is usually invested in a balanced portfolio. The Income Cushion or Bucket is replenished periodically.  For example, if the stock market is up, liquidate sufficient stock to maintain the 3-5 year cushion. If stock market is down, draw on the fixed income cushion while you anticipate the market to recover.  If fixed income is exhausted, review your income requirements, which may lead to at least a temporary reduction in income. 

The Annuity Cushion

This method is very similar to the 3-5 year income cushion. A portion of the fixed income portfolio is placed into a fixed-period immediate annuity with at least a 5-year income stream.  This method might work well when a bridge is needed to a future income stream such as social security or pension. 

Systematic Withdrawal or Total Return Approach

Consider this method again if your portfolio does not generate sufficient interest and dividends to meet your income shortfall. Generally speaking, a balanced or equity-tilted portfolio in which the income shortfall (after interest income) is met at least partially from equity withdrawals.  Lastly, set a reasonably conservative systematic withdrawal rate, which studies suggest near 4% of the initial portfolio value adjusted annually for inflation. 

After helping retirees for the last 27 years create workable retirement income, we have found that many times one of the above methods (and even a combination) works in re-creating your paycheck in retirement.  The key is to provide a strong foundation – or in this case – a sturdy stool. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  There is an inverse relationship between interest rate movements and fixed income prices.  Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.