If you're hoping to retire in the coming year, you may be very excited to kick off that new stage of life. But the wrong moves on your part could turn an otherwise happy period into a miserable one. With that in mind, here are a few big retirement mistakes to avoid in 2021.
1. Not going in with a budget
Once you retire, you may start living on a combination of income sources -- retirement plan withdrawals, Social Security, and maybe, if you're lucky, a pension. At the same time, your options for getting your hands on additional income streams may be limited, especially if you have health issues that prevent you from being able to hold down a part-time job. That's why it's important to kick off retirement with a well-thought-out budget -- one that accounts for your recurring expenses as well as sporadic ones, like annual insurance premiums, if you're still paying them, or quarterly property taxes on your home.
Having a budget to follow will help you keep your spending in check so you don't go overboard. It will also help you identify ways you may be able to lower your living costs as a retiree.
2. Not planning for taxes
Many seniors are shocked to learn that a number of key income sources are subject to taxes. These include pensions (most of the time), traditional retirement plan withdrawals (withdrawals from a Roth account aren't taxable), and, depending on your total income, Social Security benefits. Forgetting about taxes could upend your budget and create a real financial crunch, so figure out what your tax burden looks like up front and, if you're taking substantial withdrawals from a retirement plan, prepare to make estimated tax payments to the IRS on a quarterly basis.
3. Not securing a HELOC if you're able to get one
You may rely heavily on your retirement plan to provide income once you're no longer working. But given today's uncertain economic climate, we can't discount the possibility of a major stock market crash in the coming year. Now, ideally, you'll have enough of your portfolio in safer investments so that won't be an issue, but it still wouldn't hurt to secure a backup income source to give yourself the option to leave your IRA or 401(k) alone completely. And in that regard, a home equity line of credit, or HELOC, is a good bet.
With a HELOC, you don't borrow money outright. Rather, you secure a line of credit you can draw from as needed, generally within a five- to 10-year period. Of course, if you don't own a home or lack equity in yours, then a HELOC won't be an option, but many retirees regard their homes as their largest asset, and if that's the case for you, a HELOC is a good bet.
The last thing you want to do is make a few bad moves that turn retirement into a stressful period of life. Avoid the above mistakes at all cost, and with any luck, you'll enjoy this new phase to the fullest.