Maximize Your Financial Metabolism
by Susan Feitelberg
In the previous section, we looked at your income in terms
of its actual dollar amount. Now let's focus on your
benefits -- the great untapped gold mine of American wage-
earners.
Did you know the typical employer spends an additional 20
percent to 40 percent of an employee's compensation
providing them benefits? If you're thinking you'd rather
have that amount in cash, you're not alone, but your
employer reaps huge tax deductions from funding your
benefits.
Most of us face the uncertainty of not knowing how secure
our jobs are. Today, it's not unusual for companies to even
reduce your income or not give you the typical inflation
raise of 3 percent to 5 percent, and that's not very
comforting. Worse yet, though it's there for the taking,
most employees allow very large percentages of their income
to go to waste -- a significantly higher percentage than
the 3-to-5 percent bite of inflation -- because they don't
use most of their benefits.
At most companies, only 10 percent to 25 percent of
employees take advantage of prepaid services like concierge
or free legal services, etc. Can you guess why? Many human
resources departments are thinly staffed and don't have
enough personnel to educate their employees. It's as if you
vacationed at a fitness camp where the kitchens were
stocked with healthy food, but there was no budget left
over to hire nutrition coaches.
Whether or not your employer promotes its "healthiest
options," let's start with the must-haves today. The first
three benefits I tell my clients to sign up for are the
healthcare and child-care spending accounts, transportation
spending, and company match. You might be tempted to
dismiss these offerings, particularly the last two, because
they're not cash. But think of it this way: These three
expenses must be paid for one way or another. If you don't
take advantage of the break you'll get through your
employer, you'll have to surrender some of your hard-earned
cash to pay these expenses out of pocket. If you think of
your benefits this way, they start to seem like found
money!
Let me give you an example. My client, Mark, was making a
good income of $65,000 a year. But a young family and a
long commute ate through his paycheck in no time. I tried
to help him find ways to maximize his income so he would
have more left over from each paycheck to invest.
When we looked at Mark's expenses, we learned that every
year he and his wife paid at least $1,800 in health-care
costs: the $500 deductible on their health insurance,
prescriptions that weren't completely covered, contact
lenses, and so forth. Then there was the cost of child care
for their five-year-old daughter, which totaled more than
$600 a month. The train pass to get Mark to work every day
cost him $150/month. When we reviewed his benefits, I told
him he was wasting thousands of dollars every year. Of
course he wanted to know why!
I suggested that he exert a little energy and boost his
metabolism by setting up a flexible spending account (FSA),
which would allow him to put away money, pre-tax, to pay
for healthcare expenses. In fact, Mark's employer would
also allow him to use a child care and transportation
spending account. These accounts saved him a substantial
sum, because he could get all the healthcare, child care,
and transportation services he needed cheaper.
Look at it this way: If you could buy an identical item,
one costing $100 and another costing $65 -- and there
wasn't any difference in quality -- wouldn't you rather pay
$65? It was the exact same thing for Mark when he began
using these three spending accounts. Mark's annual cost for
these services totaled $6100. By paying for these services
with pretax dollars, he significantly increased his
savings. We saved him $2,135! We helped Mark reduce his
taxable income, effectively paying less for the things he
had been buying with after-tax dollars.
That's step one. Step two: Turn income into income!
That "found" $2,135 in income can be redirected toward a
college fund for his daughter's education or a retirement
plan for Mark and his wife. Let's say Mark takes this
$2,135 and invests it into a Roth IRA. (A Roth IRA is a
retirement savings vehicle. The contributions aren't tax
deductible, but assuming all conditions are met, the money
withdrawn is completely tax-free. Also, there is not a
required minimum distribution after age 70-1/2.)
We'll assume that since Mark is thirty years old, he
chooses a Roth IRA that invests in the S&P 500, where the
average return has been 10 percent, and he continues to add
another $2,135 to his account each year until he retires.
When Mark reaches age sixty-seven, that Roth IRA will be
worth $847,696. Tax-free!
That means Mark can generate a tax-free income of $33,907
per year for the rest of his life! (This figure assumes he
pays out 4 percent and reinvests the rest to hedge against
inflation.) This magic all happened by taking advantage of
the spending accounts offered through his employer and a
total investment of $78,995. That's the secret of income-
generating income.
Copyright ©2006 by Susan Feitelberg. All rights reserved.
Please feel free to duplicate or distribute this file as
long as the contents have not been changed and this
copyright notice is intact. Thank you.
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