The benefits you receive from your employer can be an important part of your wealth planning strategy.
For many employees, the phrase “open enrollment” might make your eyes glaze over.
Although employee benefits can seem like a chore at times, they actually account for almost a third of your total compensation, according to the Bureau of Labor Statistics (BLS).
For that reason, the benefits you receive from your employer are a key pillar of any wealth planning strategy. And if you’re not taking full advantage, you could be doing a disservice to your financial future—and will continue to do so every year that you don’t give your benefits your full attention.
The good news is all it takes to make the most of your benefits is a little homework and checking a few boxes. This is true regardless of where you are in your career—whether you’re just starting out, ascending the corporate ladder, or switching to another job or industry—but it’s particularly important for millennials, who have many decades of working years ahead of them.
Time is of the essence, though, since the window for annual benefits enrollment is typically a few weeks in November (though exact details vary by company). When that time comes, here are a few important things to consider:
A retirement savings account is a critical component of your financial strategy, with almost two-thirds of workers in the private sector having access to a 401(k) savings plan, according to BLS data. Typically, such plans allow for pre-tax contributions, which help to lower your current taxable income (although you’ll pay taxes when you withdraw the funds later in retirement).
Some employers also offer a Roth 401(k) option as well. With a Roth, contributions are made with after-tax dollars, meaning that the taxes on retirement withdrawals are essentially prepaid.
Perhaps the most important element for savers to consider is whether your employer offers a match on your retirement contributions, and if so, how much. For example, your employer might match your contributions dollar for dollar up to 5 percent of your salary. That means, at a minimum, you’ll want to contribute to the level of the match, lest you miss out on your chance at free money.
Another central pillar of employee benefits is your health care plan, which is a highly individual choice that hinges on your needs as well as those of your family. One potential health benefit that is often overlooked is a Health Savings Account (HSA), which can help cover additional expenses and offer an array of tax benefits as well.
If you’re enrolled in a high-deductible insurance plan, an HSA can help cover those deductibles as well as other medical-related expenses. Contributions are pre-tax, and qualifying withdrawals are tax-free. An added bonus: Sometimes employers contribute to HSAs, just as they might to 401(k)s. Be sure to check your benefits information to find out whether your plan offers an HSA, and how you could participate.
An important benefit more common to higher earners or those working at startups is equity compensation, which can be part of a job offer as well as potentially ongoing compensation. Companies might offer anything from stock purchase plans and stock options to restricted stock and performance shares.
Equity compensation can be highly complex and carry significant tax implications, making it essential to talk through your options with your financial advisor and tax planner.
Getting life or disability insurance as an individual can be expensive, but group coverage offered by your employer can often be more affordable—either on its own or as supplemental coverage to policies you have outside of the workplace.
Disability insurance, in particular, is one area where people tend to be underinsured. The chances of you becoming disabled and unable to work at some point during your career are higher than you might think, so making sure you have a level of income replacement (for instance, 60 percent of your annual salary) is essential to protecting family finances.
At the end of the day, poring over benefits documents might not seem like the most exciting endeavor, but because of the lasting impact your benefits can have on your financial security, your future self will thank you.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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