Opportunity is missed by people because it is dressed in overalls and looks like work. 

(Thomas Edison) 

With open enrollment coming up, it’s important to review and reflect on the value of the (typical) employer benefits so as to make the most of them to create your life plan.  Employer benefits make up an average 32% of total compensation.[1]  The bigger your company is, the seemingly greater the perks.  For the sake of simplicity, I categorize employer benefits into two key buckets: 

Health Insurance  

When evaluating healthcare plans, it’s best to ask yourself:  Is this a benefit I want to or am likely to consume now or later?  If the answer is now, then best to review and select the group healthcare plan that’s best for you: PPO, HMO, POS.  If you’re like many people, selection is heavily weighted towards providers’ service/expertise, copay and convenience.    

 

However, for those who are young-ish (20-50), healthy, have a family history of longevity and, thus, are more likely to consume healthcare benefits in retirement (or later), then consider an HSA, if your employer offers it.  According to Fidelity, here’s how much an average couple retiring in 2019 will spend in healthcare/medical cost – $285,000; a single woman – $150,000; a single man – $130,000.[2]  Additionally, it’s estimated that healthcare costs will increase an annual average of 5%, twice the inflation rate. 

Given the trends in longevity and healthcare cost, for healthy, young(er) workers, an HSA may be the best fit as it allows you to build up healthcare savings for when you need it most – retirement.  In my opinion, an HSA is the ultimate retirement plan as it offers triple tax benefits:       

·      Contributions are tax deductible. 

·      Assets grow tax-deferred. 

·      Withdrawals for qualified medical expenses are tax-free.  (NOTE:  The definition of qualified medical expenses is quite broad: over-the-counter medicine, surgery, assisted living, etc.)  

 

There are the drawbacks to an HSA: 

·      You must be a on a high-deductible insurance plan. 

·      Contribution limits are relatively low.  

·      HSA custodians have a tendency to nickel and dime investors.  (Here’s Morningstar ranking of the best HSA custodians: here.) 

 

 

Disability Insurance

If you’re young, one of your greatest assets is your earnings potential.  Interestingly, a 20-year-old worker has a 25% chance of becoming disabled and only a 13% chance of death between now and retirement.[3]  Moreover, women file more claims than men.                                          

 

Top short-term disability claims: 

1.      Pregnancies

2.      Musculoskeletal disorders affecting back, spine, knees, hips, shoulders, etc.

3.      Digestive disorders (e.g., hernias, gastritis)

Top long-term disability claims:  

Retirement Plan (401k, Roth 401k, After-tax 401k)

A healthy retirement savings can cover a multitude of financial
sins.  Below are the different tax flavors of the 401k…and their
potential companion – Roth IRA.  

 

Retirement Accounts	Tax advantages/treatments	Annual Limit
401k	·       Contributions are tax-deductible. ·       Assets grow tax-deferred. ·       Withdrawals are taxed at ordinary income tax.	$19,500*
Roth 401k	·       Contributions are not tax-deductible. ·       Assets grow tax-deferred. ·       Withdrawals are tax-free.	$19,500*
After-tax 401k	·       Contributions are not tax-deductible. ·       Assets grow tax-deferred.  Withdrawals are taxed at ordinary income tax.	$37,500**
Roth IRA***	·       Contributions are not tax-deductible. ·       Assets grow tax-deferred. ·       Withdrawals are tax-free.	$6,000

 *Annual combined contribution to a 401k and Roth 401k cannot exceed $19,500.

**Annual combined contribution to retirement plan (e.g, 401k, Roth 401k, after-tax 401k) cannot exceed $57,000.

***A Roth IRA is an individual retirement account and must be established on your own at a preferred financial institution (e.g.,  Vanguard, Fidelity).

 

Confused over what this all means?  Not sure which retirement accounts is best for your situation?  Here’s my general rule-of-thumb:

If your income is less than $100,000 per year:

1.     Max out your 401k. 

2.     Max out your Roth IRA (via Vanguard, Fidelity, etc) if you have leftover savings.  

       If your modified adjusted gross income (MAGI) is more than $139,000 (single) and $206,000 (couples):

1.     Max out your 401k.

2.     Max out your Roth IRA via back-door Roth.

       If your modified adjusted gross income (MAGI) is WAY MORE than $139,000 (single) and $206,000 (couples):

1.     Max out your 401k.

2.     Max out your Roth IRA via back-door Roth. 

3.    Contribute more to your after-tax 401k or  brokerage account (via Vanguard, Fidelity, etc). 

By saving in a combination of tax-deductible, tax-deferred and tax-free accounts, you’re able to reduce your income taxes now and gain more flexibility in reducing your overall taxes later (in retirement).

Conclusion

According to the paradox of choice, more isn’t necessarily merrier.  When it comes to employer benefits, more options can leave employees more prone to dissatisfaction, making inappropriate choices and/or making no choices at all (paralysis). In my opinion, when it comes to selecting employer benefits, the critical components are health insurance, disability insurance, retirement savings accounts…and life insurance if you have dependents and a sizeable mortgage.  Done strategically, these benefits go a long way in helping to secure your (financial) life now and later. Get a few of the big stuff right and you can afford to get a lot of the small stuff wrong!