Did you know that your employer uses terms like “total rewards” when strategizing about what kinds of benefits they want to offer you? Did you know that those benefits can easily account for 20-35% of the “total compensation” they give you? Did you know that, cumulatively, employer benefits account for hundreds of billions of dollars every year, and that that expense, which rises 4-7% per year, is thought to be at least partially to blame for keeping your salary increases down?
There is much in the financial independence movement on the importance of saving for retirement, especially maxing out your 401(k) contribution and taking advantage of employer matches. There’s less information about the importance of your other benefits, especially health insurance.
Your employer thinks of your benefits, both retirement and health, as compensation. You should think of them as income — not just how selecting and using them wisely will help you reach your FIRE goals but also to ensure that your FIRE dreams aren’t derailed by bad luck and bad choices.
Like many people, for years I simply took whatever I thought was the cheapest health insurance policy my employer offered that didn’t seem like total garbage. An unexpected emergency-room visit (and bill) for food poisoning [link] at least gave me the sense to not choose a catastrophic-only plan. But there wasn’t a lot of thought going into it beyond that, so I mostly stuck with the same coverage year after year.
The technical term for that kind of decision is “status quo bias,” and it’s what a lot of us do when it comes time to choose our company-sponsored benefits for the coming year. What snapped me out of that mindset was the birth of our son. With his due date coming near the start of the new year, meaning I’d have to elect my benefits for the coming year, I pay much more close attention to plan details like copays, networks, prescription drug costs, and other services. My wife had her own insurance through her work, so beyond comparing plans inside our companies, we then had to compare them against each other’s.
In retrospect, I think we only had a fraction of the data that would have been useful to us in making a decision. But, luckily, it was a bit of a simpler time and there wasn’t as much possibility of outright blowing it with our choices.
These days, employers are increasingly positioning their benefits as an enticement to get you to work there rather than giving you more money. If you’re lucky, they’ll pay a sizable chunk of your costs. But either way, you’ll want to make selections that reflect your needs, health, income level and, of course, FI goals.
In the coming weeks and months, The Benefits of FI is going to show you the many ways that your benefits are income. We will help you find the factors that will aid you in making decisions and outlining your plans for financial independence. In the meantime, here are some quick takes on how and why you should think of your benefits as income.
Healthcare Ain’t Cheap
The average annual expense of employer-based family coverage for health insurance is $18,764, according to the Kaiser Family Foundation’s 2017 annual report on employer based benefits. You pay, on average, about $5,714 of those costs — $476 per month. It can run a lot less if you’re single but your employer is likely still paying close to $10,000 per year to insure you. You shouldn’t leave that money on the table if you don’t have better, cheaper options because an unforseen medical event can set you back years or even permanently on your retirement planning.
It Helps You Plan
Hopefully, if you’re reading this article, you’re a good planner or are making a concerted effort to plan well for your future. Yet one thing that is still very frequently unplanned is starting a family. A pregnancy costs more than $8,000 on average in the United States — more if you’re in expensive urban areas or rural areas with limited resources. You don’t want to get caught without insurance if there’s any chance at all that children are in your immediate future.
It Supports Your Financial Goals
On one hand, there are a lot of things your employers may offer that will either save you money or save you effort. Many more companies are offering paid family leave — and using short-term disability insurance to help subsidize it — which lets you take time off at the birth of a child or illness of a family member and not have to dip into your own savings to pay your bills. Likewise, supplemental life insurance can frequently save you time and the hassle of a physical and underwriting process, and it might be cheaper through an employer.
On the other hand, new health financial accounts, especially HSA’s can both help you save significantly through tax preference on medical expenses and also save more for medical expenses later in life by investing the money you’re putting away.
It Gets You to the Next Phase
Companies are increasingly offering some sort of student loan debt paydown as a benefit. You should look very closely at such a program to ensure you’re not exchanging a “benefit” for income you could use better to pay down the debt on your own, but if it checks out it’s a bebnefit that will help you speed up your FI goals significantly.
The point of all this information is not to sell you on going to work for big companies because they’re really doing your right with all of these great benefits. Every company is different and has their own motivations for the benefits they offer you.
The point is that almost all of us work for someone else at some point, and that someone else is probably going to offer you benefits. Rather than just focusing on the salary, you should take a serious look at the “total compensation” they’re offering and make the best choices for your financial independence now and in the future.
We’re looking forward to helping you do just that. Thanks for joining us!Like