It's Time for Employee Benefits Review!

Image from iStock Photo License

Image from iStock Photo License

About this time each year, Human Resource departments across the country are buzzing with activity around the next year’s employee benefits.

From an employee perspective, often that means that you’re given a small window of time to verify your benefits for the coming year. It’s easy to check off the boxes that keep everything as-is without regard to new or different options and the coordination of these benefits with the rest of your financial plan.

Please don’t rush through the process this year. Your decisions may have impact far longer than the coming year!

Employee Benefits can be a broad topic. They can include:

  • Health Insurance

  • Vision

  • Dental

  • Paid Leave

  • Vacation

  • Sick time

  • Family Medical Leave

  • Group Life Insurance

  • Group Disability Insurance

  • Short term disability

  • Long term disability

  • Retirement Savings

  • 401(k)

  • Profit Sharing

  • Employee Stock Option Plan

  • Deferred Compensation

This isn’t a comprehensive list of all potential employee benefits, but should cover the majority of common options. 

First of all, some of the decisions are made for you already. Typically, a business will have standardized policies regarding paid leave and base levels of provided life insurance, for example.

As for healthcare, I get a lot of questions about HSAs (health savings accounts), so let’s cover a few basics about them.

To be eligible to use an HSA, you must opt into a high deductible health care plan. If you choose a high deductible plan, in 2017 you can contribute up to $3,400 (individual) or $6,750 (family) pre-tax into an HSA (don't worry if you don't use it all - the balance will be available for future health care needs)! Also, you are allowed to contribute $1,000 more if you are 55+. While premiums are lower in a high deductible health care plan, they typically have higher out of pocket expenses associated with them (up to $6,550 for an individual, or $13,100 for a family).

When is it advantageous to opt into a high deductible plan and HSA?

That depends on your (and your family’s) health and cash flow. If you tend to only need preventive health care and don’t have a lot of annual expenses, a high deductible plan with an HSA account can be useful because any unused HSA funds can remain available for future use! However, if you tend to need a lot of medical care or could not currently cover the max out of pocket expenses from savings or cash flow, you may decide that higher premiums and lower out of pocket limits are more manageable for you and your family.

Retirement plans are also top of mind for many people. These may include 401(k), 403(b), SEP, SIMPLE, and other kinds of tax advantaged retirement accounts. While each of these types can be slightly different, there are a few similarities. First, they each offer some level of employer match and/or contributions (aka FREE MONEY!). Please take advantage of maximizing your benefit available from your employer match or contributions! If you don’t, you’re leaving money on the table. Consider increasing your contributions each year along with your pay increases. Even a 1-2% higher contribution can make a big difference over time.

Also, they have to offer diversified investment options. Many plans have adopted target date retirement funds as choices within their plans. If you are unsure of where to start, they can be a great way to become diversified with little effort. If you have several options, or have enough in the plan to want more than a target date fund, ask your financial planner for help determining the proper allocation.

Many plans have started to offer the Roth option. If you’re considering it, keep in mind employer contributions/matches will continue being placed into the traditional account, while your contributions will be placed into the Roth account. Generally speaking, the younger you are, and the lower tax bracket you are, the more advantageous the Roth account can be since you’ll be paying taxes now for tax-free growth and income later. Again, to be sure, please contact your financial planner, since everyone’s personal financial life is different!

Life Insurance and Disability Insurance is one of the most misunderstood parts of employee benefits. Many companies provide a limited amount of group life and/or disability insurance to their employees. During open enrollment, employees often have the opportunity to purchase additional coverage for themselves and their family members. Sometimes, it may also include Long Term Care insurance.

While insurance coverage is an important part of any financial plan, it is important to understand the differences between a policy that is available under a group plan versus one that is purchased individually based on underwriting health and risk screening.

Group insurance policies are often not portable, meaning your group coverage doesn’t continue beyond your employment. Please read your coverage carefully or ask your HR representative for help understanding the nuances of your benefits.

If it is important for your financial plan to have certain levels of insurance in place, it is important to evaluate the best kind of policy to meet the need. Keep in mind, if your health or risk ratings change during your employment, insurance may become more expensive or unavailable later.

These are all reasons I encourage my clients to keep me informed when they receive open enrollment documents. It may seem like an easy task to re-enroll as-is from last year, but your decisions can have a long lasting impact. Please see your financial planner if you have any questions about your benefits.

 

All written content is for information purposes only. Opinions expressed herein are solely those of Bridge Financial Planning, LLC, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
 

Funding Future Education Expenses

Summer is coming to a close (Ok, Ok - Winter is Coming!). A lot of families have switched from juggling careers, vacations, and summer camps to juggling careers, school schedules, and kid’s sports.

It’s usually a bit of a shock when a child goes from elementary, to middle, and then on to high school. And then there’s college… It happens faster than we’d like to admit. This is a common time of year for many people to have school and future education funding on their mind.

Many parents I work with are dedicated to providing some education support to their children. There are several different options for funding education, so let’s review some of the basics.

Pay out of pocket as expenses occur

If you have the cash flow, great! But many people don’t, especially with multiple children in school at the same time. Also, by waiting to save, the potential for future income fluctuations may impact later years. This option also does not have the tax advantages of a Coverdell or 529.

Coverdell Education Savings Account

If you’re planning to send your child(ren) to a private primary/secondary school, this is one to check out – unlike 529’s withdrawals for qualified education expenses can include K-12 expenses in addition to college and graduate school. Its main drawback is that only $2,000 per year can be contributed per child, and there are income phase-outs for the ability to contribute. IRS Coverdell Information

Also keep in mind that contributions must be made before the beneficiary reaches age 18, and the account holdings need to be used before the beneficiary reaches the age of 30.

In terms of investment options, Coverdell accounts are very flexible, although the relatively low balances may limit some investments to maximize diversification.

For purposes of financial aid, the balance of the Coverdell is considered an asset of the parents.

529 College Savings Account

529 Plans offer higher non-deductible contribution limits than other options - some plans allow $300,000+ per beneficiary. Earnings are excluded from income when used for qualified higher education expenses including: tuition, fees, books, computers and related equipment, supplies, special needs; room & board for at least half time students.

Contributions are subject to the annual gift tax limits (currently $14,000), however, the IRS allows pre-gifting up to 5 years, if no other gifts are made to the beneficiary during the 5-year period and the donor lives 5 years. Parents, aunts/uncles, friends (very good ones!), and grandparents can all contribute! Another bonus – there are no income phase-outs or limitations on income to contribute.

Balances can be used for undergraduate and/or graduate programs. Beneficiaries can be changed within the family. If there is a remaining balance, or a child decides not to attend college, that’s a handy option!

Investments for 529 accounts are limited to mutual funds available in the plan chosen. Since only one rollover to a different plan is allowed per year without triggering a 10% penalty on earnings, it’s important to carefully evaluate fees and investment options for the plan chosen.

For purposes of financial aid, the balance of the 529 is considered an asset of the parents.

529 Prepaid Tuition Plans

Just a quick note for these plans – many states have discontinued Prepaid Tuition Plans. Generally, they are more restrictive than College Savings Plans and that has led to their decline. If you have specific questions regarding the differences between a 529 College Savings and Prepaid Tuition plan, please contact your financial advisor or plan administrator for more information.

Financial Aid/Scholarships

As of 2012, 57% of undergraduate students received some form of federal financial aid, including federally subsidized loans, work-study funds, and grants. When it comes to aid, the devil really is in the details! Use the resources of high school counselors, community resources around the Free Application for Federal Student Aid (FAFSA), and resources from the college of choice.

Don’t let the sticker price of a college or university keep you from looking into it. Research their typical aid packages. Sometimes the out of pocket cost to a higher ‘sticker price’ school can be less than the out of pocket cost for another school with lower published rates! Check out this site to search by several factors, including the availability of aid: Big Future by The College Board

Every parent’s dream is to have their child qualify for a scholarship! A question that comes up often is, “what happens to a 529 if my child receives a scholarship?”. Great question! You have a lot of options: you can change the beneficiary to someone else in the family, keep the 529 in place in case the scholarship recipient decides to go to graduate school, or withdraw the funds. Receiving a scholarship is one of VERY few exceptions to a 10% penalty on earnings when funds are withdrawn for anything other than qualified higher education expenses.

 

Before you begin: As a parent with the best intentions and wishes for your child(ren), take a moment to answer this question: Will my financial stability be compromised (now or later) by contributing to this education fund?

It’s incredibly hard to use Spock-like levels of logic when making decisions about your children’s education. However, at the end of the day, there are a lot of ways to pay for education, but only one way to pay for retirement and health related expenses. Please consider your own financial health a top priority!

 

All written content is for information purposes only. Opinions expressed herein are solely those of Bridge Financial Planning, LLC, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.

 

 

Investing: The Wind in your Savings Sails

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Many articles on investing assume you’ve invested before.  But what if you haven’t? Sometimes, it’s best to start from scratch!

So, why do we invest?

Put simply, we invest because if we stack cash under a mattress (or almost as bad, in a savings account with little to no earned interest), we’ll lose money over time to inflation. Have you ever heard an older family member play the “remember when” game? Remember when gas was $0.50 a gallon, remember when bread was $0.25, etc. What they’re talking about is the effect inflation has on the buying power of a dollar over time. If they had put money under the mattress back then and believed that it would buy the same thing today, they’d be pretty disappointed!

While we are currently in a very low inflation cycle, in any given year inflation can eat away substantially at your savings. In 10 of the last 16 years, inflation was above 2%, and as high as 3.85%. So, your earnings and portfolio growth needs to match that number just to stay even. Just to give you an idea of what happens to your hard-earned money if you don’t match inflation: At 3% per year inflation rate, $1 million in today’s dollars will deflate to about $412,000 in 30 years.

In a nutshell, that’s why we invest.

Ok, how am I supposed to keep up?

Historically, over the long run the best place has been in the stock market. A broad index of the U.S. Large company stock is the S&P 500 Index. Over the last 50 years, it has returned an average of 9.7%.

Stocks are fairly liquid (easy to convert to cash, compared to real estate, for example). And if you put them in an IRA, 401(k) or other tax-advantaged account, it’s a strategy that is hard to beat. They can grow on a tax-deferred or tax-free basis, depending on what type of account you pick.

But, the stock market can also be fairly volatile at times. That’s why it’s important to have a long term time horizon for investing (10+ years), otherwise a bearish market cycle could wipe out some of your portfolio’s value. In any given year, the value of a portfolio can be sharply lower or higher (2008 saw a loss of 38%, while 1954 saw a gain of 45%).

You can also help make your portfolio more stable by including other asset classes, like bonds (see below).

Be sure that you’re receiving professional advice to help target the right portfolio for your risk tolerance and time horizon. Many investors don’t actually get the returns that are cited because their risk tolerance doesn’t match their portfolio choices and they get nervous and sell when the going gets tough. In that case, you miss out on the rebound as markets improve.

What actually happens when we invest?

Well, let’s break it down by stocks (equities) and bonds (fixed income). There are other asset classes but we’ll stick to those two today. Let’s talk stocks first.

When you purchase the stock of a company, you are giving them cash to use for their business. In return, you become a partial owner in the business. When they do well, the stock goes up.  When they underperform, the stock goes down. That’s why it’s also important that you don’t ever buy just one or a few stocks, but invest in a variety of different types (like index funds or target date funds offer). It’s better to have enough stocks to give you a balance, that is, where some go up while others go down. This helps keep your portfolio more stable.

For the bond side, it’s easiest to think of it as a loan that you’re giving the company (or government). You give them your cash, they tell you when you’ll be paid back, and give you interest payments in the meantime. There are plenty of variations on this theme, but that’s the vanilla version. The interesting thing about bonds is what happens to their value if you decide to sell them prior to their maturity. If rates have gone up, you could lose money. If rates have gone down, your bonds could be worth more than the value when you purchased them. 

How can I get started?

Anyone can invest anytime, but some accounts offer tax advantages for specific purposes like education and retirement savings. As soon as someone has earned income, they can start contributing to IRAs, and opening an IRA can be a great way to start investing. See the IRS table here: IRS.gov - IRA Contribution Limits.

Most people really start investing when they get a job with an employer sponsored retirement plan. A 401(k) is one version, but there are several variations on that theme. The great thing about those plans is that contribution limits are higher than IRAs and there’s no income limit on contributions, unlike Roth IRA’s or deductibility for traditional IRA’s. Also, many employers offer a match on employee contributions. Definitely take advantage of this opportunity if you have it!

For small business owners, you have some pretty good options too: SEP IRAs, SIMPLE IRAs and other accounts that are made just for you.

The most important thing…

The most important thing is to start. Back when a bottle of Coke was a nickel, most employees could rely on pensions. Those days are gone and you’re mostly on your own for retirement savings. The value of starting early is undeniable. Just check out this recent article. Some may need more for their financial goals, some may be happy with less, but the numbers speak for themselves when it comes to investing early.

If you need some help determining the amount you should invest, and which investments are best for you, please contact a professional.

Something for women to consider:

As women, we tend to live longer than men, earn less, and to be the ones who take time away from our careers to raise children or care for aging parents. We also make a lot of the household purchasing decisions. For us, it is even that much more important that we take the time to develop a plan to help us reach financial independence and stability.

 

 

All written content is for information purposes only. Opinions expressed herein are solely those of Bridge Financial Planning, LLC, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.

 

 

 

Talking Fee-Only Planning and Financial Literacy with XYPN Radio

The work I do both through Bridge Financial Planning and Common Cents Financial Literacy are important to me and I am thankful for the opportunity to share my career story and passion for building a stronger community through financial literacy. I hope you enjoy listening!

 

XYPN Radio Episode with Jennifer Harper

 

Featured on the Show:

 

Risk.

Risk. It’s a word that’s used a lot in the investment and financial planning world. But what does it really mean?

In the typical investment/planning context it too often refers to market risk. But market risk is only one of many risks that we take.

There is inflation risk when we think cash is safer than investments – it may be over a short period of time, but it’s not in the long run because inflation is a cash killer.

There is longevity risk when we think that our choice today to save less or be too conservative won’t have an impact because we just know we won’t be the one to live to see 100, or be the one to need long term care.

There’s concentration risk. I’ve worked with business owners that have nearly all their assets in their own business and don’t see it as a risk at all (familiarity bias). I’ve seen the same with land/real estate owners.

There are lots of other kinds of risks too, but the point is made…

All this reminds me of a conference session I attended in February. Holly Thomas was the presenter for one of my favorite sessions. One of the takeaways from her presentation was that we are NOT risk averse – we take a lot of different kinds of risk in stride all the time! We are LOSS averse. Here’s her example:

Would you prefer to receive a 100% gain on $3,000?

Or

Would you prefer to receive an 80% gain on $4,000?

 

Most people have an immediate reaction that 100% gain is better. While a 100% gain sounds better, the math is in favor of an 80% gain on $4,000 (which would be a $3,200 gain!).

Still not convinced, let’s flip it:

 

Would you prefer to take a 100% loss on $3,000?

Or

Would you prefer to take an 80% loss on $4,000?

 

The math is still the same, but feels different, right? 

That’s why during weeks like this it’s easy to overlook the conversations around risk tolerance and time horizons. We become paralyzed by the media constantly streaming negative headlines. We become fearful that this time is different.

We are often ruled by emotion and our own familiarity biases. When we are familiar with something, it doesn’t seem as risky. When markets are volatile, as they have been lately, our emotional biases rise to the forefront. It’s normal. It’s ok. Recognize it for what it is. But don’t abandon a well-developed plan.

If, on the other hand you don’t feel you have a well-developed plan, you should seek qualified, professional advice on how to align your financial plan with your goals and risk tolerance (p.s. - we can help!).

One of my biggest tasks as a Financial Planner is to help take emotion out of financial decisions. Risk is inherent, but it can be managed in a variety of ways. Another big task is education. It is up to me to work with clients to develop an appropriate risk-adjusted investment portfolio using low cost, evidence based strategies. That doesn’t mean that volatility and market losses don’t happen; it means our approach is built to recognize that market cycles come and go.

And don’t forget - investments are only part of the full picture. Consistent contributions, appropriate distributions, tax efficiency, estate planning, benefits optimization, debt management, proper insurance coverage, and helping build great habits to achieve their most important goals – THAT’s what a good financial plan is all about.

 

The Human Finance Project

Last fall, I participated in a NAPFA professional development conference in Indianapolis. At the conference, TD Ameritrade Institutional had a booth set up for advisors to share their stories about how and why we do what we do - all in an effort to make finance more relatable - a worthy goal! They call it their Human Finance Project. 

I had the privilege to share my story. I'm proud of what we're building and how we're building it. I hope you are too. Let me know what you think!

 

Short stories that are long on inspiration. Listen to Jennifer H's story! https://humanfinance.com/project
 

April is Financial Literacy Month

 

In addition to being a Certified Financial Planner and owner of Bridge Financial Planning, more than ten years ago I started Common Cents Financial Literacy, Inc. to address the lack of basic financial education and the impact that lack of knowledge can have.

While statistics around the country are different, here in my hometown of Chattanooga, the statistics are bleak. Tennessee has the highest per capita rate of bankruptcies in the nation. Chattanooga is a mini-microcosm of the wealth disparity we’ve seen play such a big role in politics lately. There is a lot of ‘old money’ here, but we also have higher rates of poverty than the national average. Our education system seems to get in the news for all the wrong reasons lately (but positive change is around the corner – Thanks Chattanooga 2.0!).

Chattanooga has a lot of positive attributes too. We were the first city in the Western hemisphere to have a Gig internet connection – that has already had a significant positive impact on our entrepreneurial landscape. A lot of that ‘old money’ has been generously donated to many philanthropic causes, and we are blessed with amazing natural resources and activities. Our community is strong in a lot of ways, but personal finance is not one of them. I believe that’s probably true for a lot of other communities too.

I’ll attempt to explain some of the issues I see as it relates to financial literacy now.

The problem is simple. Financial literacy is seen as important, but not critical even though personal finance decisions impact nearly every corner of our lives. We aren’t taught how managing finances well supports our ability to create a future that is uniquely our own and keeps us and our families resilient in tough times.

It’s easier and more instantly gratifying to work on a crisis that can render more immediate results. Financial education requires sustained effort and a dedication to change the status quo. If financial education is done well and consistently, a lot of financial crisis situations can be avoided! Will there still be poverty and situations that create desperate situations? Yes, and we should try to address those situations too. However, a lot of what we struggle with financially can be avoided with education, proper planning, and values/goals alignment.

The problem is that we are taught that credit card debt is normal. We are taught that any amount of debt is acceptable for an education. We are taught that sales people should tell us how much house, car, name your ‘thing’ here, we can afford. We don’t know that a Net Worth Statement is a much better assessment of personal wealth than all the flashy stuff someone may have. And, we’re often confused between a net worth statement and personal self-worth.

It’s also evident that a lot of the financial education available is misguided, at best. Teaching ‘how to be a millionaire’ or pretending that forgoing a cup of coffee will solve all your budget problems is not working. Real solutions start with assessing the value we assign to money. What goals, dreams, and priorities can be achieved by managing it well? What are the practical day-to-day steps we can take today to avoid a big financial trap?

The results of successful financial literacy are far reaching. When we don’t feel like our next paycheck is already spent, we can literally afford to take on new opportunities. The results empower women. Women make more than 50% of the household purchasing power, live longer, and make less than men – women will be direct beneficiaries of increased financial education. Managing personal finances well allows families to be stronger: financial stress is the top reason cited for divorce. Financial stress makes employees less productive. People with strong personal finances are the ones with the opportunities to start businesses – it’s an economic development issue.

Recognizing this effort as critical and not just important will be the biggest hurdle we overcome.

Join us in supporting Common Cents Financial Literacy.

Thank you,

Jennifer

Common Cents works with schools, youth organizations, the faith-based community and others to provide financial education lessons to ages 16-22 using a train-the-trainer approach. If you are interested in learning more, please contact me at  jennifer@ccfli.org