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How to Navigate Open Enrollment and Max Your Benefits

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We are now entering open enrollment season for many companies across the country.  Most people don’t pay much attention to the process, but this is an excellent time to do a quick assessment of your financial situation.  Your decisions could make a big difference in the growth of your retirement funds. Plus, you will be able to sleep better at night knowing that your family is adequately protected in event of an illness, disability or death.  Here is a checklist of items to review during this important time period.

Increase Your Retirement Savings

Aim to contribute at least enough to receive the company match.  This is free money your company gives to as an incentive to put away money for your future retirement.  Ideally, you should be contributing at least 10% of your salary.  If you are not quite there, aim for increasing this gradually over time. Note that the maximum amount you can defer from your paycheck in 2017 annually is $18,000 or 100% of your salary, whichever is less. If you are 50 or over you can defer an extra catch-up amount of $6,000 for a total of $24,000 annually.   If you are behind on retirement savings try your best to contribute the maximum.

Another consideration is to choose the Roth 401K option (if your company offers it) if you are in the 25% tax bracket or lower.  Chances are your taxes will be higher in the future, so paying a lower tax now for money that will compound and grow tax-free makes sense, especially if you have a long time horizon.  This will decrease your cash flow in the short term but you will be happy for the tax break when you take withdrawals in retirement.

Review Your Investment Selection

Check your overall allocation to the stock market and research the funds offered in your company’s plan.  Make sure that you are comfortable with the risk in your portfolio.  For example, if you are approaching retirement, youmost likely don’t want to be invested 100% in the stock market.  Review the prospectuses for details on 1) goal of the fund 2) expenses as indicated by the “expense ratio” and 3) track record against an appropriate benchmark. You can get additional fund analysis via Morningstar.com. Try to build a diversified portfolio with the lowest cost funds provided.  You can seek out the help of a fee-only financial planner to provide you with direction here or simply choose a target retirement fund.  These funds build a portfolio for you, but make sure you are aware of the exposure to the stock market as target date funds have varying “glide paths“.  Confirm the allocation to stocks and bonds in the fund’s prospectus.

Select The Appropriate Health Insurance for your Situation

If you are young and/or healthy, you will be able to reduce your monthly payroll deductions for your health insurance if you choose a high deductible plan.  Plus, you can then contribute to a health savings account which has a triple tax advantage.  The money you put into the account is pre-tax, grows tax-free and won’t be taxed if you use it for qualified medical expenses. It is the only savings account in which Uncle Sam never taxes your money. Ultimately, you will need to weigh the advantages and costs of a traditional plan versus a high deductible plan.  Pull your medical records for the past year and look at how much was spent on copays, deductibles and other out of pocket costs.  Make sure to include your prescriptions medication costs.  Compare those charges to the difference in the cost of the plans and see if you would have exceeded the out of pocket limits.  If you are planning a lot of procedures next year, it may make sense to choose a plan that costs more but has lower deductibles and out of pocket charges.   Note that some plans have restrictions on the doctors in the network or may require prior authorization.

Make  Use of Your FSAs (Flexible Savings Accounts)

Be sure to also fully fund a flexible savings account if you anticipate out of pocket health expenses next year.  Contributions to FSAs escape income and payroll taxes.  The maximum allowed in 2017 is $2,500.  Note that over the counter drugs will not be covered through as FSA unless there is a prescription from your doctor for these medications.   You can also contribute up to $5,000 to a pretax Dependent Care Flexible Savings account.  This account  lets you use pretax dollars to pay for eligible expenses related to care for your children under 13, a disabled spouse, or an elderly parent who is physically or mentally incapable of self-care.

Supplement your Life and Disability Protection

Monthly premiums for life and disability coverage are inexpensive when you are young, but as you approach 50 these premiums can become onerous.  Chances are, like most Americans, you are underinsured when it comes to protecting against a catastrophe.  Make sure you have adequate coverage and consider purchasing individual coverage to supplement your group policies.  These policies will likely be cheaper and also portable should you lose your job.  The rule of thumb is to have disability coverage in the amount of roughly 2/3rds of your pretax income.  Life insurance should be at least 7-10x your salary but depends on your proximity to retirement, expenses, and number or dependents.

Don’t Miss Out on Other Company Benefits

See if your company provides long-term care.  These group policies while not as flexible as individual coverage can be inexpensive.   Many companies also provide subsidized estate planning documents or will services.  Be sure to take advantage of this if you do not currently have estate documents in place.  This is also a good time to check the annual funding notice of your company pension plan if you have one.  Ideally, the plan should have a funding ratio of 75% or greater.

Finally, spend the time needed to make these decisions.  These are integral pieces of your financial life and deserve a few hours of your thoughtful consideration.

 

 

The post How to Navigate Open Enrollment and Max Your Benefits appeared first on Ascend Financial Planning.


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