Retirement for Handicapped
March 7, 2006 10:47 AM   Subscribe

Please help with some early retirement advice: I am 35 and have a slowly progressive degenerative neurological condition. I would like to save money for the future because I'm not sure how long I will be able to work. I don't make a lot of money. I have a 401k at work, but what else would you recommend for someone in my situation.

I've thought about opening an IRA, but am not sure what kind to get. I don't want to be penalized for early withdrawals.

posted by spakto to Work & Money (19 answers total)
Roth IRA. You can withdraw your contributions at any time without penalty, since you fund the account with after-tax dollars. Your earnings will be penalized if you take them out early, BUT there is a provision to take them out without penalty if you become disabled. If you qualify, then there is no tax on the earnings.
posted by kindall at 10:49 AM on March 7, 2006

You could try ING Direct. They're an internet bank (FDIC insured) which offers 3.80% interest on savings accounts. There's no minimum amount, and since it's a savings account, no penalty for withdrawls. I have a friend who does financial consulting, and she recommends ING for moderate amounts of savings.
posted by vorfeed at 11:01 AM on March 7, 2006

I second the Roth IRA and add the following: Inside the IRA keep the money in a large index fund.
posted by tkolar at 11:05 AM on March 7, 2006

Max out the 401K first, _especially_ if there's employer matching.
posted by m@ at 11:07 AM on March 7, 2006

I would max out the 401K up to the max. employer matching requirements, the rest I would put into a Roth (especially if you are in the middle to low tax bracket right now).
posted by blackkar at 11:14 AM on March 7, 2006

If you're doing the savings route, HSBC online savings is 4.8%, a little better than ING Direct. I've had one for a few months and there hasn't been any hitches. I used to just keep it all in a Chase checking account and they kept charging random fees. So 4.8% beats -3% any day.
posted by lpctstr; at 11:16 AM on March 7, 2006

I assume from thinking of IRAs that you're in the US?

Presumably when-and-if you're no longer able to work, you'll be able to (with some fighting) get onto federal disability?

If that's so, how do savings interact with disability programs? Maybe they don't, and you just get whatever disability benefit you might otherwise get. But it would suck to save money and then have the feds effectively penalize you for it by reducing your disability payments.
posted by ROU_Xenophobe at 11:22 AM on March 7, 2006

Disability insurance. Life insurance (if you have dependents or a spouse).
Talk with a qualified fee-only financial planner for advice. $100 or so will buy you about an hour in most areas. You really can't afford not to.
posted by FergieBelle at 11:24 AM on March 7, 2006

WCityMike, the penalites are waived if the 401k holder is declared 'totally and permanently disabled' regardless of the age at which that happens. The tax implications would be the same as if the holder was retired.
posted by m@ at 11:29 AM on March 7, 2006

I believe - and you should check on this, since it's your money - that all of the available retirement plans in the U.S. allow you to withdraw your money without penalty if you become totally and permanently disabled.

Since you seem to be on that path, you should be able to choose freely among the various retirement plans. I would choose a pre-tax plan (not the Roth IRA, but regular IRA and 401k). You'll be able to withdraw the money when you're not working, so you'll pay no tax now, and very little tax at time of withdrawal, as opposed to the Roth, where you'll pay tax now at your regular rates.

You should also read up on private disability insurance, and the Social Security/SSI disability insurance.
posted by jellicle at 11:32 AM on March 7, 2006

m@ — given the circumstances he describes, I highly disagree with your advice. If he has a highly degenerative condition, why would he want to "max out" a pre-tax savings account which will penalize him for withdrawing his money any time over the next 30 years?

Not necessarily, WCityMike. The IRS does allow for hardship withdrawls without penalty under some circumstances.
You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

*You become totally disabled.
*You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
*You are required by court order to give the money to your divorced spouse, a child, or a dependent.
*You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
*You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

More info from Fidelity
What happens to my account if I become disabled?

If your disability meets the criteria set forth in the Internal Revenue Code, most plans provide that you become 100 percent vested in any money your employer may have contributed to your account, as well as any earnings, (if you're not already 100 percent vested). You may also be eligible to withdraw money from the plan.

However, given that both a 401k and an IRA are specifically designed for long-term investments, with conservative earnings, they may not be the ideal solution depending on what time frame the original poster is looking at. A CD (Bank of America offers a no-penalty one) may be something to think about, as would an annuity. (a life annuity, if you are able to get one- some companies will still offer them despite medical conditions at a higher premium, would perhaps be a better idea than anything else, as it will keep paying long after your own contributions are used up.)

Really, this is something to talk, in person, to a financial advisor about. Paying for a consultation now is completely worth it, as the answers all depend on how much is in the 401K, how much longer you expect to be able to work, and even what state you're located in.
posted by Kellydamnit at 11:43 AM on March 7, 2006

I would worry about the effect that taking regular IRA distributions would have on your income with regards to being eligible for federal programs. A Roth IRA distribution of contributions should show no income on your return.
Definitely talk to a fee-only advisor - write a list of questions and concerns to take with you.
posted by blackkar at 11:48 AM on March 7, 2006

I'm betting that you already know this, but I want to make sure, so...

Keep in mind that, when you are no longer able to work, you should be eligible for social security disability. The amount that you will receive each month in benefits depends on the amount you've paid in over the years. Given the nature of the social security beast, it would probably be a good idea to talk to an attorney specializing in such things and to do it before you actually stop working.
posted by Clay201 at 12:23 PM on March 7, 2006

Response by poster: Wow, thanks for all the advice. There's a lot of good info in there. Looks like it's time to call a financial advisor.

BTW my 401k is not matched by my employer. I work for the state and our retirement system is pretty good from what I'm told.
posted by spakto at 12:48 PM on March 7, 2006

Before thinking about investing anything, I'd make sure you're credit cards are paid off each month. You're not going to find an investment that'll pay you more than you're paying on any credit card debt.
posted by pwb503 at 1:28 PM on March 7, 2006

If it is available to you through your employer (at group rates and without requirements for a physical exam), *definitely* long-term disability insurance *and* (rarer these days) long-term care insurance, which can defray the costs of home nursing assistance later on.
posted by enrevanche at 1:54 PM on March 7, 2006

I am just curious, not knowing the nature of your degenerative neurological illness. Have you look at enhancing /developing those (marketable) skills that will be most avilable to you as your illness progresses. As your illness progresses your ability (as you know) to actively participate in life will be one of many important issues with which you will have to deal. Remaining employed (in some contributory capacity) can be quite important. I wish you well.
posted by rmhsinc at 3:29 PM on March 7, 2006

You need to speak with a lawyer and execute a healthcare power of attorney and a living will, at the very least. You should also consider setting up an inter vivos trust, that will hold all of your assets and name who you would like to act as trustee if you become incapacitated.
posted by MrZero at 5:28 PM on March 7, 2006

If you work for the state, they may have a very generous disability plan (depends on the state). Ask HR.
posted by clarahamster at 5:51 PM on March 7, 2006

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