5 Retirement Rules to Live By

During retirement, you'll have a lot more freedom. You won't have to answer to a boss anymore, or meet important work deadlines.

But just because your hours are your own doesn't mean you don't have to live by some rules. In fact, there are five key rules you need to follow as a retiree so you don't end up in dire financial straits. Here are those five rules, which apply no matter who you are or how much money you have set aside for your retirement: 

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1. Have an emergency fund

Emergencies don't stop just because you no longer have a job. Appliances and cars still break, roofs still leak, and unexpected doctor visits still happen. And if you don't have the money for them, this could be a big problem.

The last thing you want is to get deeply into debt during retirement, or to be forced to sell investments before you're ready because you need to cover a financial shortfall. You should have several months of living expenses saved up so when a big issue arises, you won't put yourself at risk of going broke by decimating your retirement accounts. 

Ideally, you'll have three to six months of living expenses in cash set aside before you leave the workforce. If you do, and you need to spend money from your emergency fund, cut your spending and save to replenish your fund as quickly as possible. If you're already retired and don't have an emergency fund, make this your top financial goal. 

2. Know the RMD rules

When you have a 401(k) or an IRA, you're going to have to start making withdrawals at some point, even if you don't actually need the money. That's because the law says you can't just leave your cash to grow in these tax-free accounts forever. There are rules for required minimum distributions (RMDs) that mandate you begin withdrawing money when you hit 70 1/2 years old.

The specific amount you need to withdraw should be calculated using the IRS required minimum distribution worksheet. Be sure to understand what's expected of you and make the withdrawals in a timely manner. Otherwise you could be forced to pay a penalty equaling half the amount you failed to withdraw on time. 

3. Don't withdraw too much money too fast

While you must withdraw some of your retirement nest egg starting after your 70th birthday, that doesn't mean you should be making big withdrawals. In fact, you should limit your withdrawals to a reasonable amount because when you take money out, it's no longer there to help your wealth grow.

If you draw down your accounts too fast, this significantly increases the chances you'll end up broke with no investments late in your retirement -- when you're more likely to have the most expensive health issues and when working is impossible. You need to leave enough principal invested so your account can earn reasonable returns and you'll have a nest egg that lasts for the long term.

There are lots of ways to figure out the appropriate amount of money to withdraw. Traditionally, experts recommended a 4% rule wherein you'd withdraw 4% of your principal balance in the first year of retirement and then increase your withdrawal amount by the rate of inflation each year thereafter. But there are concerns you could run out of money with this approach, so you may want to adopt a 3% rule instead -- or use RMD tables from the IRS to determine an appropriate withdrawal amount. 

4. Take steps to stay healthy

Healthcare is one of the single biggest expenses seniors face, and the costs often come as a major shock to retirees. Unfortunately, when you need health services, you have no choice but to pay for them -- and there are lots of services Medicare doesn't cover that you'll need to pay for out of pocket. 

Putting money into a dedicated account, such as a health savings account, is a good way to save money for care as a senior. But the best way to save a fortune is to do everything you can to stay healthy and avoid costly medical issues. Sometimes, it's not possible to prevent an illness through lifestyle change. But evidence has shown that regular exercise, eating right, and getting preventive care can reduce the chances of costly illnesses or make some illnesses easier to treat. 

You have nothing to lose by trying to stay healthy, and if doing so saves you a little money (or a lot) in the long run, that's all the better. 

5. Don't accept financial obligations you can't fulfill

When you're retired, requests for your financial help often don't retire with you. In fact, you may have younger relatives -- especially children -- who still rely on you. It can be hard to say no to your loved ones, but you don't do them any favors by impoverishing yourself and jeopardizing your retirement by giving them money you can't afford to lose. 

Giving money to adult kids is just one financial obligation you may not be able to afford to take on. You may want a vacation house or a sailboat to enjoy in your golden years, or your spouse may be dreaming of a big RV. But unless you're 100% confident you can take on a financial obligation without the payments putting your retirement at risk, just say no. There's nothing that you could buy that's worth running out of money in your late 80s. 

Following these rules will help you be more secure in retirement

It may not be fun to say no to family members, to hit the gym as a senior, or to limit your withdrawal rate. But when you make smart choices and follow these simple rules, you can maximize the chances your money will last and you'll stay comfortable during retirement. That's definitely worth the effort.