Welcome to the Real World: New Beginnings

In the past year my children have had major lifestyle transitions: graduations, weddings, and new jobs. My son got his first real job in May. He now has benefits. He presented me with a binder full of choices. Then last week my daughter came to me with benefit choices for her new job. If you are in a similar situation, maybe our family’s discussions can provide some guidance.

  • Health Insurance: My children are young and healthy. They can take responsibility for their own healthcare decisions. A plan with a high deductible and a linked Health Savings Account (HSA) may be the best option. The premiums are low; they can take the difference between the low premiums and the higher HMO or PPO options and invest them in a Health Savings Account. A Health Savings Account, unlike a Flexible Spending Account (FSA), can be rolled over year to year. The idea is to save enough to cover future deductible costs. As the account grows, it can be invested. Some companies will fund a portion of the HSA since this type of plan provides a savings to them as well. If your company does not offer an HSA, speak to your benefit department. As long as you have a qualifying plan, you can open your own HSA and have a portion of your pay deposited into it.
  • Retirement Plan: For young adults this is a hard choice since retirement seems like a lifetime away. Jeff Acheson gave excellent advice in his insight “Enough About Retirement Already!” My addendum is to split the contributions between the typical contributory plan and a Roth. This provides the benefit of tax savings on money contributed to the traditional plans, but the Roth will grow tax-free and will not be taxed upon distribution. I’ve seen individuals with huge retirement savings in traditional plans that upon age 70.5 are subject to minimum distribution rules. This increases taxable income and creates large tax liabilities.
  • Life insurance: Typically the company policy benefit equals annual salary. Do they need more? Probably not. My son has no dependents. But if we had cosigned a note with him, I would want insurance in at least the amount of the note. My daughter is married and in the process of acquiring a house, so yes, increased life insurance benefit would be beneficial. Group insurance policies are the least expensive way to get coverage but can disappear with a job loss. Once they have families, then some permanent insurance may be a consideration.
  • Disability: Yes, both will need an income stream if there is a prolonged medical issue. A group policy is the most affordable option. Remember, for the younger person, the risk of disability is higher than the risk of dying.
  • Emergency Fund: This is the most important and often the most overlooked financial component. Three to six months of living expenses should be readily available in a savings account. I suggested they start right now to divert cash from their paychecks directly to savings. Don’t be overwhelmed by the size of the savings goal. Even a small amount per pay helps.

Good planning will help secure the future. Don’t assume you’ll get to it later. Time has a way of running away from you. At least get some reins on before it takes off.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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