Objective information about financial planning, investments, and retirement plans

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

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Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2016 the maximum contribution to a 401(k) plan is $18,000 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email.

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401(k) Fee Disclosure and the American Funds

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With the release of the Department of Labor’s fiduciary rules for financial advisors dealing with client retirement accounts, much of the focus has been on the impact on advisors who provide advice to clients on their IRA accounts. Long before these new rules were unveiled, financial advisors serving 401(k) plan sponsors have had a fiduciary responsibility to act in the best interests of the plan’s participants under the DOL’s ERISA rules.

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Starting in 2012, retirement plan sponsors have been required to disclose the costs associated with the investment options offered in 401(k) plans annually.

As an illustration, here’s how the various share classes offered by the American Funds for retirement plans stack up under the portion of the required disclosures that deal with the costs and performance of the plan’s investment options.

American Funds EuroPacific Growth

The one American Funds option that I’ve used over the years in 401(k) plans is the EuroPacific Growth fund.  This fund is a core large cap foreign stock fund.  It generally has some emerging markets holdings, but most of the fund is comprised of foreign equities from developed countries.  The R6 share class is the least expensive of the retirement plan share classes.  Let’s look at how the various share classes stack up in the disclosure format:

Share Class Ticker Expense Ratio Expenses per $1,000 invested Trailing 1 year return Trailing 3 year return Trailing 5 year return
R1 RERAX 1.59% $15.90 -10.54% 1.77% 0.89%
R2 RERBX 1.57% $15.70 -10.55% 1.79% 0.90%
R3 RERCX 1.13% $11.30 -10.13% 2.24% 1.37%
R4 REREX 0.84% $8.40 -9.89% 2.55% 1.66%
R5 RERFX 0.53% $5.30 -9.60% 2.86% 1.97%
R6 RERGX 0.50% $5.00 -9.56% 2.90% 2.01%

3 and 5 year returns are annualized.  Source:  Morningstar   Data as of 4/30/2016

While the chart above pertains only to the EuroPacific Growth fund, looking at the six retirement plan share classes for any of the American Funds products would offer similar relative results.   

The underlying portfolios and the management team are identical for each share class.  The difference lies in the expense ratio of each share class.  This is driven by the 12b-1 fees associated with the different share classes.  This fee is part of the expense ratio and is generally used all or in part to compensate the advisor on the plan.  In this case these would generally be registered reps, brokers, and insurance agents.  The 12b-1 fee can also revert to the plan to lower expenses. The 12b-1 fees by share class are:

R1                   1.00%

R2                   0.74%

R3                   0.50%

R4                   0.25%

R5 and R6 have no 12b-1 fees.

Share classes matter

The R1 and R2 shares have traditionally been used in plans where the 12b-1 fees are used to compensate a financial sales person.  This is fine as long as that sales person is providing a real service for their compensation and is not just being paid to place the business.

With all of the publicity generated by the new DOL fiduciary rules one has to wonder if the expensive R1 and R2 share classes might go by the wayside at some point

If you are a plan participant and you notice that your plan has one or more American Funds choices in the R1 or R2 share classes in my opinion you probably have a lousy plan and you are overpaying for funds that are often mediocre to poor performers.  It is incumbent upon you to ask your employer if the plan can move to lower cost shares or even a different provider. The R3 shares are a bit of an improvement but still pricey for a retirement plan in my opinion. That evaluation has to be made in the context of the plan’s size and other factors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

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Is a $100,000 Per Year Retirement Doable?

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Is a $100,000 a Year Retirement Doable?

A 2013 New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be.  While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think.  That said I wanted to take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years.  This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool.  At you own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule.  This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds

Annual income

Retirement account withdrawals

$40,000

Social Security

$40,000

Need

$100,000

Shortfall

$20,000

 

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide.  Here are some ways this gap can be closed:

  • If they have significant assets outside of their retirement accounts, these funds can be tapped.
  • Perhaps they have one or more pensions in which they have a vested benefit.
  • They may have stock options or restricted stock units that can be converted to cash from their employers.
  • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
  • If they were business owners, they might realize some value from the sale of the business as they retire.
  • If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
  • It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

The scenario outlined above is hypothetical but very common.  As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

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6 Investment Expenses You Need to Understand

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Investment expenses reduce your investment returns. While nobody should expect investment managers, financial advisors or other service providers to offer their services for free, investors should understand all costs and fees involved and work to reduce investment expenses to the greatest extent possible.

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Here are 6 investment expenses you need to understand in order to maximize your returns.

Mutual fund and ETF expense ratios

All mutual fund and ETFs have expense ratios. These fees cover such things as trading costs, compensation for fund managers and support staff and the fund firm’s profit. Expense ratios matter and investors shouldn’t pay more than they need to.

Vanguard’s site, as you might expect, deals with this topic at length. In one example, it shows the impact of differing levels of fees on a hypothetical $100,000 initial account balance over 30 years with a yearly return of 6%. After 30 years the balance in the account would be:

$574,349 with no investment cost

$532,899 with an investment cost of 25 basis points

$438,976 with an investment cost of 90 basis points

These numbers clearly illustrate the impact of fund fees on an investor’s returns and their ability to accumulate assets for financial goals like retirement and funding their children’s college educations.

Mutual fund expense ratios are an example of where paying more doesn’t get you more. Case in point, Vanguard Growth Index Adm (VIGAX) has an expense ratio of 0.09%. The Morningstar category average for the large cap growth asset class is 1.21%. For the three years ending January 31, 2016 the fund ranked in the top 32% of all of the funds in the category; for the trailing five years the fund placed in the 19% and for the trailing ten years the top 17% in terms of investment performance.

Sales loads and 12b-1 fees

Front-end sales loads are an upfront payment to a financial advisor or registered rep. Front-end sales loads reduce the amount of your initial investment that actually goes to work for you. For example, if a rep suggests investing in a mutual fund like the American Funds EuroPacific Growth A (AEPGX) for every $10,000 the investor wants to invest, $575 or 5.75% will be deducted from their initial investment balance to cover the sales load. Over time this will reduce the investor’s return versus another version of the same fund with a similar expense ratio that doesn’t charge a sales load.

Some will argue that this load is a one-time payment to the advisor and their firm for their advice. This strikes me as dubious at best, but investors need to decide for themselves whether the advice received in exchange for paying a sales load warrants this drain on their initial and subsequent investments. This share class has an expense ratio of 0.89% which includes a 12b-1 fee of 0.21% (see more on 12b-1 fees below).

Deferred sales loads associated with B shares are largely a thing of the past. Carrying the American Funds example forward, the EuroPacific Growth B (AEGBX) which has been closed to new investors since 2009, was purchased at NAV with a deferred sales charge of 5%. The fund carried a surrender charge over a period of years whereby if the investor sold the fund during this time they would be assessed a surrender charge (see below for more on surrender charges) on a declining basis. In order to compensate the advisor for not receiving an upfront sales commission the fund’s expense ratio is 1.69% which includes a 0.99% 12b-1 fee which compensates the advisor. After a set period of time B shares are supposed to convert to the lower cost A shares. If you are still in a B share of any fund you should aggressively ask why this is and demand to have the shares converted to A shares if eligible.

Level loads are associated with C shares. The American Funds EuroPacific Growth C (AEPCX) fund has a level load of 1% in the form of a 12b-1 fee and an overall expense ratio of 1.61%. Brokers and registered reps love these as the level load stays in place for eight years until the funds convert to a no load share class of the fund. There is a 1% surrender charge if the fund is redeemed within the first year of ownership.

12b-1 fees are a part of the mutual fund’s expense ratio and were originally designated to be marketing costs. They are now used as trialing compensation for financial advisors and reps who earn compensation from selling investment products. They can also be used to provide revenue-sharing in a 401(k) plan. While 12b-1 fees don’t increase expenses as they are part of the fund’s expense ratio, typically funds with a 12b-1 fee will have a higher expense ratio than those that don’t in my experience.

401(k) expenses

For many of us our 401(k) plan is our primary retirement savings vehicle. Beyond the expense ratios of the mutual funds or other investments offered, there are costs for an outside investment advisor (or perhaps a registered rep or broker who sold the plan) plus recordkeeping and administration among other things. If your employer has these costs paid by the plan they are coming out of your account and reducing the return on your investment.

Add to this mutual funds that may be more expensive than needed to compensate a brokerage firm or insurance company and all of a sudden the expenses associated with your 401(k) plan are a real drag on your investment returns.

Financial advice fees

Fees for financial advice will vary depending upon the type of financial advisor you work with.

Fee-only financial advisors will charge fees for their advice only and not tied to any financial products they recommend. Fees might be charged on an hourly basis, on a project basis for a specific task like a financial plan, based on assets under management or a flat retainer fee. The latter two options would generally pertain to an ongoing relationship with the financial advisor.

Fee-based or fee and commission financial advisors will typically charge a fee for and initial financial plan and then sell you financial products from which they earn some sort of commission if you choose to implement their recommendations. Another version of this model might have the advisor charging a fee for investment management services, perhaps via a brokerage wrap account, and receiving commissions for selling any insurance or annuity products. They also would likely receive any trailing 12b-1 fees from the mutual funds used in the wrap account or from the sale of loaded mutual funds.

Commissions arise from the sale of financial and insurance products including mutual funds, annuities, life insurance policies and others. The financial advisor is compensated from the sale of the product and in one way or another you pay for this in the form of higher expenses and/or a lower net return on your investment. Additionally, financial sales types are incented to sell you products for which they are compensated, it is highly unlikely they will push a low-cost Vanguard index fund.

Investors need to understand these fees and what they are getting in return. In fact, a great question to ask any prospective financial advisor is to have them disclose all sources of compensation that they will receive from their relationship with you.

Surrender charges

Surrender charges are common with annuities and some mutual funds. There will be a period of time where if the investor tries to sell the contract or the fund they will be hit with a surrender charge. I’ve seen surrender periods on some annuities that range out to ten years or more. If you decide the annuity is not for you or you find a better annuity the penalty to leave is onerous and costly.

Taxes 

Taxes are a fact of life and come into play with your investments. Investments held in taxable accounts will be taxed as either long or short-term when capital gains are realized. You may also be subject to taxes from distributions from mutual funds and ETF for dividends and capital gains as well.

Investments held in a tax-deferred account such as a 401(k) or an IRA will not be taxed while held in the account but will be subject to taxes when distributions are taken.

Tax planning to minimize the impact of taxes on your investment returns can help, but investment decisions should not be made solely for tax reasons.

The Bottom Line

Fees and expanses can take a big bite out of your investment returns and your ability to accumulate a sufficient amount to achieve your financial goals. Investors should understand the expenses listed above and others and take steps to minimize these costs.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

My Top 10 Most Read Posts of 2015

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I hope that 2015 was a good year for you and your families and that you’ve had a wonderful holiday season. For us it has been great to have our three adult children home and to be able to spend time together as a family. We saw the movie Sisters on Christmas day and I highly recommend it.

My Top 10 Most Read Posts of 2015

Hopefully you find many of the posts here at The Chicago Financial Planner useful and informative as you chart your financial course. Whether you do your own financial planning and investing or you work with a financial advisor my goal is to educate and provide some food for thought.

In the spirit of all of the top 10 lists we see at this time of year, here are my top 10 most read posts during 2015:

Life Insurance as a Retirement Savings Vehicle – A Good Idea?

7 Tips to Become a 401(k) Millionaire

4 Signs of a Lousy 401(k) Plan

Is a $100,000 a Year Retirement Doable?

4 Reasons to Accept Your Company’s Buyout Offer

401(k) Fee Disclosure and the American Funds

Is My Pension Safe?

My Thoughts on PBS Frontline The Retirement Gamble

7 Reasons to Avoid 401(k) Loans

YOU RECEIVED A PINK SLIP AND SEPARATION AGREEMENT – NOW WHAT?

I continued to write elsewhere as well, most notably Investopedia and Go Banking Rates.

I want to thank you again for your readership.  I invite you to contact me ( or thechicagofinancialplanner at gmail dot com) to ask any questions that you might have, to tell me what you like or don’t like about the site and to suggest topics that you would like to see covered here in the future. Don’t miss any future posts, please subscribe via email.

I wish you and your families a happy, healthy and prosperous 2016.

5 Reasons 401(k) Lawsuits Matter to You

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Several 401(k) lawsuits against major employers have been in the news this year. These suits are about high fees, conflicts of interest and plan sponsors failing to live up to their fiduciary obligations.

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Ameriprise Financial settled a suit that alleged that the firm offered a number of its own proprietary mutual funds in the company’s 401(k) plan and collected revenue sharing payments on these funds from an Ameriprise subsidiary.

The U.S. Supreme Court ruled in Tibble vs. Edison International that the large utility company had a duty to monitor the investments offered in the plan no matter how long along they were initially added to the plan. One of the issues here surrounds the fact that lower cost share classes of these funds became available but the plan stayed with the higher cost retail share class.

Most recently Boeing settled a lawsuit that was first filed in 2006 for $57 million. The suit alleged that the company had breached its fiduciary duty to its employees by using high cost and risky investment options in the plan and by allowing the plan’s record keeper to charge employees and retirees excessive fees.

While all of this may be interesting, you may be asking what does any of this have to do with me? Here are 5 reasons 401(k) lawsuits matter to you.

Plan Sponsors have a fiduciary obligation 

These and a growing number of 401(k) related lawsuits have reaffirmed that retirement plan sponsors have a fiduciary obligation to act in the best interests of the plan participants. This includes:

  • The selection and monitoring of the mutual funds (or other investment vehicles) offered in the plan.
  • The selection and monitoring of the service providers selected for the plan.
  • All costs and fees associated with the plan.

Moreover plan sponsors should have a process in place to manage all aspects of the plan.

Mutual Fund share classes 

Several of the lawsuits centered on plan sponsors offering expensive retail share classes of funds when lower cost share classes were available. These higher cost share classes might throw off more revenue sharing and other fees to the plan but they are more expensive for the plan participants. It behooves plan sponsors more now than ever to offer the lowest cost share classes of a given fund available to them.

Numerous studies have shown the connection between lower investment costs and investment return. Well-run 401(k) plans strive to keep investment costs down and one way to do this is to ensure that the plan offers the lowest mutual fund share classes available.

Duty to monitor 

As shown in the Tibble versus Edison ruling the Supreme Court said plan sponsors have a duty to continue to monitor the investments offered in the plan long after they may have been initially offered. This dovetails into an ongoing duty of plan sponsors to monitor the investments offered to you to ensure the costs are reasonable and that they meet a set of criteria.

Typically a 401(k) that is well-monitored and managed via a consistent investment process will tend to offer a better investment line-up to their participants.

Manage plan expenses 

Boeing recently settled the second largest 401(k) suit in history at $57 million. In part the allegations included that Boeing allowed its outside record keeper to charge employees and retirees excessive fees.

This and other suits underscore the responsibility of plan sponsors to manage 401(k) plan costs and the activities of plan providers such as an outside record keeper. To the extent that administrative expenses are paid out of plan assets plan sponsors who strive to keep these expenses low are doing the right thing for their employees.

Plan Sponsors are getting it 

While this is not a blanket statement as there are still plenty of lousy 401(k) plans out there, there is evidence that plan sponsors are getting the message that they have a responsibility to the plan’s participants.

As an example mutual fund expenses in 401(k) plans have been declining for the past 15 years. Fewer companies are mandating the use of company stock in their 401(k) plans and a 2014 Supreme Court ruling will certainly help keep this trend going.

The Bottom Line 

Retirement plan sponsors have a fiduciary obligation to act in the best interests of the plan’s participants. A number of 401(k) lawsuits in recent years have served to reinforce this duty and this is a good thing for those participating in 401(k) plans. As a plan participant become knowledgeable about the investments offered in your plan and how much the plan is costing you. If you have concerns raise them in a constructive fashion to your employer.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email.

Open Enrollment Exploring Your Employee Benefits

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This post was written by Katie Brewer, CFP®.  Young, smart financial planners like Katie bode well for the future of the financial planning profession. Her bio and contact information are provided at the end of the post. This post is timely for those of you who are in the midst of open enrollment via your employers and Katie offers some solid tips to consider.

Is that email from HR about open enrollment buried in your inbox? If you wait until the last minute and then race through your choices, you’re not the only one. Almost half of all employees spend 30 minutes or less choosing their benefits every year. And 90% of employees choose the same benefits every year, even though your family and your benefits are constantly changing.

Employee benefits are a large part of your compensation, and it pays to make the right choices for your family. Forty-two percent of employees believe they waste up to $750 a year due to open enrollment mistakes. We’ll explore a few common employee benefits so you can feel confident that you’re making the right choice for you and your family during open enrollment.

Save for Your Future with Your Employer Retirement Plan

Many employers offer a retirement plan to help you save for a comfortable life in your later years. The name of the plan will depend on your employer. Do you have a 401(k), Thrift Savings Plan (TSP), 403(b), or SIMPLE IRA? All of these plans allow employees to contribute to a retirement account on a tax-deferred basis.

You’ll also want to look into the details to see if your employer offers a Roth option. With these plans, you pay tax now, but you’ll be able to take your contributions — and all your earnings — out tax free. It’s nice to have options about how to take money out in your retirement.

Some employers also provide a generous match to employee contributions. If your employer provides a match, you’ll want to take advantage of it. If you get a 50% match on your contributions, that’s a huge return on your money that’s tough to get anywhere else.

Protect Your Income with Disability Insurance

If you review your benefits package, you’ll probably also see some mention of long-term disability insurance coverage. This group coverage is an inexpensive way to make sure you are protecting your income. If you rely on your salary to pay your bills and save for your future, you need insurance to protect against a loss in income. Understanding the finer details will help you make the best choice for your policy.

First, what’s the elimination period (or waiting period)? You’ll want to have enough cash in your emergency fund to bridge the waiting period if you need to file a claim.

Second, is there a way to easily increase coverage? It’s a good idea to cover at least 50% of your income.

Third, do you have the option to pay tax on the premium? If so, that’s usually a good choice. It’s very inexpensive, and it means you’d receive your disability payments tax-free when you need the money the most.

Some employers offer short term disability coverage as well. You should have an emergency fund that will help you ride out any short periods away from work. But if you’re still building up your emergency fund, it can make sense to pay for a short term disability policy.

Look After Your Loved Ones with Life Insurance

Another common employer benefit is to provide some amount of life insurance for employees. It’s usually on the order of 1 to 2 times your annual salary. For most families, this is not enough.

Your employer might offer the option to buy additional life insurance without needing a medical exam at a reasonable cost. If you have medical conditions that make it difficult to get life insurance, this is a great way to increase your coverage.

Now that you know how much life insurance you have, you can also purchase your remaining life insurance on the open market. This is usually a better option as you can take it with you if you leave your job.

Cushion Your Budget with Health Insurance

Health insurance is an important part of your benefit package. You might have several options to choose from, and what plan is the right one for you will change as your family changes.

A low deductible and small co-pay plan with a wide range of specialists is important if you or your spouse are facing health problems.

If you are in good health and have the financial means, a high-deductible health plan might be the right choice. This plan has a high out of pocket deductible, but you’ll pay less in premiums, and you can take advantage of a health savings account.

Health savings accounts (HSA) are a fantastic way to build wealth. With a HSA, you contribute pre-tax money into the account to be invested. The money rolls over from year to year so you can build a balance. You can withdraw the money, including any earnings, tax-free on qualified medical expenses. Very few things are completely income tax-free! This is different than a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA), so make sure you know exactly what type of plan you have.

You might also have the option to participate in a health care Flexible Spending Account (FSA). With a FSA, you put away pre-tax money to cover healthcare costs like co-pays, deductibles, and medications. These plans are “use it or lose it,” so be careful about how much you put in the account. While there’s usually a grace period for spending your funds, you can’t rollover much (if any) to the next year. If you’re at the end of your FSA year, check your balance so you aren’t wasting money.

Be On the Lookout for Other Benefits

Many employers also offer a dependent or daycare flexible spending account (FSA). This lets you put away pre-tax money to pay for expenses related to caring for dependents like kids or an elderly parent. Many parents use a dependent FSA to get a tax break on day care. If you decide to skip the FSA, you might be able to claim a credit on your taxes instead.

Some employers also offer the option of pre-paid legal services. If your family needs estate planning documents or other legal services, this can be an inexpensive way to get these papers in place. Other employers offer free or reduced tuition to college or training programs. Benefits like these can add up to a significant sum.

There’s such a wide variety in employee benefits that it’s difficult to name all the possible benefits you might receive. Read the fine print of your package to make sure you’re taking advantage of every benefit you can.

Make this year the year that you take the time to understand your employee benefits. Employee benefits are an important part of your compensation. Be sure to get what you deserve by making the most of open enrollment.

Katie Brewer, CFP® is a financial coach to professionals of Gen X & Gen Y and the President of Your Richest Life. She has accumulated over 10 years of experience working with clients and their money. Katie has been quoted in articles in Money, The New York Times, Forbes, and Real Simple. Katie resides in the Dallas, Texas area, but works virtually with clients across the country. You can find Katie on Twitter at @KatieYRL and email her at info@yrlplanning.com. 

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.