Retirement planning tips for a 65-year-old divorcee

At first blush, you might think retirement advice aimed at a 65-year-old divorced woman doesn't apply to you. But even if you're not in that category, "Janet's" circumstances are typical for many women in her situation, and maybe someone you know is in a similar spot. And regardless of your sex or whether you're happily married or have never been, her story offers guidance that can help anyone approaching retirement with less-than-perfect resources.

Janet was a stay-at-home mom until age 45, when she and her husband divorced after a 20-year marriage. She has been working full-time since then, although she doesn't have very much money saved for retirement. Her primary source of income in future years will come from working and from Social Security.

She's in a tough situation -- no use sugar-coating her circumstances. But she can definitely improve her financial security in her retirement years. Let's take a look.

Optimize her Social Security benefits

"There are a few critical steps Janet can take to boost her Social Security benefits," said Andy Landis, author of Social Security: The Inside Story ^[1], when I spoke to him about Janet's situation. It would be best if she delays starting her earned Social Security benefits until age 70, when she can take full advantage of delayed retirement credits ^[2] that will increase her monthly income.

This tactic has another advantage: By working longer it will boost her average earnings, and those are the numbers Social Security uses to calculate her benefits.

One input into Social Security's complex formula for calculating benefits is the average pay someone has earned over 35 years. If Janet has fewer than 35 years of wages or self-employment income, the formula plugs in zeros for the missing years, dragging down her average earnings.

At age 65, Janet will only have 20 years of employment income, so the formula will plug in 15 years of zeros if she starts her Social Security at age 65. At age 70, she'll have only 10 years of zeros, which provides another boost to her benefits.

If she continues working after age 70, Social Security will recalculate her benefit each year she continues working, substituting each subsequent year's earnings for a zero that had been previously plugged into the formula. So continuing to work after age 70 will keep boosting her Social Security income.

Speaking of working, Janet had the misconception that working would reduce her Social Security benefit. She was thinking of Social Security's earnings test ^[3], which would only apply if she started her Social Security benefits before age 66, her full retirement age, and she continued to work. So she can keep working beyond age 70 without reducing the Social Security benefits that she will have started.

Janet can also take advantage of grandfathered rules regarding restricted application ^[4] because she was born before Jan. 2, 1954. Once Janet reaches her full retirement age, she can file for an immediately payable spousal benefit based on her ex-husband's earning record. She'll receive a monthly income equal to half of her husband's Primary Insurance Amount (an amount equal to his Social Security income as if he had started benefits at his full retirement age).

This income will be payable to Janet until she reaches age 70, when she can switch over to her own earned benefit if it's higher than the spousal benefit. This spousal benefit will be in addition to her own employment income.

If she had been born on or after Jan. 1, 1954, she wouldn't be able to start the smaller spousal benefit while delaying her earned benefit.

Interestingly, Janet had three misconceptions about this spousal benefit. First, she thought it might reduce her earned benefit starting at age 70, but it won't. She can receive this spousal benefit and still increase her earned benefit as described above.

Second, Janet thought her ex-husband would need to start his benefit before she could start her spousal benefit. But that's not the case: She can start her spousal benefit even if her husband hasn't started his benefit because she has been divorced for more than two years.

The third misconception Janet had was that if she started the spousal benefit, the Social Security income payable to her ex-husband and his wife would be reduced, but that's also not the case. No reduction in her ex-husband's benefits will result from the spousal benefit payable to her.

The bottom line is, the spousal benefit can provide Janet with four years of additional income from Social Security. If she doesn't need this income to pay for her living expenses while she continues to work, she'd do well to sock it away into a retirement savings account to use when she really needs it.

Working longer

For Janet, the reality is that she'll benefit by continuing to work well into her 70s. Fortunately, she has work that she's passionate about -- helping farmers and producers get their organic certification. She's building up a client base that can produce income for years to come, plus it gives her valuable social connections that she enjoys. And she has control over many of her working hours and conditions.

These are all valuable attributes for people who need to continue working into their 70s for financial reasons.

Another plus: Janet eats well and keeps her weight at a healthy level, which will be critical to keep her in good health so she can continue working.

Managing living expenses

Janet watches every penny she spends, and she grows much of her own food. She lives close to her adult children, which provides rich social engagement and possible emotional support in the years to come. She may want to continue looking into even more creative ways to manage her living expenses, such as the "Golden Girls ^[5]" solution: sharing living quarters with other, nonfamily adults.

Millions of older women -- and men -- will need Janet's creativity and resilience in their retirement years. They'll need to make every dollar count and take advantage of all their financial, family and social resources.

That's the reality of retirement in America today.