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Find your 'magic number'
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September 6, 2000: 11:14 a.m. ET
A financial pro takes your questions on how to retire comfortably
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NEW YORK (CNNfn) - How much will it take? You've heard the question, or asked it yourself. How much money will you need to retire comfortably when you're 55 or 60 years old?
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Douglas Flynn, a certified financial planner answers questions on Your Money's viewer mail segment.
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Douglas Flynn, a certified financial planner in New York, calculated that a 40-something who needs $60,000 a year will have to save a lot more than he thinks when you take into account inflation and taxes.
Flynn appeared on the CNNfn show Your Money recently and answered the following e-mail questions for CNNfn.com.
Question: My wife and I are both 47 and would like to retire at 55 or 60. We have built up a fairly good portfolio and have a nice mutual fund and a SEP-IRA. My question to an expert is: How much money do my wife and I need to have in order to retire reasonably comfortably? We need to have approximately $60,000 per year to be comfortable, so, how much do we need? What is the magic number?
Without more details I am assuming that you need $60,000 per year just from your investment portfolio. Therefore, I am not counting income from Social Security and other fixed pension sources. Therefore, if you use a hypothetical 7 percent distribution rate for income in retirement (realizing your return will be higher or lower, depending on your risk tolerance and investment allocation choices), the short answer is that you will need approximately $858,000 to provide $60,000 in annual income. The only problem is this does not at all count for inflation and taxes. That is why this is only the short answer.
The long answer needs to count in the purchasing power erosion that will occur during your lifetime, and the effect taxes will have on the various aspects of your portfolio.
Retiring at 55 or 60 does give you the potential to have a very long retirement lifetime, and as a result the actual amount of money you will need will probably be significantly higher.
In addition, retiring prior to the collection of Social Security can put a financial strain on a portfolio until this benefit kicks in for you, so you will need a specific plan of action to account for that.
Your individual "magic number" cannot be determined so easily without knowing a great deal more about your exact financial picture, your risk tolerance, and your thoughts and feelings. Ultimately you may decide that you need professional help in determining your exact "magic number" as there are so many variables.
Question: I am currently employed full-time and am past the regular and Roth IRA limits. I also have a consulting business that I run from my house. Can I open a SEP-IRA, and are there any limits to the contributions other than 15 percent of net profit?
You absolutely CAN open a SEP-IRA on your consulting income, as this type of income is treated completely separate from your full time position's W-2 wages.
You are correct in your notice of the limit to 15 percent of net profit for you contribution, up to $30,000. If you are interested in making a contribution to a Qualified Retirement Plan that is higher than the 15 percent a SEP offers, you may wish to consider the following potential option: Consider setting up a Money Purchase Plan (MPP) with a 10 percent mandatory contribution, and attach a Profit Sharing Plan (a.k.a. a Keogh, or P/S) for an additional 15 percent.
Although you will be required to continue the MPP yearly, the P/S plan is discretionary and you can choose to do 5 percent, 15 percent, 0 percent, or any amount you desire. This will enable you to put a higher percentage of your consulting income away tax-deductible, however, the maximum dollar limit remains $30,000.
Do you have a question about your retirement portfolio? E-mail your question to CNNfn.com's panel of experts.
Please consult your tax adviser for full details on all of the positives and negatives when comparing plan choices. In addition, please keep in mind that you can actually open and fund SEP contributions for 2000 through the time of filing your return in 2001. The MPP and P/S plans have to at least be OPENED by Dec. 31 2000, but you have until the time of filing your return to FUND them. You cannot open these particular plans for a prior year, as you can with IRA's and SEP-IRAs.
Question: Which hardship, in general, could one use to withdraw from an IRA without penalty? Loss of job, natural disaster which insurance doesn't cover, incurring big debt, bankruptcy?
Unlike many 401(k) plans, there aren't currently many "hardship" withdrawal features available to avoid the 10 percent early distribution (prior to 59 1/2) IRS penalty.
With that said, there are certain instances where you can avoid this penalty for IRAs. For instance, since 1998 you have been able to use IRA money for "qualified higher education expenses" and the 10% penalty will not be assessed. There is also $10,000 available from IRA money for first-time homebuyer expenses.
And, there is also a very complicated availability to certain unemployed individuals for "qualifying medical insurance premiums." You may wish to check out the IRS Web site and click on "Forms and Publications." It is a great source (it is actually THE source) of information for details on the various options. You should check out Rule 72(t) with all it's subsections, or speak with your tax adviser for details.
* Disclaimer 
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www.FlynnZito.com
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