It's that time of year – time to make your benefit choices for next year. For Eli Lilly employees the period to make your choices begins October 17th and ends November 4th. Other employers' open enrollment period may differ but is probably around this same time. You only get a couple weeks to make decisions that will impact you and your family for all of 2017. These selections can only be made during this enrollment period and are irrevocable unless you have a change in your status. In the words of Eminem, "You only get one shot, do not miss your chance"... some of you get that reference and some of you have no idea. Anyway, make sure that you consider your options carefully.
Here are 10 things you should do during enrollment. Hopefully this will help make the process a little bit easier for you.
1. Enroll. If you don't enroll, your 2017 medical, dental and life insurance elections will remain the same as they were for 2016.
2. Consider using the Health Savings Account (HSA) option for your health insurance. This lets you invest money on a pre-tax basis, it grows without tax, and as long as it is used for healthcare expenses you can withdraw it tax-free. You can use the money to pay your medical expenses, including deductibles and coinsurance. And after age 65 you can withdraw the money for any reason, even non-healthcare expenses, and only your gains are taxable. So at that point it basically becomes like an IRA. If you leave Lilly you don't leave your HSA behind. The money in your HSA is yours and you can continue to use it for qualified health expenses.
You should especially seriously consider using the HSA if you're maxing out your 401(k) because this is an excellent place to stash some more cash for your future. An individual can contribute up to $3,400 per year and a family up to $6,750 per year. For Eli Lilly employees, Lilly will contribute $800 for an individual and $1,600 for a family. If you will be age 55 or older on December 31, 2017 you can make a catch-up contribution of an additional $1,000.
3. Save money and taxes by using Flexible Spending Accounts. Lilly offers three different Flexible Spending Accounts: Health Care FSA, Limited Purpose FSA and Dependent Care FSA. Your contributions from your paycheck go into your FSA without being taxed and the money can be used to reimburse yourself for various medical expenses not covered by insurance, such as eyeglasses, contacts, dental expenses, prescriptions, copayments, coinsurance, deductibles and eligible dependent day care expenses. You can use money in your FSA to pay these expenses for yourself as well as for your spouse and dependents. This saves you money because you are paying these expenses with money that you did not pay tax on.
You can contribute up to $2,550 to an FSA and $5,000 to the Dependent Care FSA. But be careful. If you don't use it, you lose it. Any money left in your FSA after March 31you will lose. So plan carefully to try to match up the amount you will contribute with what you project you will spend.
4. Get life insurance. Life insurance is the foundation of a family's financial plan. If you have a spouse and or children get as much of the company life insurance as you can get. Your employer usually provides a certain amount. For Eli Lily employees, Lilly provides two times your base salary at no cost to you and then you can purchase up to an additional five times your base salary, for a total of seven times your base salary of life insurance with no medical underwriting.
I don't think people spend enough time planning their family's life insurance needs. Consider the family that has a $500,000 policy on one spouse and thinks that they're covered pretty well. Let's assume that spouse is making $100,000 a year. If they were to die that $500,000 policy would provide income for the family for five years. So $500,000 really isn't a lot of life insurance because it has to replace your income. And I'm sure you want it to replace the income for more than five years. At a minimum, sign up for all the life insurance that the company will provide and as much as you're able to buy. After that look outside the company to buy even more if you need to.
5. Sign up for additional Extended Disability Leave. Just as you would be unable to provide for your family if you were to die, a disability can also impact your ability to provide an income for your family. Your health insurance does not replace income from disability. Disability insurance does. It insures your income if you are unable to work due to a prolonged illness or injury.
Lilly provides short-term disability and extended disability. Short term disability will provide 65% of your full pay for a number of months depending on your years of service. Extended Disability Leave (EDL) will provide 55% of your monthly pay. You can purchase additional EDL during benefits enrollment to provide an additional 15% of your monthly pay to get you to 70% of your monthly pay if you have a long-term disability.
The next 5 tips are things that you can do any time of year, but benefits enrollment is a good time to remind yourself to do them.
6. Get the 401(k) match. Make sure you're contributing to your 401(k) at least the amount that your employer will match so you get the maximum employer match. It's free money. Eli Lilly matches 6% of your base salary. If you're not an Eli Lilly employee and you're unsure of what the employer match is, talk to someone in your benefits department and ask or get the Summary Plan Document for you 401(k). This is a document that provides all the details for your plan and each participant in the plan is entitled to receive a copy.
7. Increase your 401(k) contribution automatically every year. Set up auto escalation of your 401(k) contributions. Often people set up their 401(k) contribution percentage and don't adjust it upward as the years go by. It's kind of out of sight, out of mind. It's definitely a good idea to increase your 401(k) contributions whenever you can. At a minimum, if your employer offers automatic increase or automatic escalation of your contributions each year, like Eli Lilly, sign up for that. This way your contribution rate will increase each year and you don't even have to think about it.
8. Max out your 401(k). As I mentioned in number 7, often people set their contribution rates and never go back and adjust them. They start making more money but they never contribute more to their 401(k). Double check and make sure that you're contributing as much as you're able to afford. The maximum is $18,000. If you're over age 50 you can contribute another $6,000 for a total of $24,000 per year.
9. Take a serious look at your 401(k) investment options. You should make sure that you have your investments spread out in a way that will serve you best for the long term. If you're young and early in your career you can have more in stocks. Over the short term they will bounce around but historically they have had higher returns than bonds. Even if you're older and later in your career you should carefully consider the amount you have in stock investments because you're investing for the rest of your life, not just until you retire. For many people their time horizon is actually longer than what they think it is.
And don't fall into the trap of chasing performance thinking that you should invest in whatever investment or investments have done well lately. The reality is that those are the investments that likely won't do as well over the coming year or two. Investments move in cycles. It's impossible to predict which investment categories are going to be up or down at any particular time. This is precisely why you should spread your money out among several different types of investments so that you don't have to try to predict which categories are going to perform a certain way at a certain time.
10. Consider using the Roth 401(k) for part or all of your 401(k) contribution. In a traditional 401(k) the money you contribute is not taxable. This lowers your current income tax but you will have to pay tax on the money when you withdraw it later for retirement. In a Roth 401(k) you pay tax now on the money you contribute, but it grows without being taxed and is not taxed when you withdraw it.
Unlike a Roth IRA, there are no income limits to prevent you from contributing to a Roth 401(k). The 2017 limits have not been announced yet, but for 2016 if your income is above $132,000 if you're single or $194,000 if married, you cannot contribute to a Roth IRA. But you could still use a Roth 401(k).
A Roth 401(k) can be a great way to diversify your retirement savings so that you have some money that will be tax free in retirement. It could especially make sense for you in the following cases:
- You are in a lower marginal income tax bracket now and expect that to be higher in retirement.
- Your retirement savings and income (pension and Social Security) are mostly in tax-deferred assets (like traditional 401(k)s and IRAs).
- You have enough cash flow to make sufficient ongoing contributions on an after-tax basis. Because it takes more money to make a Roth 401(k) contribution than a traditional 401(k) contribution because you're paying tax on it when you contribute.
A Roth 401(k) may not make sense for you if:
- You are currently in a high tax bracket and expect to be in a lower marginal tax bracket during retirement.
- You aren't able to make significant contributions because of the taxes. You may be better off using the traditional 401(k) and getting more money into the 401(k).
The Roth vs. Traditional 401(k) decision isn't an all or nothing decision. You can select a certain percentage of your contribution to go to each. How much you should allocate to either one is a personal decision. There isn't a definite answer as to whether the Roth is right for you or not. There are several factors to consider, including your current situation and what your projections are for your future income and taxes.
Protect your family and your future by selecting your benefits choices carefully. It's worth spending some time on because after the enrollment period closes there's no going back until next year.
By Ed Snyder, CFP®, ChFC
These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.