Tips for Choosing Benefits in Your First Job

When you get your first job, you are so excited because you are finally independent!
Nicole Swanson, CFP®, ChFC Monday, 06 May 2019

Tips for Choosing Benefits in Your First Job

But on your first day, you’re given a massive employee benefits package and have no idea where to begin. College didn’t teach us how to select benefits! Here is a guide as you begin your first job and enroll in employee benefits.

401k Enrollment:

Many employers automatically enroll you when you become eligible. You can choose a certain percentage of salary to contribute each pay period. You can change this percentage any time because you shouldn’t have to wait for benefit enrollment periods with your 401k Plan. You likely get a matching contribution from your employer too, which is free money! Make sure to contribute enough to meet the matching requirements. For example, if your employer matches 50% of your contribution up to 6% then you should contribute at least 6% because that means your employer will contribute an additional 3%, which means you just earned a 50% return on your first investment! You will have two options to select for your 401k. You can elect pretax or Roth (after-tax) or a mix of both. The difference is for pretax you get the tax break now and pay taxes when you take distributions in retirement. For Roth, you pay the taxes now and get the distributions tax free in retirement. For most people starting their first job, Roth makes the most sense as you are likely in a lower tax bracket now than you will be in retirement.

When selecting investment options, there will typically be a group of target date funds, which is a fund with a date next to it. These dates correspond with the year of expected retirement. For example, if you plan to retire in 40 years and it’s 2019 you would select the 2060 fund because that date is closest to your target retirement date. The fund will start off aggressively invested because of your long-term time horizon and will become more conservative as you approach retirement. These funds can make investing your 401k very easy without regular review or knowledge of stock market performance because they are usually well diversified across US and International markets with a mix of stocks and bonds. Plus, you only need to pick 1 fund which keeps your investment account easy to maintain.

Health/Dental/Vision Insurance:

Determine what benefits you need before signing up because these benefits will usually cost you money. It is important to be insured, but you may still be covered under your parents’ health plan if you are under 26. If you enroll in health insurance, you may also be eligible for a health savings account (HSA). Many employers match contributions into this account too! The dollars contributed to an HSA are neither taxed on the way in or on the way out, but the account can only be used for medical expenses and prescriptions. Your HSA is an account you can take with you if you ever decide to move companies. The money never expires in there and can even be used for health care related expenses in retirement.

Life and Disability Insurance:

Your employer likely provides basic group life and disability insurance coverage. The standard life insurance amount is $50,000 where you can designate a beneficiary of your choosing. You are not taxed on this benefit. The short-term disability insurance coverage is typically 40-60% of base pay, but this can vary substantially across companies and be as much as 100% of base pay. The benefit is usually between 9-26 weeks but could be up to 52 weeks. Long-term disability starts after short-term disability ends and is typically 50-60% of base pay until age 65. If you aren’t taxed on your paystub for disability insurance premiums, that means the benefit will be taxable. I would recommend asking HR if you can be taxed on the insurance premium you pay so the benefits your employer pays will make the benefit tax-free if you need it because it is a very small tax to pay up front. Some additional things to consider are supplemental policies either through work or through outside providers for disability insurance and life insurance. One thing to consider is if you have dependents, for example, you may find that $50,000 of life insurance isn’t enough for your loved ones to cover expenses, rent/mortgage, college funding and more. For disability insurance, if you are the sole income earner, 50% of pay may not make ends meet if you ever become disabled.

Annual Bonus and Salary Increases:

I believe that annual bonuses and salary increases are the best opportunities for additional savings for retirement. Annual bonuses aren’t guaranteed, so you can’t plan for them to meet required expenses. The best way to treat an annual bonus is to use a small portion to treat yourself and then use the rest to make a great contribution to a retirement or investment account. For salary increases, you were able to live just fine on $50k, so why not try to increase savings when your salary increases to $60k? It is amazing how much savings is required for retirement. People are living longer and wanting to retire sooner, so the more you save and the sooner you save it will make a big difference in your ability to retire when you want to and to have the lifestyle you want in retirement.

Don’t let the excitement for your new job be overwhelmed by the paperwork associated with joining a new company. The decisions you make about benefits are very important because they have a big impact on your future for healthcare coverage and retirement savings. Most companies have people in the HR department that will be helpful in describing the information in the documents, but they might not be able to give you advice on what to choose. Hopefully, this article will help you be ready for that first day so you know what to expect, get a chance to make your decisions in advance, and have the opportunity to discuss these important topics with your family. Then you can focus on making a great first impression and building a successful career!

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About the Author

Nicole Swanson, CFP®, ChFC

Nicole Swanson, CFP®, ChFC

Nicole Swanson is dedicated to working with clients and helping them achieve long-term goals. After starting her studies at the University of Wisconsin-Madison as an Accounting major, Nicole switched to Personal Finance so she would have more opportunities to directly interact with clients. She enjoys getting to know people, learning about their background, and then developing a customized financial plan that will hopefully exceed their expectations for what life can look like in retirement (or even when they can retire). 


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