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Savings and Health

Question: I just finished graduate school and started my first real, full time job. I want to begin contributing towards retirement. My situation isn't as simple as many people my age, as I'm a 30-year old with several chronic health conditions. I'm currently able to work, but a downturn in any of my conditions could change that ability. I have two main concerns:

1) Contributing to a retirement account and then needing the money due to a reduced income due to my disability and having to pay an early withdrawal penalty.

2) I have no idea how much to contribute for retirement health insurance costs, or such costs if I have to retire prior to 65 (before I qualify for Medicare). I'm currently in such a high risk insurance category that it would be several thousand dollars per month IF any insurance company would insure me.

I'm unable to find any information on the web and doubt many retirement advisors deal with this type of concern. Thank you! Dawn

Answer: A lot depends on the income you're earning, of course. But let's start with retirement savings. Take full advantage of a 401(k), 403(b), or similar retirement savings plan at work if it offers a company match. When you look at the performance of a retirement savings plan at work, much of the gain comes from the company match. (And you can draw on that money after age 59 ½ without penalty if you need to pay for medical expenses before Medicare kicks in at age 65.)

You could use the rest of your savings money to open a Roth-IRA. Roth contributions are paid with after-tax dollars, so there's an upfront tax hit, but any gain from your investments is tax free. Contributions to a Roth can be a maximum of $4,000 a year; $5,000 if you're over 50.

But the real advantage for someone with your circumstances is that the Roth is both a retirement savings plan and a store of emergency savings. In an emergency, you can take out money from your Roth contributions without paying or taxes on it. You leave the investment gain in the portfolio alone.

Here's a hypothetical example: Let's say in 2005 you put $2,000 into a Roth, and in 2008 you need $1,000 to pay medical bills--and there is no other pot of savings. You could take out $1,000 from your Roth and not pay a 10% penalty or taxes to Uncle Sam on the withdrawal. Of course, the main drawback to this strategy is that you will earn less on your Roth savings. But sometimes that's a price worth paying.

Two quick thoughts on the healthcare front. If I were you, I would focus my job search and employment goals on employers who offer a good healthcare plan. In most cases, that means finding a government job, or working for a large national or multinational corporation. I don't how much you'll need to set aside for healthcare when you get older. By then, we could have universal health insurance--or not. My main message is that you have to save more than the average person to build up a financial cushion. And A Roth is one way to accomplish that goal.

02/12/08 by Chris Farrell

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Co-signing and Insurance

Question: I'm divorced with 2 children who have college loans on which I cosigned. I want to make sure that if anything happens (god forbid) that I don't end up paying for those loans. They total about $50,000. Should I buy term life insurance for them? I know this sounds cruel, but I'm about to retire from the teaching profession on a limited income. Christine

Answer: I answered a similar question a couple of weeks ago on the air. I do think having your children buy cheap term life insurance to cover the student loan debt in case of tragedy makes financial sense. It isn't cruel, either. It's just practical.

02/27/08 by Chris Farrell

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Early Retirement and Health Insurance

Question: My husband and I are planning on retiring at age 50 (we have approx 13 years left)...meaning we hope to quit our 8-5 corporate jobs and find something more fun perhaps working part time at the local greenhouse or golf course. Many articles in magazines or stories on talk shows focus on how much to save but no one ever discusses healthcare options for those of us who want to retire early and will be without Medicare until age 65. We suspect healthcare will take a chunk of change but don't know how much or even where to find individual coverage. Can you please provide some guidance. Peggy, Minneapolis, MN.

Answer: You're right that the deal-breaker to early retirement is usually health insurance. It's expensive. Early retirement is probably out of the question for two groups of people: those who can't afford to absorb expensive annual health-insurance costs until Medicare kicks in at age 65 and anyone with a serious medical condition, such as diabetes or heart disease, that makes it next-to-impossible to get decent coverage.

Assuming you don't fall into those two categories, you should shop around and learn everything you can about deductibles, co-pays, networks, out-of-network costs, and other nuances of health-insurance policies.

I'd look into high-deductible plans. Basically, the higher the deductible, the lower the premium. The most popular high-deductible plans are those with preferred provider organizations that give price breaks for staying within a network. Still, coverage can range from bare-bones (read cheaper) to reasonably comprehensive (read expensive).

Better yet, consider a health savings account. You use these tax-advantaged savings plans in conjunction with a high-deductible policy. For a family in 2008, the catastrophic insurance policy has a minimum deductible of $2,200 and an out-of-pocket limit of $11,200. The maximum a family can contribute into the tax-sheltered account is $5,800. HSA contributions are made with pretax dollars, and any unused money in the savings account is rolled over for future use. Withdrawals are tax-free so long as the money goes toward qualified medical expenses.

You could also check out professional associations, trade groups, and even chambers of commerce offer group health plans to members, but they will probably be more expensive than an HSA or a high-deductible plan.

05/07/08 by Chris Farrell

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Retirement Savings vs. Life Insurance

Question: I'm 56 and my wife and I together make around $80k and both contribute to our company matched 401Ks. I plan to retire at age 70. My insurance agent is suggesting I stop contributing to my 401K and instead buy a "Permanent Life" policy of $250k which he says will pay out better than if I stayed in the 401K (the company matches 50 cents on the dollar up to 6%)by spending down what I already have and spending down the dividends in the insurance policy. Is this possible? Is buying Permanent Life Insurance considered a good investment? Dennis, Silverthorne, CO.

Answer: I have a very simple point of view toward questions like this: When a company matches half of your contribution into a retirement savings plan you are outperforming over the long-haul Warren Buffett, George Soros, William Gross, and any other legendary investor of the past half-century. Why would you give up such a superior investment track record?

Financial planners disagree on many things, such as the cost and benefits of actively managed investment funds versus passively managed index funds. But most if not all would agree with me that everyone should take full advantage of their retirement savings plan at work--as well as IRA, Roth-IRA, SEP-IRA, or comparable products if you qualify--before even considering putting money into a cash-value life insurance product. Cash value life insurance, such as whole life, universal life, and variable life is not a retirement plan.

I'd stick with your 401(k).

That said, you should evaluate your need for permanent life insurance as a distinct financial planning question. For instance, at your age do you still need life insurance? If so, how much? Does your company offer a group policy? Is it enough, and if it isn't, how much more insurance do you need? Compared to permament life insurance, would it be better for you to invest the potential life insurance premiums in a low-cost tax-efficient taxable account, such as in the S&P 500--or not? These are the kinds of questions I'd pursue before buying a policy.

05/21/08 by Chris Farrell

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