October 18, 2019
When I arrived at my first real job out of college, there was a lot of handshaking and nodding, but I specifically remember being pulled aside by the human resources administrator mid-day to review the company’s employee benefit package and complete my paperwork. Amid the jargon, I heard a few recognizable words: “health insurance,” “retirement” and “we recommend.”
Our conversation led me to enroll in the most popular plan among employees. And frankly, I was happy for her guidance. I could more easily land a rover on Mars than calculate the right type of insurance plan for my personal needs at age 22. Was there a class I missed in college?
I’ve been in the workplace for over 20 years now, and open enrollment still feels daunting. It’s that time of year again, and you’ll likely be receiving an email from your company’s human resources department about open enrollment for employee benefits soon.
Reality is few people have much comfort or skill in determining an appropriate benefits plan that aligns with their personal needs. But keep in mind that job benefits are an essential part of wealth planning. The two most important benefits — medical insurance and retirement savings — help to protect and strengthen your financial picture. Once you understand the basics, you might actually enjoy crafting a benefit plan that optimizes the offerings provided by your employer and fully meets your needs.
Choosing a health plan is one of the biggest decisions you’ll have to make as it not only impacts your near-term cash flow, but it could also have implications on your long-term physical and financial health. When determining the appropriate type of coverage, you’ll need to consider several factors:
Everyone will have different priorities, and since no two employee benefit packages look alike, you’ll have to do a little homework. Conduct a personal inventory of your needs and wants and then evaluate your plan options to determine which makes the most sense. For example, if you take a specific medication, one plan might cover more of the prescription cost than another plan. Some plans cover acupuncture and mental health visits while others do not. Plus, it’s practically guaranteed that your priorities will shift over time.
Before you analyze insurance options, it’s important to understand these key terms:
Now, here are the three most basic types of coverage you’ll see:
You must be enrolled in an HDHP to contribute to an HSA. When you enroll, you’ll specify how much money you want to contribute to this fund during the year. The maximum amounts for 2019 are $3,500 for individuals and $7,000 for families. Contributions will come out every paycheck, so when starting an HSA, it’s important to have cash reserves set aside until your HSA balance builds up.
An HSA provides a powerful opportunity for long-term savings. Here are the basic benefits of these plans:
Remember, not contributing enough to your HSA could leave you vulnerable if you have unexpected medical expenses. Some people with HDHP plans don’t seek medical care because they don’t have enough funds to pay the high deductible.
While saving money is great, consider the greatest benefit of some plans is the simple freedom to choose your own care provider. Having fewer restrictions on your health-care decisions may easily outweigh the affordability of a more restrictive plan. That’s why your lifestyle preferences and current health-care needs play the most important part in choosing a plan.
Employer-based retirement plans are a great way to save for retirement, allowing you to put aside more money, up to $19,000 in 2019, than an IRA which caps out at $6,000 this year. If an employer offers a retirement plan, it’s typically a traditional 401(k). But some employers are starting to offer Roth 401(k)s, which offer attractive tax advantages.
401(k) plans allow you to pull money from each paycheck and deposit it into an investment account. As an added bonus, many companies also offer a match on your savings. For instance, if your employer offers to match 50% of the first $10,000 you defer to the plan, they’ll contribute up to $5,000 to your retirement fund. This is an important part of your compensation and as a general rule, you should try to set aside enough to get the maximum match.
Note that in order to retain employees, some companies will make their match amount vest over a certain amount of time. This means that if you leave the company before the vesting period is over, they can keep the portion of their contribution that hasn’t vested. They can never keep any of the contributions you made or the growth of those contributions.
There are two main types of 401(k)s:
See To Roth or Not to Roth, to help you decide which option is best for you.
If you’re a public employee or work at a non-profit, you may have different options:
An interesting new feature being added to retirement savings plans is auto enrollment. This allows companies to automatically enroll eligible employees in their savings plan at contribution rates set forth in the plan documents. Employees must now actively choose to not participate. The idea appeals to the sense of “path of least resistance” or forced saving. The hope is that the administrative hurdle long cited as reason to put off saving will be turned around. Now, employees will find they don’t want to go to through the trouble of turning off their contributions. Be sure you understand if your plan will be doing this for you and factor it into your monthly budget. You will still have the option of adjusting the amount you defer.
Once your employer-sponsored retirement account is open, you’ll be provided a list of investment funds that you may buy with your savings. The first thing to consider when deciding what to invest in is determining your risk tolerance for your retirement funds. How would you feel if your portfolio dropped 20% in value?
Your risk tolerance will inform your asset allocation choice. Asset allocation is a measure of how much of one kind of investment you have as opposed to another, typically stocks and bonds. The more stocks you take on, the more risk and volatility you will experience. If you don’t plan to retire for another 30 years, it might make sense to hold a higher allocation (60% or 80%) to stocks (equities) in the account. If you know that retirement is closer on the horizon and you’re going to need those funds soon, you may want to consider an allocation with more bonds (fixed income) than equities.
It’s rare to see individual stock and bond holdings. This creates access to volatility that employers don’t like to be associated with. Therefore, the majority of what you’ll find in your plans will be mutual funds and occasionally ETFs. You will be able to set your asset allocation by combining individual funds or choosing a target date fund, which are described below.
Visit Morningstar.com to research each of the funds offered in your employer plan. The site will provide the fund cost, management fees (beyond the purchase price of the fund), its top holdings and its historical performance.
Another potential investing option will be target date funds. These are mutual funds that are actively managed to automatically re-allocate investments based on your anticipated retirement date. For example, if you buy a 2060 target date retirement fund today, you’ll get a fund with a much riskier allocation than a 2025 target date fund. As time goes by, the fund will change its allocation to become more conservative as you approach retirement.
As you can see, there’s a lot to consider for just health care and retirement benefits alone. Adding to the overwhelming choices, you may also be offered life insurance, disability insurance, flexible savings accounts for day care and health care, and more. But it’s really worth your time to read the materials and examine your options. With careful consideration and guidance (a wealth planner can help), you can use these valuable benefits to get steps ahead on a secure wealth plan.
Important disclaimer: Individual health care policies may differ from what is described in this article.
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