It’s that time of year again – many companies are opening the door for benefits enrollment. This is a good reminder for you to not only check in on your current benefit elections, but also to realign your overall saving strategy. Open enrollment usually focuses on switching up your health care plan – which is important. However, you may have many more savings options open to you through your employer that reach beyond health care coverage.
It’s that time of year again – many companies are opening the door for benefits enrollment. This is a good reminder for you to not only check in on your current benefit elections, but also to realign your overall saving strategy. Open enrollment usually focuses on switching up your health care plan – which is important. However, you may have many more savings options open to you through your employer that reach beyond health care coverage.
DEVELOPING A SAVING STRATEGY
Developing a sound saving strategy doesn’t have to be difficult. I recommend that most people follow a similar savings hierarchy when deciding where their dollars need to go.
- #1 Priority: Building an emergency fund with 1-6 months of living expenses.
- #2 Priority: Save 15% of your after-tax income for retirement. Contribute enough to your employer plan (401k,403b, 457, etc.) to meet your employer’s match. Then, proceed to max out an HSA. After that, if you, start contributing to Roth IRA. If you’ve maxed out your HSA and Roth, head back to your employer plan to save the rest. If you’ve maxed your HSA, Roth, and Employer plan – we need to talk.
- #3 Priority: Save 5% of your after-tax income for stuff you want. This can be anything! Vacation? Sure. New home? Save to your heart’s content. Prioritize your “want” list and start squirrelling away 5% of your after-tax income to get you there.
COMPANY RETIREMENT PLANS
Depending on the kind of company you work for, you could be contributing to a 401(k), a 403(b), or a 457(b). Open enrollment is important for company retirement plans because it prompts you to check in on a few things:
- How much you’re currently contributing. Many people pick a contribution number that sounds good, or one that they read was “correct.” But now is the time to adjust your contribution to make sure you’re getting your employer match and you’re staying on track to meet your needs in retirement.
- If your allocation is still correct. Risk tolerance changes with time, and you need to keep an eye on how things in your portfolio are balanced. If you don’t have a handle on your Risk – find your Risk Score here and we’ll help you design an allocation.
- Check your company stock exposure. You might be surprised to know that a lot of companies match your contributions to employer plans in the form of company stock. This isn’t all bad – but if your company takes a financial downturn, you don’t want all of your assets to be tied up in their stock. Find out how they match your contributions, and what other stock you hold in the company. I recommend keeping ANY holding in your portfolio to under 20% of your overall allocation. If you find yourself with more than 20% held in your company’s stock, talk to a professional to determine the best course of action.
In 2017, the maximum you could contribute annually to an employer retirement plan (if you were under 50) was $18,000/year. That’s a lot – and I’m going to venture a guess that nobody’s maxing that out. You don’t have to, but it should encourage you to look at whether or not you’re contributing enough to get your employer’s match or 15% of your income. NOTE: If you’re a high-income earner, or are enrolled in an income-based repayment plan for your Student Loans, a workplace plan may be one of the only ways to decrease your Adjusted Gross Income.
INSURANCE CHECKS
Insurance isn’t exactly a savings vehicle offered by employers – but it does pay to make sure everything’s updated. Aside from making sure your health insurance coverage is in line with what you need (and that you’re not overpaying), I recommend checking to make sure your beneficiary information is up to date on health and life insurance. Although you’re not actively growing wealth with this step, you will be saving your loved ones time and money by making sure their information is correct.
HSAs AND FSAs
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both valid savings options. There are a few clear differences between these accounts, but their purpose is the same: to put money aside to cover out-of-pocket medical expenses. This can include copays, hospital visits, prescription costs, and everyday household medical supplies (like Band-Aids or cold medicine). You can also use them to cover future medical expenses – like if you’re planning on having a baby, or you want to prepare for the inevitable spike in health care costs during retirement.
The obvious positive of HSAs and FSAs is that they’re both tax-friendly. All the money you contribute to these accounts is pre-tax. That lowers your total taxable income, which reduces the total amount of taxes you need to pay. Basically, you get to take home more of your hard-earned cash in your paycheck by putting a little bit of the money into your HSA or FSA upfront to use that money for medical expenses – which you’d probably need to do at some point anyway.
I mentioned that there are a few key differences that separate HSAs and FSAs. Here’s what you need to know:
- An FSA is an employer-established account. You can only open an FSA through your employer – and you can’t take the funds with you should you leave the company. This isn’t a huge deal if you’re not planning to make a career shift, but should be a consideration.
- Some FSAs don’t allow you to “roll over” your account balance. Basically, this is a use it or lose it account. If, by the end of the year, you don’t use the money you saved – it’s gone. That being said, they often allow you to roll over $500 through March of the following year.
- HSAs are for high deductible health care plans only. You can’t qualify for an HSA if you aren’t enrolled in a high deductible health care plan.
- HSAs aren’t always employer-established. While you can access an HSA through your employer, you don’t need to. Many health care agencies offer HSAs with high deductible plans outside of your company.
- HSAs do allow you to “roll over” your account balance. That’s right – you can roll over your account balance year-to-year without an issue.
There are contribution caps that come with both accounts – but they’re still an excellent savings option.
TAKE ADVANTAGE OF ALL OPTIONS
Some companies go so far as to offer their employees transportation saving accounts, and dependent care flex spending accounts. See if your company has these options! If you’re already going to be incorporating these qualifying expenses into your budget, it pays to use these accounts and save money on your taxes.
Open enrollment only comes around once a year, so it’s important to sit down and really weed through your elections. There’s a lot of money to be saved by being aware of what your company has to offer and whether you’re taking full advantage.