Financial Planning

The cost of higher education has skyrocketed, leaving many families scrambling to figure out how to afford tuition. And while investing in a 529 plan to help fund your child’s education is always a good idea, even high-income earners may wonder how they will cover costs, especially in households with multiple children. Fortunately, there are options available for financial support, but learning what they are and how to pursue them requires research, time, and effort.

Finding help with college expenses can be challenging, but the potential payoff is well worth the effort. According to CollegeBoard, the average tuition and fees for a four-year public in-state university were $10,740 in 2021, $27,560 for out-of-state residents, and $38,070 for private nonprofit four-year institutions. This doesn’t include room and board, which averages upwards of nearly $18,000. (1)

Multiply those numbers by four years, and a bachelor’s degree now runs from approximately $109,000 to $223,000—and the cost continues to rise each year. Over the past 20 years, the data shows tuition and fees alone at public four-year institutions have increased by nearly 180%, dramatically outpacing inflation. (2)

Unfortunately, rising costs are placing higher education out of reach for many American young people. And in pursuit of achieving this aspect of the American Dream, some are finding themselves in student loan debt that exceeds their ability to pay it back without significant financial strain. This is why it’s important for parents to do what they can to help their college-bound children find help paying for college.

Grants 

The best thing about a grant is that it typically doesn’t need to be repaid unless a student withdraws or fails to complete a service obligation. However, most grants, such as Federal Pell Grants or Federal Supplemental Educational Opportunity Grant (FSEOG), are only available to students with exceptional financial needs. Others are available to students who fit certain criteria, such as the Iraq and Afghanistan Service Grant for children in Gold Star Families. And some are for those who agree to a particular service obligation, such as the Teacher Education Assistance for College and Higher Education (TEACH) Grant. 

While most grants tend to be need-based, you may also find merit-based grants for students who demonstrate a commitment to community service, high levels of academic achievement, or remarkable leadership skills. Conduct an internet search for education grants in your state, and you may find options that meet your student’s profile.

Scholarships

A scholarship is a type of financial aid designed to help students cover the cost of an undergraduate degree, awarded based on merit. Like grants, scholarships do not have to be repaid. Eligibility criteria are set by the scholarship granting organization, such as the college or university, state education departments, private businesses, foundations, charities, and clubs.

Some scholarships may be awarded based on academic merit, exceptional athletic achievement, artistic talent, community service accomplishments, leadership track record, or merit-based diversity and inclusion designations for historically marginalized groups. Other scholarships are awarded as prizes for events such as essay contests, beauty pageants, oratorical contests, or robotics competitions. 

You can find information about scholarships through high school guidance counselors and the college financial aid office and by doing research for yourself. Search online, check with your employer and any clubs or organizations you are a member of, look into local opportunities, and ask around. You might be surprised by what you find.

Work-Study Jobs

The Federal Work-Study Program is a way for students with financial needs to earn money to help pay for education expenses by working a part-time job. Unlike Pell grants, the need criteria for work-study may accommodate some middle-income families. Work-study jobs are usually community service-oriented or related to the student’s intended course of study. For example, if the student majors in psychology, they may work for a mental health facility affiliated with the school, providing administrative support. 

The idea is to allow students to learn and contribute to public interest while earning at least minimum wage. Jobs may be on-campus working for the university or off-campus working for a non-profit, civic organization, or public agency. 

Aid for Military Families

If either parent is a veteran or active duty or the student is planning to join the military or is currently active-duty personnel, the federal government and various nonprofit organizations offer money to cover higher education expenses.

Reserve Officers’ Training Corps (ROTC) scholarships, through the U.S. Army ROTC, Navy ROTC, and Airforce ROTC, award full and partial scholarships with various stipulations based on merit. Through the GI Bill, The Department of Veterans Affairs also offers educational benefits for veterans, widows, and dependents at select schools and job training sites. 

Organizations that offer scholarships to military families include the American Legion, AMVETS (American Veterans), Paralyzed Veterans of America, and Veterans of Foreign Wars, as well as smaller nonprofits throughout the country. 

Other Federal and State Aid

The federal government also offers a variety of additional financial aid programs, including educational vouchers for former foster youth, tax credits for higher education, community service awards through AmeriCorps, Department of Health and Human Services programs, the National Institutes of Health programs, and more.

State governments offer aid, such as discretionary grants awarded using a competitive process. Some states have generous higher education support programs, such as the CAL Grant for California-specific financial aid, the New York State Tuition Assistance Program (TAP), and the Georgia Hope Scholarship.

Student Loans

A student loan for college is money offered as part of the student’s financial aid package, and it must be paid back with interest. Federal student loans are funded by the government, and private student loans are made by another lender, such as a school, bank, credit union, or state agency. Types of federal loans for undergraduate students include Direct Subsidized and Unsubsidized Loans. Federal student loans for parents (which parents are responsible for paying back) are called Direct PLUS loans. 

Federal student loans have terms and conditions set by law and come with benefits such as income-driven repayment plans and fixed interest rates. On the other hand, private loans come with terms and conditions set by the lender and tend to be more expensive than federal loans. In either case, the interest and fees are not cheap, and it’s a major commitment that should not be entered into lightly. 

For many students, loans are a means to an end and a necessary evil that can’t be avoided. Gone are the days when a part-time job or even entry-level full-time job pays well enough to work one’s way through college, even with grants and scholarships. 

But on average, a bachelor’s degree holder earns 75% more over a lifetime than someone with only a high school diploma. While going into significant debt can make other goals, such as purchasing a home, difficult, and the media often points to billionaire dropouts like Mark Zuckerberg and Bill Gates, the data still shows that education is the best route to earning more money and building wealth over a lifetime. (3)

How to Get Financial Aid

The most important step in gaining access to grants, scholarships, loans, work-study, and other aid is for the student to apply for it through the school’s financial aid office using the Free Application for Federal Student Aid (FAFSA®). 

Before completing the form, you should use the Federal Student Aid Estimator to estimate how much the student may be able to receive and what your Expected Family Contribution (EFC) will be. From that point, you can start considering various options.

Whether your student will be pursuing loans, grants, scholarships, work-study, other aid, or all of the above, the sooner you get started, the better. Many types of aid are awarded on a first-come, first-served basis, so it pays to complete the FAFSA early. (It becomes available on October 1st of the year PRIOR to enrollment.) Waiting until the last minute can mean you miss out on funds and opportunities that would have been available to your family and can be a costly mistake.

1. https://research.collegeboard.org/trends/student-aid
2. https://educationdata.org/average-cost-of-college-by-year
3. https://www.cnbc.com/2021/10/13/more-education-doesnt-always-get-you-more-money-report-finds.html

 

Strata Capital is a wealth management firm serving corporate executives, professionals, and entrepreneurs in the New York Tri-State Area, focusing on corporate benefits and executive compensation. Co-founded by David D’Albero and Carmine Coppola, the firm specializes in making the complex simple to ensure clients feel confident in their financial decisions. They can be reached by phone at (212) 367-2855, via email at carmine@stratacapital.co, or by visiting their website at stratacapital.co. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.

Receiving a financial windfall, whether it’s a surprise inheritance, a lottery win, or a legal settlement, can be both exciting and overwhelming. It’s natural to feel a rush of emotion and to want to spend the money right away, but it’s important to take a step back and think about how to be smart with your windfall. 

Here are a few tips to consider if a financial windfall occurs:

Don’t Make Any Hasty Decisions

It’s important to take your time and think through your options before making any major financial moves. Avoid the temptation to make impulsive purchases or investments. It may be helpful to allow yourself a cooling-off period before making any major decisions to allow emotions to calm. This is especially important if your newfound wealth is the result of the death of a loved one, as grief may cloud your judgment. Give yourself time to adjust to the change in your financial situation and to think through your options before acting.

Pay Off Debt

If you have high-interest debt, such as credit cards or student loans, it may be a good idea to use some of your windfall to pay it off. With credit card debt in particular, the interest you are paying may be hindering your ability to pay for other things, but even for lower-interest debts, paying them off before spending in other areas often makes good money sense. And paying down debt will also improve your credit score.

Build Your Emergency Fund

If you don’t already have three to six months of income set aside in an emergency fund, now’s the time to get that taken care of. Having a fully funded emergency fund is important in the case of an unexpected event like a major home or car repair, medical problems, or job loss. 

Max Out Your Retirement Accounts and Invest

Once you’ve taken care of debt and set aside money for a rainy day, saving some of your windfall for your future may be your next goal. Even if you’re close to retirement, the power of compound interest can still work to your advantage. You may decide to make it a priority to max out contributions to your retirement account and consider investing the rest for other long-term goals, like buying a home or paying for a child or grandchild’s college.

Beware of Lifestyle Creep and Impulse Buys

A financial windfall can tempt you to upgrade your lifestyle and spending habits, but it’s important to be mindful of overspending and to maintain a level of discipline. Even though your expenses may be lower now that some or all of your debts are paid off, you may be better served saving the excess towards a long-term goal than finding new ways to spend it. And while there’s nothing wrong with treating yourself with some of your windfall, you may want to pause before giving in to the temptation to make large, expensive purchases (or even a lot of little ones) that aren’t true needs. A budget can help you keep track of your spending and ensure that you’re using your windfall in a way that aligns with your goals. 

Give Back

If you’re feeling grateful for your windfall, consider giving back to your community or supporting a cause that is important to you. Or, you could put some aside for a child or grandchild to help them buy their first car or home. This can be a fulfilling way to use your money and make a positive impact.

Seek Professional Advice

It’s often suggested to seek professional advice when you come into a large sum of money. Depending on your circumstances, consider working with a tax professional to understand the tax implications and a lawyer to help navigate any related legal matters. Also, speaking with a financial advisor, such as our team, can help you make informed decisions about developing a plan for managing and investing the money. 

Be Smart

By following these tips, you can be smart about your windfall and use it to help improve your financial future. The main idea should be to have a well-thought-out plan, make smart financial decisions, be mindful of the long term, and seek professional advice.

 

Strata Capital is a wealth management firm serving corporate executives, professionals, and entrepreneurs in the New York Tri-State Area, focusing on corporate benefits and executive compensation. Co-founded by David D’Albero and Carmine Coppola, the firm specializes in making the complex simple to ensure clients feel confident in their financial decisions. They can be reached by phone at (212) 367-2855, via email at carmine@stratacapital.co, or by visiting their website at stratacapital.co.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.

As people live longer and longer, it becomes increasingly important to plan thoroughly for “life after work.” Most people know they’ll need to prepare financially for retirement, but they often overlook the possibility of paying for a long-term care event or misunderstand how this kind of care is funded.

At Strata, we look at our clients’ financial worlds through a holistic lens, meaning we consider an individual’s entire situation before we make recommendations. And in the many cases we’ve managed, we’ve learned one thing—there simply isn’t enough education or awareness about long-term care planning. So, in our next couple of blogs, we’re sharing some information about long-term care and how to best prepare for it.

What qualifies as Long-Term Care?

Long-term care, or LTC, is (as the name implies) a form of medical or assisted-living care administered over an extended period, generally referring to care of the elderly. And while it’s not top-of-mind for most people in their earning years, it’s an important scenario for everyone to consider and plan for, as more than two-thirds of individuals over the age of 65 will require long-term care at some point in their lives.

Many people associate the term “long-term care” with living in a nursing home or assisted-living facility, but long-term care can also mean having a professional care for you in your own home. Unfortunately, due to lack of planning or resources, not everyone has a choice in the kind of long-term care they receive. Home health care can cost anywhere from $56,000 to more than $200,000 annually if around-the-clock skilled nursing care is required, and the cost of assisted-living facilities in the New York City metro can range from $79,000 to $102,000 annually—which is why it’s important to prepare for these costs.

The Government & Long-Term Care Coverage

One common misconception about long-term care is that the government will pay for it, particularly if an individual is on Medicare—but that’s not exactly the case. Medicare will cover skilled care at a nursing facility after a three-day hospital stay. And even then, it only covers the full cost for the first 20 days; after that, it will cover a portion of the cost for up to 100 days—from there, it’s the individual’s responsibility to cover the cost.

Medicaid, on the other hand, is a program designed for low-income households, so there are specific income and asset requirements* an individual must meet to qualify for Medicaid. If an individual qualifies, Medicaid will cover the cost of long-term care only at approved facilities.

Another common misconception is that the government (or even LTC facilities themselves) will seize your assets to pay for your long-term care—but again, that’s not the case. Medicaid will only take responsibility for the cost of your care once you’ve spent your assets and your net worth has fallen below the threshold, making you eligible for benefits.

*Something to understand about Medicaid eligibility is the “Five-Year Look Back” policy. When determining an individual’s eligibility, Medicaid reviews their records from the previous five years. The purpose is to discover if a person might have gifted or transferred assets out of their name in order to purposefully impoverish themselves and therefore qualify for benefits.

Will My Health Insurance Cover Long-Term Care?

The short answer is no—typically, health insurance doesn’t cover this type of care. Fortunately, there are other ways you can prepare for these costs.

How Can I Prepare for LTC Costs?

There are two primary ways you can plan for long-term care costs: purchase a LTC insurance policy or self-insure. There are advantages and disadvantages to each, so it’s important to discuss your situation with a financial professional to determine the best option for you.

Self-Insured Long-Term Care

In this case, self-insuring simply means setting aside funds you can use later for long-term care. That said, for this strategy to be effective, there are several factors to consider and address:

• The cost of long-term care is rising year over year, so you’ll need to ensure your savings keep pace—this usually means implementing some sort of investment strategy.
• There are multiple ways to save money for LTC costs—in a retirement fund, in cash, etc.—and you’ll want to determine what kind of vessel is most advantageous for your situation.
• If you’re married, there might be legal complications down the road unless you work with an attorney to ensure your assets end up in the right hands—for example, if the assets are in your name and you pass away before your spouse, you want to make sure your spouse has access to those funds you set aside for long-term care.

Self-insuring isn’t for everyone; for this strategy to be beneficial, you must have the means to set aside cash for long-term care, and even then, doing so could potentially diminish your retirement lifestyle. There’s also the possibility you could bankrupt your spouse if you end up needing more money than you planned for LTC, or if you need it sooner than anticipated.

Policies to Cover Long-Term Care

The primary reason most people purchase a LTC policy is so they can receive the kind of care they want, rather than be left with fewer or less attractive options. There are several types of LTC policies, so it’s important to understand the features and benefits when choosing one.

Traditional LTC is the type of policy most people are familiar with, and it allows for the most flexibility when designing your benefits.

Hybrid Life & LTC policies are designed for individuals who have a LTC and life insurance need. With this kind of policy, you can leverage your death benefit to pay for LTC costs, but if you pass away without needing long-term care, your death benefit is passed on to your beneficiaries.

If you decide to self-insure, you might consider Asset-Backed LTC coverage; this strategy allows you to leverage your current assets for LTC purposes. That means if you set aside $100,000 in a savings account, you could then reposition that cash into this type of insurance policy. It would then enhance your savings (so your $100,000 might be worth $400,000) for the purposes of long-term care. This kind of insurance policy also offers a death benefit, a return-of-premium feature, and can grow at a fixed rate to help your savings keep pace with inflation.

Legal Work, Gifting Strategies, and Asset Transfers

Some people opt to set up trusts or start a gifting strategy to transfer assets out of their name. Though this can be an effective strategy for some, it’s important to remember that you will lose control of and access to those funds. One of the most common strategies used by elder-care attorneys is to transfer the primary residence to an irrevocable trust; this can be an effective strategy if you plan to live the rest of your life in that home. Transferring liquid assets requires more planning, as you must make sure you won’t require those funds later to supplement your lifestyle or expenses. It’s also difficult to predict when you will need care, and you must consider the Five-Year Look Back for this strategy to work seamlessly. This strategy is typically used in conjunction with one of the others mentioned above.

Start Today

When it comes to long-term care planning, there is no one-size-fits-all solution. Each person’s situation is different, so it’s best to have an open mind and consider all your options. One thing is true for everyone, though—the earlier you start planning, the better. That’s why we recommend meeting with a financial professional as soon as possible to discuss the best strategy for you. We’ll review your options with you, identify potential risks, and help you find the solution that best fits your needs and goals. If you’d like to talk with one of our planning professionals, we’d love to help—you can schedule a consultation with us here.

Financial planning is a professional service that’s often misunderstood. Some people assume wealth management is only for the wealthy or that advisors are only out to sell them something. But a fiduciary advisor helps you make the most of the money you have—they coach you through financial decisions that fall in line with your goals.

As financial planners, it’s our job to understand what you want to accomplish; educate you about potential roadblocks, setbacks, and opportunities to build your wealth; and help you achieve your financial goals in the most effective way possible. In short, a good advisor helps you optimize your financial world so it supports the life you want to live—and we do it all by putting your needs and desires above our own.

That said, not all financial advisors are created equal. Some advisors aren’t required (and/or don’t have the desire) to give advice that’s solely in your best interest. Depending on the organization they work for, licenses they hold, or what their planning ideology is, some advisors may suggest strategies or products because they receive higher compensation for them or have proprietary product requirements from their employer to recommend them—this means the product could be “suitable” or appropriate for you, but not necessarily in your best interest.

That’s why it’s incredibly important to do your research before engaging a financial advisor. Ask your friends, family, or colleagues for recommendations and find out if the advisor they work with is a fiduciary. If they are, it’s important to clarify whether the advisor is a fiduciary solely for the account they are managing or if they are required to give fiduciary advice regarding your entire financial situation. (You can also visit BrokerCheck.com to see if the advisor has any disclosures on their licensing.) Advisors working in a fiduciary capacity are required to serve your best interest, so you can trust their recommendations will be genuine and beneficial. (And yes, we at Strata operate in a fiduciary capacity!)

So, working with the right kind of advisor can be highly beneficial—but how do you know if you’re ready to engage a financial planner in the first place? Here are some indications you should hire a professional to help manage your wealth:

• You have an ambitious financial goal (like buying a second home) and you’re unsure how it will affect your finances.
• Your children are about to start college and you’re trying to determine the best way to fund their education.
• You’re thinking about retiring in a few years.
• You just experienced a significant liquidity event (e.g., your company was bought out, you received an inheritance, you sold property, or your stock options vested).
• You feel uncertain about a specific financial decision or your finances in general.
• You want a practical plan to prepare for the future and you’re not sure where to start.

If any of these scenarios sound like you, you’d likely benefit from talking to a financial planner. That said, we know people sometimes still have doubts about whether working with a professional is necessary, so we want to address those concerns. Here are some common questions people have about hiring a financial advisor.

What do financial advisors do, exactly?

Essentially, we help you achieve your financial goals. For some, that’s early retirement; others may want to buy a second or even a third home. We start by getting to know you as a person; then we discuss your hopes and objectives. From there, we review every aspect of your finances and look for ways we can improve your strategies or help protect you from unnecessary risks. Whatever your financial dreams are, it’s our job to show you what steps you can take to achieve them.

Can’t I just do financial planning myself?

Yes, but consider this: most people only retire once, but we as advisors have “retired” dozens of times. We’ve walked multiple clients through multiple scenarios, and we’ve seen what works and what doesn’t. A 2019 Vanguard whitepaper says an investor could increase their net returns by 3 percent by working with an advisor. And Vanguard isn’t the only one—Russell Investments estimates that the value gained in working with a dedicated financial partner could mean as much as a 3.75 percent increase in returns.

So you can take a DIY approach, but you likely won’t reap the same benefits you would when working with an advisor. Just like you can go to court and represent yourself in matters of the law, you can manage your wealth without the help of a professional—but you’ll lower your chances of getting your desired outcome. When you engage the help of someone who specializes in wealth management, you’re more likely to achieve your goals and enjoy the process.

Many people also don’t realize the time they can save when working with an advisor. Engaging a professional allows you to focus on things that matter to you, rather than worry about financial details.

I work in finance for a living—why would I need help managing my own money?

More than half of our clients work for a financial institution, and they value our guidance. One reason is that not all financial professions are the same—just like you wouldn’t go to a podiatrist for heart surgery, an accountant or financial analyst won’t necessarily understand all the intricacies involved in personal (or business) wealth management.

For example, here’s something people–even those adept in financial concepts–often misunderstand: life insurance is not always completely tax free. Life insurance benefits are exempt from income tax, but not from state or federal estate tax. Depending on where you live, if you purchase a life insurance policy under your name rather than having your trust purchase the policy, you may subject your estate to estate taxes because the death benefits would be included in the calculation of your estate—potentially putting you over the limit for estate tax exemptions. If you live in a state like Massachusetts or Oregon, where the state estate tax exclusion is a mere $1 million, this could potentially affect your heirs.

Something else to know is that many people who work in finance are subject to restrictions or pre-approval when making investments. But if you sign over your investment discretion to an advisor, you can avoid that compliance hassle and benefit from the knowledge of someone who specializes in professional money management.

Am I too young to work with an advisor?

If you’re worried an advisor won’t agree to work with you (some do have minimum net worth or assets-under-management requirements), know that there’s an advisor out there for everyone—the key is finding someone you feel comfortable talking to and sharing the details of your life with.

Beyond that, “young” is a great time to start financial planning because you have so much time to save for your goals. And the more time you spend in the market, the less that you need to save.

For example, if you start saving $5,500 a year beginning at age 25 and continue until you’re 65, you’ll end up with $1,174,852 after those 40 years (assuming a 7% net rate of return). If you start saving the same amount at age 35 and get the same return, you’ll only earn $555,901.

Remember, you don’t get time back. We’ve met too many people who reach retirement and regret they didn’t start planning sooner. The best time to start planning is now, because the earlier you visualize your goals, and the earlier you take those goals to a financial planner, the better chance you’ll have of accomplishing them.

Is there ever a time someone shouldn’t work with an advisor?

If you feel overwhelmed by all the financial decisions you have to make, worry you might be missing something, or simply want greater confidence about your future, talk to an advisor. In our experience, this is the number one reason people seek financial guidance. Not only can an advisor help you clarify and prioritize your goals, but they can also show you the impact of financial decisions before you make them, so you don’t end up further from your goals.

That said, for a financial planner’s advice to be effective, you’ll need to keep an open mind and be willing to change—so if you’re not ready to make adjustments, it might be best to wait.

If you have more questions about what it’s like to work with a financial planner, please don’t hesitate to contact us. In the meantime, you can learn about various financial topics on our blog.

¹ https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf

²https://www.thebalance.com/should-you-hire-a-financial-advisor-4120717

³https://money.usnews.com/money/retirement/aging/articles/states-with-estate-and-inheritance-taxes#:~:text=State%20Estate%20Tax%20Thresholds&text=Massachusetts%20and%20Oregon%20have%20the,million%20and%20%245.9%20million%2C%20respectively.

Starting a new job is exciting—it usually means opportunity for growth, often in more ways than one. One of the challenges of transitioning jobs, though, is determining how to maximize your benefits—both those from your previous job and those at your new place of employment.

There are lots of factors to consider when reviewing your benefits, which is why we recommend talking with your advisor during the process. Someone who knows your long-term goals and values can help you see the bigger picture and decide what’s best when it comes to keeping old plans or leveraging new ones.

For now, let’s review some potential benefit options when transitioning jobs—specifically, what you can do with a 401(k), a pension, stocks, and other investment opportunities.

401(k), 403(b) or other ERISA plan

If you leave a company where you have a 401(k) or other employer-sponsored retirement plan, you can do one of three things with the money in your account:

• Leave the balance in your previous employer’s plan
• Transfer the balance into your new employer-sponsored plan (if you have one)
• Transfer the money into an IRA, where you’ll have diverse investment options like stocks, bonds, ETFs, mutual funds, annuities, CDs, and more

One thing to note about company contributions is that some or all of the money your employer contributed may not be yours if you leave the company. Companies often have vesting schedules tied to their contributions, so the money they add to your account isn’t considered fully “yours” until you’ve been with the company for a certain period of time. So if you leave before the end of the vesting period, they’re entitled to take some or all of their contributions back.

The most common arrangements are three-year cliff vesting (where an employee is fully vested after three years) and gradual vesting (where an employee gains more benefits over a period of time), typically between two to six years.

So, if you worked at a company with a three-year cliff vest and decided to move on after four years, you’d be able to keep all their contributions. But if that same company had a five-year equal percentage graded vesting schedule, you would only be able to keep 80 percent of their contributions when you leave.

Pensions

The two most common pension plans companies offer are defined benefit plans and cash balance plans, and depending on which one you had (or have), you’ll have different options when you move to a new company.

Cash Balance

Cash balance plans allow you to keep your pension plan as-is or roll over your account balance into an IRA. If you’re considering transferring the balance, there are a couple steps you should take first:

1. Request an analysis that shows the estimated value of your plan at the age you plan to retire. (So if you’re 55 and want to retire at 65, request an estimate of what the value would be in ten years.)
2. Once you have this value, you can compare those estimated returns to what you might earn if you invested in different vehicles through an IRA. Then you can decide whether it makes sense to keep your plan as-is or transfer it to an IRA.

Whichever way you’re leaning, we recommend reviewing your options with an advisor to determine which strategy will best support your overall goals.

Defined Benefit

Unfortunately, there aren’t any rollover options with defined benefit plans, so you simply have to focus on managing your current plan as effectively as possible. We suggest keeping a record of this plan year-over-year and requesting an estimate of what your monthly payment will be when you retire. Ask your company or plan provider when you can start withdrawing income from your account—some plans specify an age when you have to take distributions (e.g., 65) but others let you take them whenever.

Stock Options

If your current company offers stock compensation, you’ll likely have a few different options when you leave the company. It’s important to reference your specific plan documents before you make any decisions, since the rules regarding stocks vary from company to company. Generally speaking, though, employees have up to 90 days after termination to exercise their vested stock options; after that, unvested options are typically forfeited.

Stocks are one of the more complicated benefits to navigate when leaving a job. Every company has different rules, and your options might vary depending on how long you’ve been at the company. If you have the flexibility, it might make sense to delay your departure until all your stock options are fully vested. There are many factors to consider, which is why we recommend discussing your options with a financial planner who’s well versed in this area.

Restricted Stock Options

Just like other stock options, restricted stock and restricted stock units (aka RSUs) can get tricky when you leave a company. Typically, an employee can keep the vested portion of their restricted stock or RSUs when they leave a company, but they’ll have to forfeit any unvested shares. Again, it’s vital that you reference your plan documents because the rules vary from company to company. From there, you’ll want to talk to a financial professional about the best way to leverage your particular benefits.

Have Questions?

There are lots of things to consider when you change jobs, and navigating your benefit plans can be complicated. That’s why no matter what benefits you have, it’s best to lean on a financial professional so they can help you make the best decisions for your unique needs. If you’re changing jobs and have questions about your finances, we’d love to help—our goal is to help you protect everything you’ve worked for and make the most of your new opportunities.

Starting a new job is often as stressful as it is exciting—not only are you learning new systems and developing relationships, but you also have to reevaluate your financial situation—specifically whether and how to leverage your employee benefits. If you’ve changed jobs recently or plan to soon, you’ve probably asked yourself:

Should I take advantage of my new employer’s insurance plan or search for other options? Should I consider my spouse’s plan?

Can I keep my current plan?

How do I know if I have enough coverage?

If you’re looking for answers to these questions, we’re here to help! In this blog, we’ll discuss your options for changing benefit plans and the factors you should consider to make the most of what’s offered to you. And of course, we’re always happy to answer additional questions you have—just give us a call or send us an email!

For now, let’s review a few types of benefits and what you need to know about each when leaving a company or changing jobs…

Health Insurance Coverage

When you transfer to a new company, make sure to review the health insurance plan it offers and compare it to what you had at your previous job—if it provides less coverage or comes with much higher premiums, you may want to consider an independent plan or supplemental coverage. If you’re married and your spouse’s employer offers a health plan, you should also consider the cost of joining his or her plan and the coverage you would receive.

With any employer-offered plan, remember to check whether your preferred physicians are in network—if not, you might want to seek an independent plan.

Health Savings Account (HSA)

A Health Savings Account is almost like an IRA for medical expenses, and it can be funded by you, your employer, or both. HSAs are only available to individuals with high-deductible health insurance plans, but the good thing about these tax-advantaged accounts is that they belong to you, not your employer, so you have several options when you transfer jobs:

• HSA Transfer: If your new employer offers an HSA, you can transfer your current HSA funds into the new account. Your new employer will need to provide the paperwork to complete this transfer.
• HSA Rollover: Similar to a 401(k) rollover, with an HSA rollover, you’re issued a check for your HSA balance, and you have 60 days to deposit the funds into your new HSA account. Just note that if you don’t deposit the funds within the 60 days, those funds will be taxed and you’ll be penalized.
• Maintain Current HSA: You can also keep the funds in your current HSA. But if your previous employer has been paying administrative costs, you will now be responsible for those costs.

Flexible Savings Account (FSA)

Unlike an HSA, an FSA is owned by your employer, and you don’t need to be enrolled in a specific health plan to be eligible for it. If you have an FSA at your current job, your best option when you leave or change jobs is to check your account balance and try to spend the remaining funds before your last day at the company. These accounts can’t be transferred from one company to another, nor can they be owned by an individual, so the money remains with the employer if you don’t spend it before you leave.

Group Life Insurance

If you have a group life insurance policy with your current employer, you should check and see whether your benefit is portable or if it can be converted to an individual policy. Here’s how those options work:

Porting Your Policy

If your policy is portable, that means you can continue your current group policy as an individual. However, your rates will likely be higher than your original premium because group plans often calculate rates based on generic health classifications. That means that under a group plan, you might be classified under a rate that applies to a generic unisex smoker (which could elicit a high premium)— even if you’re a young, fit female who would typically pay lower life insurance premiums.

Converting Your Policy

Most group plans are term life insurance policies, but you might be eligible to convert your plan to a permanent individual policy. This offers more comprehensive coverage, but it will likely increase your premiums.

Other Options

You should also explore any benefits your new employer offers for life insurance. Most companies offer a low-cost term policy that applies while you’re employed at the company. These premiums typically increase every five years.

Depending on what your new company offers and what you need, it might make sense to enroll in a completely new policy independent from your employer. Choosing an individual life insurance plan would mean you don’t have to rely on your employer (or your employment, for that matter) to protect your family in the event of your death. This option can also be very cost effective because you can lock in your rates.

Evaluating the advantages and disadvantages of each plan can be overwhelming, but it’s important to review the details of the policies available to you. That’s why it’s a good idea to discuss your options with a professional—your advisor should help you understand what each plan offers and how they could affect your overall goals.

Group Disability Insurance

Unlike group life insurance policies, group disability policies (both short- and long-term), are generally not portable. So when you transfer jobs, you’ll want to see if your new employer offers disability coverage and exactly what the plan covers. If your new employer doesn’t offer a disability plan, you should consider purchasing your own, especially if you’re the sole (or majority) provider of your family’s income. If they do offer a plan, you’ll want to review how much of the premium the company pays and whether you have the option to supplement your coverage by paying out of pocket.

For example, your employer might offer to pay for a long-term disability plan that covers just 40 percent of your salary*; but they might allow you to buy an additional 20 percent of coverage for which you pay the premium—giving you a total of 60 percent income coverage if you were to become disabled.

You could also consider purchasing an individual policy to supplement what you have through your employer—this is one of the best ways to maximize disability benefits. That said, there are lots of long-term disability plans available and multiple ways to customize them, so it’s wise to discuss your options with your advisor. They’ll help you sort out the details and determine what options best support your goals.

*It’s important to note—any portion of a benefit from a plan that is paid for by your employer is taxable. If you pay the full premium, the full benefit is tax-free. If you pay a portion of the premium, whatever percentage of the premium you pay is the percentage of your benefit that will be tax free.

We’re Here to Help

Each of these decisions—from choosing the right health plan to determining how much disability insurance you need—creates a significant impact on your overall financial plan and future goals. That’s why we don’t want you to walk this road alone. If you’re transitioning jobs, we’d love to guide you through the process so you can identify the benefits that are best for you—just give us a call or send us an email.

If you’ve changed jobs recently or plan to soon, you probably have additional questions about your 401(k) and other investment options—don’t worry; we didn’t forget these vital components of your plan! Check out Part II of this blog where we discuss your options for pensions, 401(k)s, and other benefits when you transition jobs.