If you expect to retire next year, you can be very excited to start this new phase of life. But the wrong moves on your part can turn a happy period into a miserable one. With that in mind, here are some major retirement mistakes to avoid in 2021.
1. Don’t go on a budget
After you retire, you can start living on a combination of sources of income – taken from retirement plans, social security and perhaps, if you’re lucky, a pension. At the same time, your options for obtaining additional income streams may be limited, especially if you have health problems that prevent you from getting a part-time job. That’s why it’s important to start retirement with a well-thought-out budget – one that accounts for your recurring, sporadic expenses, such as annual insurance premiums, if you’re still paying, or quarterly property taxes on your home.
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Having a budget to follow will help you keep your spending under control so you don’t overdo it. It will also help you identify ways to reduce your cost of living as a retiree.
2. Not planning taxes
Many seniors are shocked to learn that a number of important sources of income are subject to taxes. This includes pensions (most of the time), withdrawals from traditional retirement plans (withdrawals from a Roth account are not taxable) and, depending on your total income, Social Security benefits. Forgetting taxes can overwhelm your budget and create a real financial crisis, so find out what your tax burden looks like in advance, and if you are making substantial withdrawals from a retirement plan, be prepared to make estimated tax payments to the IRS at a quarterly.
3. Do not protect a HELOC if you are able to obtain a
You can rely heavily on your retirement plan to earn income when you are no longer working. But, given today’s uncertain economic climate, we cannot rule out the possibility of a major stock market crash next year. Now, ideally, you will have enough of your portfolio in safer investments so that this is not a problem, but it still wouldn’t hurt to guarantee a source of backup income to give you the option of leaving your IRA or 401 (k) alone completely. And in that regard, a home equity credit line, or HELOC, is a good bet.
With a HELOC, you don’t borrow money right away. Instead, you guarantee a line of credit from which you can withdraw as needed, usually within five to 10 years. Of course, if you don’t own a home or don’t have capital in your home, then a HELOC will not be an option, but many retirees consider their homes to be their greatest asset and, if that is your case, a HELOC is a good bet.
The last thing you want is to take some wrong steps that make retirement a stressful time in life. Avoid the above mistakes at all costs and, hopefully, you will make the most of this new phase.