October 31, 2005 edition, By Steve Dinnen
Q: How much should one have saved when it becomes mandatory to start taking money out of an IRA? What would be a reasonable amount for a comfortable retirement which would include a cruise once a year and account for taxes, home insurance, a car, gasoline, food, and inflation? Would $1 million cover all that? All my relatives are over 100 years old and I need to think in the long term. And staying independent is important.
A: A million dollars might sound like a nice, round – and precise – figure. But before determining how much you need to have saved, Tony Proctor, a certified financial planner from Wellesley, Mass., says that you must calculate how much you plan to spend each year. And you must calculate all of your sources of retirement income, such as Social Security and pensions.
Someone who plans to spend $150,000 per year in retirement, and who only has Social Security to offset their spending, will need much more than $1 million in the bank, Mr. Proctor says. But that amount would be a fortune to someone who only spends $40,000 per year and has Social Security income of $20,000 per year.
The key to determining a reasonable amount to have saved is knowing your "annual cash flow need," he says. Proctor defines that as the difference between your spending and your sources of income.