Sep 8, 2016 4 min read

This is the final installment of a three-part series on retirement planning.

Determining the amount of retirement income you’ll need is the most important step in retirement planning. For many years, there were two common thoughts about retirement , which are probably not true today.

The first was you would only need 70 to 80 percent of the income you earned while working after you retired. The second was your taxes would be lower after you retired so you would have more purchasing power from the income you deferred while working.

The idea you would need less income was you would not have to commute to work, eat meals away from home and buy clothes or incur other work expenses. But the truth is you have more time when you quit working and probably have a bucket list of things you want to do. Many of these things cost money.

Often retirement comes in three phases. The first is what I just described: You are healthy and want to be very active. The second stage may be in eight to 10 years. You are starting to slow down, and have already achieved many new challenges. The third phase is when your health begins to slow and you need to be more careful.

Taxes may very well be higher when you retire. The United States has a large national debt and current tax rates are at historic lows. Do not be surprised to see tax rates rise. If you were a good retirement saver, you will have to soon start using that money and paying taxes on it. Make sure you use your money in the most tax efficient way.

Once you have an idea how much you will need, you can figure out how to produce it. Social Security is one very important income source, and we will discuss it in more detail in the next column.

Many people wondered how much of their money they could spend each year and not run out of money during retirement. In 1994, William Bengen and Morningstar did a study to determine a safe withdrawal rate. They concluded that most of the time, you could withdraw 4 percent plus an index for inflation and probably not run out of money if you retired at age 65.

This means if you wanted $30,000 per year from your investments, you needed to save $750,000. This is a lot more than many people have in their 401(k). If you think about it, taking 4 percent without inflation coverage would last about 25 years with no earnings growth. Many people used this for income planning guidance.

In 2013, Morningstar revisited the rule and said it needed to change it to the 2.8 percent rule. The reasons for the change were that interest rates were so low and the stock market so volatile. Many seniors had relied on CDs for their safe money. Rates have been near zero for many years. The stock market has already experienced two crashes in the first 16 years of this century.

If you need to withdraw money from the market when it is down, you can get wiped out by sequential risk. Morningstar felt these two increasing risks could cause you to run out of money during retirement, so it lowered the suggested withdrawal rate to 2.8 percent. If you still needed $30,000 per year, you would have to save $1,071,429.

These rules do not guarantee you will not run out of money, but they do give you some guidance to consider. There are new ways to guarantee this income and the good news is it takes significantly less than either of the above examples. We will talk more about it in a future column.

Remember, Social Security planning is very important to help offset some of your retirement needs.

Most people make decisions without knowing the facts, and this can be a huge mistake. Your retirement can be much more enjoyable with the right plan.

Gary Boatman is a Monessen-based certified financial planner. He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com