Dear Liz: I am 49, single, with no kids. Until about three years ago, I wasn’t even sure how much credit card debt I had. I had less than $200 in savings and I was just plugging along making minimum payments. It turns out I had over $14,000 in credit card debt and $12,000 in student loan debt. The credit card debt was accumulated not from extravagant purchases but rather from living in an expensive city and trying to pursue a dream career. (I worked only three days a week in my “day job” for about 12 years.)
My living expenses have always been modest, but I made a budget, lived even more frugally, and made large monthly payments. In the process I also cashed out my small 401(k), as I have done a couple of times previously. Fast-forward to now — my credit card debt is paid off, my student loan is paid off, I have about five months of living expenses in savings and a reasonable annual income of $60,000. I have no retirement savings, though. What is my next best step to get money accumulating for my old age?
Answer: You’re to be congratulated for taking charge of your financial life, but it’s unfortunate you sacrificed your 401(k) to do so. It rarely makes sense to cash out retirement funds to pay debt. The interest you saved is typically far outweighed by the taxes, penalties and lost future tax-deferred returns you incurred by tapping your 401(k) prematurely.
Fortunately, the budgeting skills you learned will come in handy now that you’re focused on saving for retirement. Continue to make large monthly payments, but direct the money into your 401(k) if you still have one or an IRA if you don’t. If you max out your tax-deductible options, you can continue to put money into a taxable brokerage account.
You should plan to continue working as long as possible and to delay starting Social Security, preferably until your benefit maxes out at age 70. Social Security is likely to be your largest source of income, so the bigger your check, the more comfortable your ultimate retirement will be.
Also, take steps to protect and enhance your biggest current asset — your ability to earn money. Many people are derailed financially in their 50s by unexpected layoffs and health problems. You can improve your chances of being able to earn well into your 60s by taking good care of yourself, investing in new skills and trying to be a top performer at work.
Redirecting a 529 college savings plan
Dear Liz: Years ago when my children were young, we established 529 college savings plans for them. Unfortunately, both children ended up in the wrong crowds and never entered college. We still have the funds. What are our options? We do have a grandson now; would it be possible to change the beneficiary?
Answer: Yes. You can change a 529 plan’s beneficiary without triggering a tax bill as long as the new beneficiary is a “qualifying family member.” By the IRS’ definition, that includes the original beneficiary’s child or other descendant. (Qualifying family members also include spouses and siblings, parents, in-laws, uncles, aunts, nieces, nephews and cousins.)
Signing up for Medicare
Dear Liz: Is it mandatory to sign up for Medicare at age 65, and how is it paid for? I’m 64, don’t have any assets and I’m not working (I’m living with a friend for free). I’d like to wait until 70 to collect Social Security. Is that possible? Someone just told me that I have to sign up for Medicare, and to pay for it, I have to sign up for Social Security. Is that true?
You’re not required to get Medicare at 65. You should, however, at least sign up for Medicare Part A. Part A is the portion of Medicare that’s free and covers hospital visits. You sign up for Medicare through Social Security, either online or in a Social Security office, but you don’t have to start your Social Security benefit to do so.
The other parts of Medicare — Part B, which covers doctor’s visits, and Part D, which covers prescription drugs — require paying premiums, but you can pay those without signing up for Social Security. Some people are confused about this, because most people who get Medicare have those premiums deducted from their Social Security checks. But that’s not required.
Liz Weston, Certified Financial Planner®, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.