5 ways to avoid regret with Social Security, retirement planning

Russ Wiles

Life is filled with choices, and some of them will lead to regrets. That's certainly true in the financial area, where Americans routinely grapple with difficult decisions.

Most everyone has financial regrets (if they're being honest), though 15% of respondents in a survey by Bankrate.com said they have no such concerns.

Maybe these people put all their money into the stock market at the start of the bull rally in 2009, bought their dream homes with little cash down and adequately funded their retirement accounts and children's college education. But chances are, they didn't.

At any rate, here are five issues related to retirement and Social Security that can cause second-guessing years from now.

1. Don't tap Social Security early

Yes, there might be good personal reasons to start taking Social Security retirement benefits as soon as you can, at age 62, or soon thereafter. These include a recent job loss, financial stress such as that centered around high medical bills and even an expectation that you might not live that much longer and want to recoup the money you paid into the system.

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Still, this is an area of possible regret because recipients who tap into Social Security early are locking themselves into lower monthly payments than would be the case if they delayed, thus increasing the odds that they eventually could run out of money.

In a study released this month by MassMutual, 38% of respondents now collecting Social Security said they wished they had waited longer. More than half said they decided to claim benefits at an early age owing to a financial need, with one in three citing issues such as health problems or employment changes. But six in 10 respondents admitted that they didn't receive advice before making this key decision.

The MassMutual survey elicited responses from more than 600 Social Security recipients ages 70 and up.

2. Don't wait too long to start saving

Not saving early enough for retirement is the recurring top choice when respondents cite their top financial regrets, according to an annual survey by Bankrate.com.

It was cited by 18% of respondents in last year's poll, eclipsing not saving for emergency expenses (cited by 14%) and carrying too much credit card and other debts (10%). Bankrate will publish this year's results later this month.

Regrets about not saving early for retirement grow more pronounced with age, according to the study. Unfortunately, the older people get, the more difficult it is do anything about it by boosting incomes.

Meanwhile, younger adults often are more preoccupied with different priorities such as paying down student loans and trying to afford cars, homes and other big-ticket items.

"Retirement seems so far away, and there are more pressing financial needs" such as repaying student loans, said Dagmar Nikles, a retirement-plan specialist for investment giant BlackRock.

But eventually, retirement will come into focus for younger adults, too.

3. Don't be too conservative

Retirement planning is a long-term pursuit, often spanning three decades or more. This means young investors have the luxury of gravitating toward stocks and other growth assets without worrying about price fluctuations along the way. Unless you will need to cash out within a few years, growth assets are the sensible choice.

Still, it's not easy to avoid overreacting to those occasional jarring down days or to prolonged swoons that might last a year or two. That's why most people prefer to anchor a growth portfolio with bonds, cash instruments and other stable investments.

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"If you play it too safe, your retirement income won’t be enough to keep pace with inflation," said Dana Anspach, a certified financial planner with Sensible Money in Scottsdale. But if you're too aggressive, you're likely to react to market downturns by selling out when prices are low, she added.

In short, a balanced portfolio usually is the best option, especially one that starts out with riskier assets at earlier ages and grows more conservative over time. But older investors who might not tap their accounts for maybe a decade often can be more aggressive than they think.

4. Be smart about withdrawing retirement funds

Even if you get a decent start on retirement planning, you still can mess things up later. Aside from depleting your savings with early withdrawals, you can incur taxes and penalties and subject your Social Security benefits to taxes if you're not careful.

"Two common mistakes are taking Social Security at the wrong time or withdrawing money in a way that costs more in taxes," Anspach said.

Up to 85% of Social Security benefits potentially are taxable. "When you have other sources of income, such as a withdrawal from your IRA, that can result in more of your benefits subject to taxation," she said.

By planning ahead, you could time some of those IRA withdrawals to occur in years when you might be able to minimize the tax bite. In particular, retirees in their 60s often can reduce the tax bill by withdrawing and living on funds from IRAs while delaying  Social Security benefits until around age 70, when payments will be larger anyway. 

5. Have a financial cushion

Lacking a rainy-day fund wouldn't seem to be a retirement problem nor a regret but it can be, as not having emergency funds can trigger a chain reaction of negative consequences. In fact, that was a theme at a mid-May conference in Scottsdale hosted by the Financial Health Network, a group focused on helping lower-income individuals with their finances.

About half of people 50 and up have insufficient short-term savings, said Paolo Narciso, a vice president at the AARP Foundation. About 40% have unmanageable debt.

When people in this age group get hit with an unexpected expense such as big car repairs or medical bills, they might need to pull money from retirement accounts and thereby incur taxes prematurely or otherwise-avoidable penalties. They also might need to start taking early Social Security benefits, at reduced rates.

After not saving enough for retirement, not having an emergency fund was the No. 2 regret cited by respondents in the Bankrate survey.

This dovetails with a finding from another Bankrate study, which found too many older adults are imperiling their retirements by subsidizing adult children. Half of parents with adult kids said supporting them has impeded the growth of their own nest eggs.

More troubling, people 50 and up have amassed a sizable $290 billion of student loans of their own, noted the AARP Public Policy Institute, citing Federal Reserve data. That's one-fifth of the student-debt total, and it represents a fivefold increase over a decade and a half for people in this age group.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

This article originally appeared on Arizona Republic: 5 ways to avoid regret with Social Security, retirement planning