Can social security impact a settlement structure in a divorce?

The short answer is absolutely. But, you would never know it if you didn’t work through the details and get a reasonably clear look into your financial future. 

Below is a real life situation which may provide you some insight. You’ll notice there is a major life lesson in this situation. It boils down to the following: 

  1. Social security rules are complex.
  2. If you don’t understand them and the impact on you then you then you will likely not clearly understand how to best design your settlement structure. 
  3. You may need a different settlement structure to make your divorce truly fair and equitable. 
  4. If you don’t design your settlement structure in context to your social security benefits (among numerous other factors that will impact your life) then you may discover you have far less financial flexibility than your spouse does in future years resulting in an unfair and inequitable settlement structure that you used for your divorce.

If you want to avoid that potential outcome, you may want to focus in on the numerous factors that could impact your future financial life. What we say is which financial life do you want and how do you want to design it? More on that another day as there is too much to talk about in that context.

Here is the real life situation.

A husband and wife are getting a divorce. They have already reached their retirement years. So, they are living off the passive income generated from their investments. The husband was the breadwinner in the family. The wife was the homemaker and didn’t make a lot of money. Most people believe they can receive 50% of their spouse’s social security benefits when they retire. This may be true, depending on your situation, if you file when you reach full retirement age. Yet, there are numerous factors that can get in your way. The social security administration can provide the specific rules.

In this situation, the impact was fairly sizable. Through a pure 50/50 allocation of the assets, the Husband would be left with 5x more financial flexibility than the Wife. On the surface the Husband thought a 50/50 allocation sounded reasonable and was the most logical approach to move forward. Yet, the Wife was not so convinced. She knew the devil was in the details and started asking questions.

To cut to the case a bit, a 50/50 allocation was not ideal for them at all. There were a  number of reasons why. Some of them were their portfolio consisted of a lot of taxable assets. Based on the Husband’s social security benefits he did not have as much of a cash shortfall each year compared to the Wife. This resulted in a lower draw down on the investable assets and left him with a pot of gold when he passed away to provide to his children. The Wife was in the opposition situation where she continuously struggled financially and she had no control over how much she could bequeath to her children.

This issue was discovered when we were looking into their financial future and noticed what the Wife thought she was going to receive in social security was not going to come true. This small point (which was hiding in the data) had a significant impact on her financial outcomes from the divorce process.

If you want a free consult about your situation (30-60 minutes) feel free to reach out to me at [email protected] or call me at 617-680-5222. I’m a CPA, not an attorney, who has been focused on the divorce space since 2003 to help people manage their financial outcomes from their divorce.

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