On your first day at a new job, it’s easy to concentrate only on your immediate needs: salary, job responsibilities, new co-workers, best place to get lunch. What you’re probably not thinking about is your last day – and that’s a mistake. As a new hire, you’ll have to accept or decline your employee benefits, which can help secure your financial future, including retirement.
That’s why it’s important to take the time to consider the benefits your company offers. The insurance and benefit decisions you make today can affect you tomorrow. Here’s what you should know about the most common employee benefits to help you make the right decisions from the start.
The 401(k), 403(b) or 457
A 401(k), 403(b) or 457 plan allows you to save a portion of each paycheck, pre- or post-tax, into an account where it can grow tax-deferred for future use. That means you don’t pay any taxes on any pre-tax money until you withdraw it.
Ultimately, consider saving as much money as possible. If your employer offers a match, you should contribute at least enough to earn the full match. It’s free money! The more you save early on, the more you can benefit from compounding – earnings on your earnings. If you find it difficult to save, set a reasonable savings goal and make small increases over time; especially, if you receive a pay increase or bonus.
The process of selecting investments in your account is critical to your financial success, but it can be challenging if do not understand the options available. If you’re at the beginning of your career, start aggressive then reduce risk closer to retirement. Younger employees generally should have more money invested in stock for their high return potential. Over time, gradually reduce risk and move more of your accumulated savings to lower-risk investments such as bonds.
Another consideration when choosing investments in your account is costs. The lower your costs, the more you get to keep of your return. Also, the first time shouldn’t be the only time you review the investment options available to you. Check your account periodically to make sure you’re still on track.
While some employees try to invest on their own or rely on recommendations from co-workers, everyone’s situation is unique. Working closely with an experienced adviser can help you choose the investments most appropriate for you and your specific financial goals.
Each company has its own set of policies regarding health insurance. Typically, if you are a full-time employee then you qualify for health insurance. Some companies will fully cover you, with the option to buy additional coverage for your family. Or, you must pay a premium for both yourself and your family.
You’ll be offered a Health Maintenance Organization (HMO) or Preferred Provider Option (PPO) plan. Under an HMO plan, you are limited to seeing doctors who are contracted with a specific insurance company. HMOs can cost less than PPOs, but PPOs provide greater flexibility when it comes to choosing doctors. You may see a doctor who is not on the PPO’s list and the insurance company may still cover some of the services you receive.
If married, you may want to compare costs to see if it makes more financial sense for both of you to be on a single employer’s insurance.
Further, you may want to consider your medical history before signing up for a dental or vision plan. If you rarely need to visit the dentist, for example, paying out of pocket for your dental care may be cheaper than the insurance. Find out what services are offered and determine how much you think you would use them.
Life and Disability Insurance
Life and disability insurance are two other common benefits offered by employers. Your company may pay one year’s salary to a beneficiary of your choice to help offset lost wages and income. Be sure to consider the appropriate beneficiary for your life insurance policy before you sign up. Also, review your beneficiaries annually and update them, when necessary.
Your primary life insurance, however, shouldn’t come through employer; if you lose your job, then you lose your coverage. If you’re married and/or have children, you may need more coverage than your employer provides. Instead, purchase a term-life insurance policy from a separate provider. If you are single and not supporting anyone, life insurance may not be much of a financial priority.
Whether single or married, disability insurance is something you should consider. If you become disabled, you would receive a payout in place of income.
Flexible Spending Accounts
A flexible spending account allows you to save pre-tax dollars to be used for medical care. This reduces your taxable income, which helps you save money on taxes. To decide if you need an FSA, take stock of your health. If you have an ongoing medical condition or expected healthcare expenses, then an FSA can help you save on out-of-pocket costs. But, if you’re young, healthy and with full benefits, then your need for an FSA is low.
Paid Vacation and Sick Days
Generally, you are given an allotted amount of days based on seniority. These days may accrue and you may carry them over into the following year. The important thing to remember is that your company should receive reimbursement for any unused time off when you leave.
Unfortunately, pensions are offered by fewer and fewer employers. If you’re lucky enough to get one, great! A pension is a valuable source of income for retirement and you don’t have to do all the investment work as you do in a 401(k). Keep in mind that you may have to stay with your company for a certain amount of years to maximize the amount you receive – or to get any of it at all.
Your employer may offer stock options, which allows you to purchase stock in your company at a set price. There may be a waiting period as to when you are fully vested and when you can sell the stock. The benefit is to purchase the stock options at a lower price and then sell them at a higher price. This can give your retirement savings a boost. However, you should avoid concentrating all or a major portion of your retirement savings in company stock. After all, you don’t want to put all your eggs in one basket.
Your Previous Employee Benefits
When you leave an employer, don’t leave any benefits behind. Find out what you need to do with your previous employee benefits. For example, do you need to roll over your 401(k) to an IRA? Do you have money saved in an FSA or HSA that you’re entitled to? What about a pension plan?
Employee benefits can vary widely from employer to employer. Your company may offer other benefits options than you don’t find here. Dedicate time to understanding your benefits on day one so you can make the right choices for the future. Work with your human resources department or benefits administrator to find out more information about what they offer. It’s important to make sure to update your choices as your needs change.
Finally, most employees don’t receive all these benefits, so consider talking to a financial adviser about the steps you can take to meet any financial or insurance needs and improve your financial security.