When a medical crisis empties retirement funds
A 66-year-old has to start over after an illness
Dear Maturing Loans,
Help! I am 66-year-old widow. I work as the COO (for the past nine years) for a small nonprofit that has a 403(b) retirement plan for its employees. My account has only $2,000 in it at present due to emergency withdrawals last year to pay some medical debt. Starting next month, I will have $300 per month deducted from my payroll check and deposited in the plan. My salary is $72,000 annually. Thanks to secondary insurance that paid me directly, I now have $4,000 in my savings account that is available for investment. Also, I started receiving Social Security payments of $1,500 each month, but I do have some minor credit card debt that I'm carrying as well. I love working and don't intend to retire any time soon; however, I may have no choice in the matter if my health changes. Assuming that my health holds, what can I do to build dollars? -- Donna
You're on the right track. Your positive attitude and motivation will take you far. What you need to do is build a plan to take you through the rest of your life. This plan should balance your wants and needs, examine your budget, keep your interest costs down, and allow you to save. While this may seem like a daunting task, each piece is complementary.
First and foremost, if you do have any credit card debt, make sure you have paid down all of your credit cards so that you are not incurring any interest costs. Every dollar you pay in interest cost reduces dollars available for you to save for the future. But that doesn't mean throw your credit cards away.
There are rewards cards that can help you out with cash rewards for dining and shopping. You just need to be smart about how you use these cards by placing all of your purchases on your cards and paying them off in full each month. This will help you utilize your dollars and give you the protection you need by using your available credit.
This should be done after you have carefully examined all of your expenses and determined that you are not making purchases in areas that are unnecessary. By reducing your expenses and using reward points for purchases, you will free up extra dollars for your investments. For example, if you are making $30 payments today on a credit card and you pay $5 on the balance in interest cost, by eliminating this debt and using reward points to pay for this purchase in the future you save; $30 payment, $5 interest cost, and $30 from your checkbook because your rewards paid for the purchase. This equals $65 in savings on a $30 payment.
It is important that you know how much you need to save in order to reach your goals. Given your age and the fact that you depleted your savings and are just starting over again, you need to save every penny. No need for a calculator here. The answer is simple: Shove every dollar into your 403(b) that you can.
For 2008, the 403(b) contribution limit for most people is $15,500 from your salary. But since you are over 50, you are eligible to add an additional $5,000 for this year. That means that the total you can contribute from your salary is $20,500. Here's the good part: The total contributions between yourself and your employer can be up to 100 percent of your eligible compensation (please see your employer and your CPA to calculate this number) up to $45,000.
You also need to sit down with a certified public accountant about your Social Security benefits and make sure they are not being taxed in such a way where it would make more sense to defer them to a later date.
There is a lot of room in that 403(b) for you to save; plus, 403(b) contributions can be made with pre-tax dollars, which means you get to save on taxes just for contributing! Taxes will be due when you start taking withdrawals. If company offers a Roth 403(b), then your savings will not reduce your taxes today, but the funds from a Roth 403(b) can be withdrawn free of tax in the future.
Investing is a personal matter, but at this stage of your life you need both stability and growth. That doesn't mean go hog wild, but get together with your financial professional and start building a diversified portfolio of exchange-traded funds (ETFs) and mutual funds that suit your needs. Focus on creating a good balance between growth and stability in your portfolio.
Keep the positive attitude, budget to save, keep the credit costs down, use your rewards points, stuff that 403(b), build a well-balanced diversified portfolio and have fun doing it.
See you back here next week to answer more questions.
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