Michelle: In two words -- a lot.
Most people don’t contribute the maximum allowed. You can contribute up to $17,500 for 2013 in a 401(k). And if you are 50 or older there’s a catch-up provision that allows you to contribute an extra $5,500. That means the overall limit for workers 50-plus is $23,000.
If that’s too much for you, at least contribute enough to qualify for your company’s maximum contribution match, if there is one.
Q: With the dismal interest rates on savings accounts the last several years, I’ve been struggling with whether my wife and I are ready to and should start investing our money. We both work, and we have about $50,000 in cash in an online savings account. That includes our emergency fund, as well as money set aside for home repairs, annual Christmas gift-giving, etc. I contribute to my Thrift Savings Plan, and my self-employed wife has a Roth IRA. We have a mortgage on our house with a recently refinanced low interest rate and comfortable monthly payments, and a new car with low monthly payments and low interest (0.9%). Finally, we started a 529 plan when our 2-year-old was born. I think that we have all of our fundamentals covered, so that we can start investing some of our surplus into non-retirement investments, something easy like an index fund from Vanguard or T. Rowe Price. What do you think? Do you see anywhere else the money should go first?
Michelle: I can’t tell you where to invest the money, but I can say that, yes, you have all financial ducks lined up just right. You have an emergency fund that also includes money you can use for the things in life that happen, such as unexpected car repairs. I call that “life happens” funds. You’re saving well for retirement and your child’s college fund. And your mortgage is reasonable.
You’re doing quite well compared to most. So if you want to grow your money, invest it -- because with the low interest paid on cash, money in a simple deposit account won’t keep pace with inflation.
But I will add one more thing. I would also take some of that money and make extra mortgage payments. Imagine heading into retirement with the single largest monthly expense gone – your housing expense. If nothing else, just make one extra monthly mortgage payment a year and you can knock several years off a 30-year-fixed loan.
Note: Earlier this month Stan Hinden, author of “How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire,” joined me for a chat online.
Hinden’s book was the Color of Money Book Club selection for April. One reader had a question for Hinden based on his advice about signing up for Medicare, and Hinden replies here.
Q: On page 156 in the section “Applying for Medicare” in the second sentence, [Hinden] states: “If you continue to work after you reach 65 and continue to have company health insurance, as I did, you should take Part A at 65 and wait until you retire to sign up for Part B.”
That seems quite clear. However, on page 157 he says: “If, like many people, you decide to retire when you reach your full retirement age and begin drawing your Social Security benefits, you must enroll in Part A at that time. You should also sign up for Part B and Part D at that time. You can notify the SSA anytime before you stop working or within eight months after you stop working that you want Medicare, and your Medicare benefits will begin almost immediately. Don’t delay. Delay could cost you money. If you wait 12 months or more to sign up for Medicare, your monthly premiums will go up. Part B premiums will rise 10 percent for each 12 months in which you could have enrolled but didn’t.”
After reading these two sections, my husband and I are totally confused. They seem to contradict each other.
If you continue to work after age 65 and have company health insurance will you be penalized for not signing up for Part B until after you stop working? When do the penalties kick in?
Hinden: If you are covered under a group health plan at work, you will not be penalized.
However, please be aware that the phrases “company insurance” or “group health plans” can cover a lot of territory. And when you dig into the meaning of “company insurance” and “group health plans,” you will find that certain types of companies and insurance plans qualify for the Medicare exemption while others do not.
Therefore, it would be worth a call to Medicare (1-800-MEDICARE (1-800-633-4227) to double check on whether your company group health plan qualifies for the exemption.
You also asked: “When do the penalties kick in?”
The answer is: There won’t be any penalties if, when you stop working, you enroll in Part A, Part B and Part D. You will have eight months to do so, but the sooner the better.
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