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.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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