4 Retirement Rules to Live By

Retirement means no longer dealing with the daily grind -- but having more freedom during retirement doesn't mean there are no rules to live by. Most retirees have limited incomes and concerns about making their money last -- which means that making a plan and setting guidelines can be essential.

To help ensure you'll be able to enjoy your retirement and escape financial disaster, make sure that you live by these four important retirement rules.

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1. Don't spend your savings too quickly

The No. 1 retirement rule to follow is to make your savings last. Retirement tends to be more expensive in the beginning -- when people are spending to enjoy life -- and in the end, when you incur healthcare costs. Unfortunately, if you've spent a fortune traveling the world, you may not have cash when a serious health issue comes along. It's imperative you have a plan so you don't find yourself broke at 85 -- and this plan must involve being strategic about money withdrawn from investments. 

Conventional wisdom centered around the 4% rule, which said you wouldn't run out of money if you withdrew 4% from investments the first year of retirement and adjusted upward annually based on inflation. Unfortunately, in a low interest rate market, the 4% rule puts you at risk of running short on cash. Instead, you may wish to limit withdrawals to 2.5% to 3% of savings. Alternatively, Required Minimum Distribution (RMD) tables from the IRS can guide withdrawals.

These tables dictate withdrawal rates based on life expectancy, and the Center for Retirement Research recommends using them as your guide. Because RMD tables from the IRS don't start until 70, the Center used IRS formulas to extrapolate backwards to age 65. According to the Center, these are the safe withdrawal rates at each age that you can use as your guide to determine your own withdrawal rate. 

Data source: Center for Retirement Research.

2. Always take your RMDs

Required Minimum Distribution tables from the IRS exist for a reason -- and it's not just to help you figure out how much you can withdraw safely. You must take RMDs from tax-advantaged accounts such as IRAs and 401(k)s during retirement. 

If you don't take RMDs starting at 70 1/2, you face a 50% tax on money you were supposed to withdraw, but didn't.  If you were supposed to withdraw $20,000 but failed to do so, you'd lose $10,000 in tax penalties. 

RMDs typically must be taken by the end of each calendar year. However, for your very first RMD, you have until the start of April in the calendar year after you turn 70 1/2.  If you turn 70 1/2 in 2018, you'd be allowed to wait until April 1, 2019 to take your first distribution.

While you must take RMDs each year, you have a choice as to when and how to structure withdrawals. You could take all of the money in one lump sum or make withdrawals throughout the year. 

3. Know how you'll cover healthcare costs

While your plans for retirement probably don't include dealing with a serious illness, most people face more health challenges as they get older. In fact, according to a Nationwide study, 1 in 3 retirees said health issues were interfering with retirement plans.

When you experience health problems, you may face both physical limitations and financial struggles. Unfortunately, many seniors aren't prepared to cover the costs of care because they erroneously believe Medicare provides comprehensive coverage. 

In reality, a senior who uses a lot of prescription drugs might need as much as $370,000 to have a 90% chance of affording care during retirement, according to a study conducted by Employee Benefit Research Institute. And that's factoring in a supplemental Medigap plan paying for some costs Medicare doesn't cover. 

Bottom line: You need a plan to pay for healthcare. This could include buying the most comprehensive insurance coverage possible and reserving some savings in case you or your spouse get seriously sick. 

4. Be prepared to need long-term care

Once you've lived to 65, there's about a 70% chance you'll need nursing-home care at some point. Nursing homes cost thousands, and Medicare and private insurance don't pay anything unless you qualify for specialized care in a skilled-nursing facility -- which most people don't. If you don't want to spend every dime you have on nursing-home care, you need a plan to pay for care in a facility or long-term care at home.

Options to cover these costs can include buying long-term care insurance -- which can become prohibitively expensive or come with coverage limits -- or working with an attorney to create a plan to protect assets while allowing you to qualify for means-tested Medicaid.

Medicaid pays for nursing-home care. While you can't qualify if you have more than a few thousand dollars, there are ways to structure ownership of wealth so you can get covered. You'll need to act before you need care if you hope to shield the maximum amount of assets through Medicaid planning, as Medicaid reviews five years of transactions to determine if you've made improper asset transfers in the years immediately before trying to qualify for coverage.

Planning ahead is essential

Each of these four key rules has one thing in common -- they're all aimed at protecting your savings. You've worked hard for your money -- your wealth should buy you financial security and serve as a legacy that you can hand down to loved ones.

By making smart and strategic choices, you can protect what you've worked for and live a comfortable life during your golden years.