To Win the Social Security Game, You Must Know the Rules

— -- Many people may think Social Security is different from other assets, but that’s precisely how they should think about it: like any other asset.

Of course, the key difference with investing in other assets, like stocks and bonds, is that those are a matter of choice, while investing in Social Security is mandatory for most of us. Your employer has been taking money out of your paycheck for Social Security and sending it to the government since your first part-time job in high school.

Just as investors do with stocks or bonds, people should get a grip on Social Security’s complex rules to develop a strategy, based on their personal circumstances, to maximize their returns. By failing to do so, many people end up drawing far less money than they otherwise would.

Here are some things to keep in mind when planning your Social Security strategy:

• Don’t jump too soon. All too often, people are in a rush to claim benefits to get those monthly checks coming in. Though you are eligible to receive benefits starting at age 62, waiting to claim might be your best move, because the longer you wait, until age 70, the larger your check will be, by 8 percent per year, not including the value of compounding — the effect of each annual 8 percent increase on each previous 8 percent increase).

This is like getting a certificate of deposit with an 8 percent annual rate (a rate astronomically higher than money markets have provided for years). This annual increase may turn out to be more than the stock market returns annually in the next several years. In addition, benefits increase annually by a cost-of-living (COLA) adjustment.

And, like the benefit increases, these adjustments accumulate year to year. How long you should wait after the age of 62 to claim benefits depends on various factors, including your health. If you die before claiming, there will be no benefits for your estate or your spouse. You can get a close idea of your monthly benefit check at different ages by visiting the Social Security Administration’s benefits web site, and using its estimator function. If you’ve been meticulously saving your W-2 forms over the years, or if you can get access to them through your employer(s), you can challenge the amount if you believe the SSA has made an error.

• Know your full retirement age (FRA) — a designation by the Social Security administration. For many, depending on their personal situations, FRA may be your optimum time to claim benefits. For example, if you were born between January 2, 1943, and January 1, 1955, your FRA is 66. You can determine your FRA by consulting the Social Security website. FRA is an increasingly important concept for people to understand now that many are continuing to work later in life.

If you claim benefits before your FRA and continue to work, your benefits will be reduced by one dollar for every two you earn over $15,480 annually. The amount of this cut can vary. This year, if you earned $20,000, your benefits would be cut by $2500. But if you wait until your FRA to claim, there’s no offset: No matter how much you earn from your work, you get the full benefits you have coming for claiming at that age. Now that people are living and working longer, waiting until FRA or longer to claim may be the best option.

• You and your spouse together might be able to receive far more money by using a claim-and-suspend strategy. If you claim your benefits and suspend them to defer payments, your spouse immediately becomes eligible to draw spousal benefits based on your claim, provided that he or she is at least 62.

Let’s say a man who is 66 claims his monthly benefits of $3,000 per month at the age of 66 and then suspends that benefit. His wife, who is 62, is then eligible to receive $1,500 per month on his claim until she reaches FRA at age 66. In that intervening four years, the husband’s eventual monthly benefit checks grows substantially, and he files to remove the suspension and receive his maximum benefit at age 70. At this point, his wife is 66 (FRA), and then claims her own benefit. By using this strategy, they get $1,500 a month income they otherwise never would have received while waiting to get a much greater benefit for the husband.

Some people argue that claiming as early as possible is the best course of action because the Social Security program may end due to financial instability. Well, anything’s possible. But because just about everyone eventually will be eligible for these payments and has had money deducted from their checks since their high school jobs, ending these benefits is something of a political third rail; no elected official wants to touch it.

And, as long as the system exists, you must know the rules to get the most out of it.

Any opinions expressed here are those of the columnists and not of ABC News.

Jamie Cornehlsen and Ted Schwartz are advisors with Capstone Investment Financial Group in Colorado Springs, Colo. Cornehlsen is also president of Dunn Warren Investment Advisors in Greenwood Village, Colo. A Certified Financial Planner®, Schwartz advises individuals and endowments. He holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at ted@capstoneinvest.com. Cornehlsen, a Chartered Financial Analyst®, advises business owners and employees on retirement plans. He holds a B.A. from the University of Colorado and an M.B.A. from the William E. Simon School of Business at the University of Rochester. He can be reached at jcornehlsen@capstoneinvest.com.