Don’t Sink Your Retirement Ship While Battling Waves of Bills
Question: Due to severe illness, all of our savings and retirement funds are gone. We even used the money from the sale of our house to pay medical bills. So, in our late 50s, we are starting over with only one salary. How do we build up a retirement fund again? My husband’s employer does not make any contributions to employees’ 401(k) plans. Is this the best place for his retirement money? If not, what would you suggest?
Answer: Before answering your question, let’s take a moment for a public service announcement. Readers: Don’t let this happen to you.
Wanting to pay your bills is good and honorable, but you can take honor too far when you raid assets that generally are protected from creditors (your retirement funds and home equity) to pay debts that could be wiped out in Bankruptcy Court (such as medical and credit card bills).
When push comes to very hard shove, the hospital or credit card company can get along without your payments. How are you going to get along in retirement with no money?
The sad fact is that it may be too late to build up a substantial retirement fund on one income starting in your late 50s. Whether you need a substantial retirement fund, however, isn’t clear. If your income and expenses are low, you may be able to get enough to live on from Social Security (assuming one or both of you have been contributing all these years). If your income and expenses are high, you probably will have to continue working well past the usual retirement age or accept a significant reduction in your standard of living.
Contributing to a 401(k) is often a smart move even without an employer contribution. You also might fund an individual retirement account. Congress has raised the contribution limit for IRAs and Roth IRAs to $3,000 a person starting next year, and people 50 and older can contribute an additional $500.
Consider investing $25 in Ralph Warner’s book “Get a Life: You Don’t Need $1 Million to Retire Well” (Nolo Press, 2000). This inspirational book discusses how people can have a successful retirement without a lot of money as long as they have strong relationships, decent health and absorbing activities to keep them going. Warner’s premise is that even if you can’t have the retirement you planned, you still can have a retirement that’s full of fun and growth. Good luck to you both.
Unpaid Loan May Be Deducted as Bad Debt
Question: Three years ago, a friend borrowed money to be repaid in one year. On and off, she repaid part of the money at 10% interest. Her last payment was in February and she still owes me $500. She claims she can’t repay the balance left, even in small monthly installments. Her only asset is her house. Can I place a lien on the property and how do I go about it? Do I need to take this matter to small claims court first? She signed a note. Do I have any recourse at this point or is the money she owes me, as well as the friendship, lost?
Answer: One has to wonder what you would do to an enemy, if this is how you want to treat a friend. Perhaps there’s a future for you in corporate raiding or vehicle repossession.
You can find out what you want to know by reading “Everybody’s Guide to Small Claims Court” by Ralph Warner (Nolo Press, 2000). But you’d be a lot smarter to just leave it alone.
Loans to friends or family often turn into gifts anyway, and it’s hardly worth the expense and hassle to place a lien on her property or to go to small claims court.
You should be able to deduct the loan as a bad debt. Unpaid loans that aren’t related to a business can be entered as a short-term capital loss on a Schedule D; consult a tax advisor or tax guide such as “J.K. Lasser’s Your Income Tax” for details.
Whether the friendship is lost is up to the two of you. Presumably, you wouldn’t have lent her the money if you couldn’t afford to part with it. You simply could acknowledge that the last $500 now is a write-off and reassure her that you were happy to help in her time of need. Whether she buys that may depend on how much of your original collection plans you shared with her.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at money talk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://wwwlatimes.com/moneytalk.
