By FPA member Amy Jo Lauber, CFP®
Last Updated: May 15 2012
If you are a young person who has recently graduated from college and are entering the professional workforce, you have your whole life ahead of you. This time is like no other; you can establish a solid financial foundation from which to build on for the rest of your life. Much of this foundation can be built using employee benefit programs offered through your employer. These benefits may include some or all of the following, and perhaps other benefits:
- Health insurance
- Life insurance
- Disability insurance
- 401(k)/403(b)/457(b) retirement savings program
- Direct deposit
- Employee education program
Employer stock purchase program
Under the new health care act, young people may remain on their parents’ health insurance if they are under the age of 26. If you are over the age of 26, it is wise to obtain health insurance on your own. If you are able to obtain it through your employer, you probably can do so at group rates, which are typically lower than individual rates, and your employer may pay for part of the coverage.
Many employers offer group life insurance, typically a multiple (one to seven times) of your salary. This may be completely, partially, or unfunded by your employer. The first $50,000 in life insurance death benefit is tax deductible to your employer and the cost is not taxable to you. Amounts over this figure may or may not be paid by your employer; any amount of coverage over the $50,000 limit paid for by your employer will be taxable income to you and will be reflected on your W-2. Keep in mind that your beneficiary receives the death benefit income tax free.
How much life insurance do you need? It is prudent to have enough life insurance to cover any debts (student loans, car loans, credit cards, etc.) you may have to pay for your final expenses (about $10,000), and, if you have any dependents, to provide income to your survivors. The majority of college graduates have some student loan debt; some have significant debt. If your parents have co-signed for your loans, you should consider listing them as your beneficiaries on your life insurance, so that they will have the resources to pay off such debt.
There is a greater risk of you becoming disabled during your working years than of you dying during your working years. If you become disabled — due to an accident or illness — and cannot work, you still have bills to pay (rent, utilities, food, clothing, loan payments, etc.). Disability income insurance provides a percentage of your gross income (usually 60 percent) to you while you are considered disabled by a physician. There is an “elimination period” — the time frame where you are ineligible for benefits (days, weeks or months), and a benefit period — which determines how long (in months or years) you may receive benefits. Short-term disability insurance typically has a seven day elimination period and pays benefits for up to two years. Long-term disability typically has a six month elimination period and pays benefits for five or more years, sometimes until you reach age 65.
401(k)/403(b)/457(b) Retirement Programs
The type of retirement savings program you may use depends on what type of employer you have. A private company uses a 401(k), a non-profit organization uses a 403(b), and a governmental body uses a 457(b). There are also Savings Inventive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) plans that may be offered through smaller employers. These plans allow an employee to set aside money for retirement on a pre-tax basis. This means that the money is taken from your pay before taxes are withheld, and you subsequently pay less in taxes. You may choose what percentage of your pay you wish to set aside (strive for at least 10 percent) and how you would like the money invested (there are usually several mutual fund or variable annuity sub-accounts to choose from, based on your risk tolerance, goals and time horizon). The plan administrator may offer some investment guidance to help you select investments that may be appropriate for you. You may also contact a financial planner to receive personalized, professional guidance in this and other areas. Very often, an employer will match your contributions to your 401(k); this is free money! But remember, these types of plans are specifically designed for your retirement and should not be used unless and until you have adequate emergency reserves/savings to meet day-to-day living expenses if you lose your job or become disabled.
Most employers now arrange for their employee’s paychecks to be directly deposited in one or more bank accounts. This is an opportunity for you to establish a cash reserve for emergencies and/or save towards a larger purchase, such as a home or car. Designate at least 10 percent of your pay to a savings account and the balance to a checking account to cover your bills. By establishing both a savings program and a retirement program, you will be well on your way to living within your means and saving toward future goals. This will help keep you out of debt.
Some employers may offer to pay for an employee’s further education. This solidifies the employee’s relationship with his/her employer and helps the employer groom certain employees for advancement. Education benefits typically are deductible to the employer and not taxable to the employee; this makes them especially beneficial for both parties.
Employer Stock Purchase Programs
Some employers may provide their employees with the opportunity to buy shares of the company’s stock at a discount. This gives the employee a chance to own part of the company for which they work, helping them become more familiar with and invested in the company’s success. This may or may not be an appropriate investment for you; it would be best to consult with a professional. Keep in mind that investing too much in your employer poses significant risks; if the company does poorly, not only would your investment suffer (decline in value), but you may also lose your job.
It bears noting that one should not depend too heavily on employer-offered benefits, as tenure with an employer may be brief; causing gaps in coverage.
FPA member Amy Jo Lauber, CFP®, is President of Lauber Financial Planning in West Seneca, NY.