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Do you know the answers to these important questions?
- What can you do now with your compensation and benefits plans at Cox to ensure you will be able to meet your financial goals, such as:
- How should you invest your 401(k) plan and other investments today to build wealth?
- Are you taking full advantage of tax savings strategies available to you?
- Is the medical insurance plan you’ve elected the best one for you and your family?
- If something happens to your job, will you and your family be financially OK? What moves should you take now to make sure you will be?
- Should tragedy strike, will your family be secure without your income?
- Are your life insurance and 401(k) plan beneficiary designations coordinated with your will and estate plan?
Brightworth specializes in helping busy professionals build and maintain a financial strategy to address their retirement planning, college funding, taxes, cash flow, investments, risk management, estate planning, and philanthropic objectives. One of the most common themes we’ve heard when speaking with an executive during their working years can best be summed up in a quote: “I am so busy with my career and family life that I have no time to focus on my finances, nonetheless understand the details of how all of my company plans work.” Yet your personal finances are so critical to your future. It is the means to reach many of your life’s goals such as paying for your children’s college, retiring and moving to the beach, or making a sizeable contribution to your favorite charity. Achieving your financial goals is like putting together a puzzle; each piece must fit together in order to complete the whole picture. If you want to make sure the pieces of your financial puzzle fit together, we can help.
Below are some highlights of how Brightworth approaches coordinating corporate compensation and benefits plans with a client’s overall financial picture.
Many professionals working in corporate America use their 401(k) plan as their primary savings vehicle. It’s convenient, Cox makes a matching contribution, and the money you save is automatically deducted from your paycheck. You will be amazed at how quickly you can build a nest egg for retirement within your 401(k) plan because of these features. As such, you should consider setting up automatic monthly savings with all of your investment accounts! It is a great way to build wealth systematically and keep your lifestyle in check.
Cox employees should strive to put the maximum amount into their 401(k) plan each year. For many Cox employees, their savings into the company’s 401(k) will grow to be their primary source of income in retirement. For those under age 50, in 2022 the maximum deferral amount is $20,500. For those age 50 or above in 2022, the maximum deferral amount is $27,000 (including a $6,500 catch-up contribution). That said, highly compensated employees are typically limited to contributing 6% of their pay up to the IRS pay limit ($305,000 in 2022) due to plan testing rules. Eligible employees should consider participating in the Cox Restoration Plan to save above this 6% limit. Once you are regularly funding your retirement plans each year, try to never reduce your savings election.
Your 401(k) at Cox includes both your voluntary contributions and the company’s contribution. The amount of the company contribution depends on whether you are considered a Traditional Match Employee or an Enhanced Match Employee. Generally speaking, employees hired on or prior to March 31, 2017, are considered Traditional Match Employees and are eligible for the Cox Pension Plan. Employees hired after March 31, 2017, are typically considered Enhanced Match Employees and are ineligible for the Cox Pension Plan. There are some exceptions to this rule, most notably for Cox Automotive Division employees who may be covered through collective bargaining.
Cox offers a 50% match on the first 6% of contributions for Traditional Match Employees. Enhanced Match Employees receive a 100% match on the first 6% of contributions. Enhanced Match Employees are also eligible to receive an additional 2% non-matching contribution from Cox that vests after three years of service.
Your 401(k) plan often offers a number of other investment choices which should be coordinated with your overall investment strategy. Typically, the younger you are, the more equity funds you should have since you are most likely in accumulation mode. As you approach retirement, adding in a few more bond, real estate or alternatives funds makes sense. CI Brightworth can provide our clients with specific investment recommendations for their 401(k) plan based upon their personal situation.
Finally, be sure you have an updated beneficiary designation on file with Vanguard. Especially if your 401(k) plan administrator changes over time, be sure you’ve re-entered your beneficiary elections every time the plan administrator changes, even if you’ve been told your elections will carry over. We’ve seen many instances where they do not. Make sure your beneficiary designations are properly coordinated and integratedwith your overall estate plan. For example, if you have created a trust in your will to hold assets for minor children, but your 401(k) beneficiary designation still shows your child’s names individually as the ultimate beneficiaries, none of the 401(k) money will land in the trust created in your will. This is one of the most common mistakes we see people make with their 401(k) plans – not having their beneficiary designations updated and coordinated with their estate plan.
The Cox Restoration Plan allows highly compensated employees to save up to 15% of their pre-tax pay to the plan, in addition to the maximum 6% of pre-tax pay that they can contribute to the 401(k) plan. Cox also makes an employer contribution for employees participating in the plan. The plan provides a fixed interest rate each year. The fixed rate for 2022 is 5.75%. This can be a powerful way to save for future goals and significantly reduce your current tax bill, especially in high income years. Deferral elections are made in the fourth quarter and cannot be changed during the year. Payout elections vary depending on your plan balance, when the funds were contributed, and your age and years of service upon separation. For example, if you retire after age 55 with 10 years or more of service and have a balance greater than $10,000 that was accumulated after 2005, the funds in the Restoration Plan would be payable in equal installments over 5 years.
For many individuals pondering retirement, “What pension option should I elect?” is often the primary question they ask us regarding a qualified pension plan. (Many plans, including the Cox Pension Plan, offer different payout options.) “Should I take the lump sum?” “The monthly annuity seems stable, but what about inflation?” While the answer does depend upon each person’s particular situation, there are a number of factors to consider such as 1) your age and health at retirement, 2) whether you are married, and 3) whether you have any other pensions or stable monthly income streams you can rely on. Figure out what percentage of your retirement income is coming from “you” (i.e., your portfolio, consulting income), vs. Social Security, vs. a company pension plan. Generally speaking, the younger you are when you leave your company, the more likely taking a lump sum payout then and rolling it tax-free to an IRA is a good move. It provides you control over the money, an investment horizon adequate to grow the funds, and more flexibility over when and what you use the money for in retirement. However, if you find money burns a hole in your pocket, you are worried you’ll spend the pension money too fast, are extremely worried about reinvesting your pension money, and/or have longevity in your family history, electing the monthly pension when you get ready to retire could be the right move. However, inflation is a major consideration, and it’s likely that your purchasing power will decline over the years if you take the monthly payment as most plans don’t increase the pension during payout years.
If you are eligible for benefits under the Cox Pension Plan (generally if you were hired on or before March 31, 2017, and have enough years of service), your benefit will be calculated based on your years of benefit service, your final annual compensation, your estimated primary Social Security benefit at age 65, and the Cox retirement benefit formula. For eligible individuals, pension benefits can begin as early as age 55 or as late as age 72. If you begin receiving your pension benefit before age 65, the monthly benefit amount is reduced by 4% each year between age 65 and the year you begin benefits. For example, if you receive benefits at age 55, your monthly benefit is reduced by 40%. Furthermore, executives and associates who are going to work somewhere else, have significant other assets, or have serious health issues may want to look at other pension options such as a Lump Sum from the Pension Plan. In cases where a Lump Sum makes sense, the proceeds can be rolled over directly to an IRA, deferring the taxes on the lump sum for years to come. You take control of your pension asset here.
CI Brightworth has helped a number of people make wise choices with their pension payout elections. Having a clear picture of how your pension coordinates with your overall cash flow and investment strategy in retirement is one of the largest puzzle pieces to address.
A solid investment strategy is the cornerstone to building and preserving wealth. It should be designed to meet your specific cash flow needs, time horizon, growth requirements, tax objectives and risk tolerance. Successful investing requires a long-term perspective and discipline to avoid making short-term emotional mistakes. Having a coordinated and comprehensive strategic asset allocation is the foundation for your entire portfolio. As such, the investments you have outside of company plans should be designed to complement, not contradict, the investments you have within your company plans.
As your time frame for needing to spend down your investments for goals like college and retirement comes closer, you should adjust your investments to be more conservative. However, since you can spend more time in retirement than in your working years, stocks or other assets that have growth potential are still important for a portion of your portfolio to outpace inflation. Timing the market is not an investment strategy nor is looking at what did well last year and assuming that’s where your money should be invested. Investing is about looking forward, placing probabilities on various scenarios, and aligning your investments so that you’ll do well in multiple future scenarios.
CI Brightworth provides investment management services to our clients using sound investment disciplines with customized, innovative planning. The core of this system is a portfolio of carefully selected investments designed to enhance wealth while protecting capital over the long term. Through ongoing monitoring and evaluation, tactical shifts, and flexible managers, we are able to take advantage of opportunities and help mitigate risks for our clients.
As a W-2 employee, you have limited ways to save taxes each year, but there are a number of strategies to take advantage of. Saving in the before-tax plans available to you at your company 401(k), the Restoration Plan, and health savings account (HSA) are typically “must-do” moves.
Next, consider funding an IRA or backdoor Roth IRA strategy for additional tax-advantaged retirement savings. College savings 529 plans are solid investment and tax savings strategies – research your home state’s 529 plan as you may receive a state tax deduction on your contributions. With 529 plans, the withdrawals used for qualified education expenses are tax-free.
Some states offer tax credits for film, energy and/or low-income housing. Purchasing these credits can lower your overall state tax bill as you buy the credits at a discount, while receiving a dollar-for-dollar credit towards your state taxes in most cases.
Finally, read on for charitable giving strategies which can help you save considerable taxes while fulfilling your charitable intent. Above all, consider working with a qualified accountant who is familiar with executive compensation strategies and can advise you on a variety of tax reduction strategies, especially in high income years.
If you’ve held stock for a long time and you have a lot of built-up gain in these shares, they could be great candidates for charitable giving. When stock is given to a charity, and the charity sells it, nobody pays capital gains tax on the sale. A terrific tool for charitable giving that has great tax advantages is a donor advised fund. This is essentially a brokerage account with a charitable wrapper around it. Cash, stocks, real estate and other appreciated assets can be transferred into the account, the assets are sold with no capital gains tax due, and the cash proceeds become available for benefiting your favorite qualified charities. You receive a tax deduction for the value of the assets the year they are transferred into the donor advised fund and can determine how much and when to gift out the assets in the account to charity. This makes for very easy tax reporting, no more keeping track of various receipts, and more control over the timing of charitable gifts for tax savings purposes.
You may have the bulk of your health, life, and disability insurance through your group coverage. For health insurance, this is typically fine and provides adequate coverage. For life and disability insurance, your group coverage may not provide enough benefits and you may need to supplement with outside insurance policies.
Life insurance is most important during your working years while you are accumulating wealth to reach your long-term goals, as well as covering daily living expenses and debts. This is the time where your life insurance need is greatest, yet as you build wealth, your need for life insurance goes down. You should run numbers with a professional to determine how much life insurance is right for you and your family. Consider the need to replace your income for a period of time, top off college savings, pay off the mortgage and other debts, and whether you want a retirement fund secured for your spouse or partner should something happen to you. Buying supplemental life insurance through your employer may be more expensive than securing it with an outside company, where you can also lock in your premiums for a period of time.
Cox provides a basic level of life insurance for 1x base pay up to a $2 million limit. You can also elect to buy optional supplemental and dependent life insurance; however, it may be worth exploring supplemental life insurance with an outside carrier to compare premiums and terms. It is very important that your life insurance beneficiary designation is coordinated with your estate plan. Your life insurance may not payout according to your wishes unless you word the beneficiary designation accordingly. One common question to address with your estate attorney is whether your life insurance policies should be in a trust. If the answer is yes, you must fill out the proper assignment and beneficiary change paperwork to transfer your group coverage into the trust.
Disability insurance replaces a portion of your income if you are unable to work for an extended period of time. For most people in corporate America, your ability to earn an income is your greatest asset, so it should be protected. It often makes sense to have supplemental disability insurance above the basic amount your employer offers. You may be able to buy supplemental disability insurance coverage during open enrollment through your company, or you can buy it through an outside insurance company. Purchasing disability insurance with after-tax dollars is ideal, as the disability income received would be tax-free to you.
Cox provides 60% company-paid long-term disability up to a maximum of $10,000 per month. This benefit would be taxable to you should you need it. You have the option to buy up to bring long-term disability benefits to replace up to 66.67% of your monthly pay, up to a maximum of $17,500 per month. Because you are paying for supplemental insurance with after-tax dollars, the buy-up benefit of 6.67% is tax-free to you. Purchasing disability insurance with after-tax dollars is ideal, as the disability income received would be tax-free to you.
Cox offers three different types of health care options: low deductible, medium deductible, and high deductible. High deductible medical insurance plans have become increasingly popular in corporate America due to their lower monthly premiums. However, as the name states, the employee pays more of their first medical expenses each year until the higher deductible is met. A Health Savings Account (HSA) is available with high deductible medical plans. It’s a great tool to take advantage of the “triple tax play” as an HSA is the only investment vehicle where it’s pre-tax going in, tax-deferred while the money is in the account, and withdrawals are tax-free if used for qualified medical expenses. If you can build up this account and avoid using it for current medical expenses, this is a good tax efficient strategy to help pay for higher medical expenses in retirement. Plus, once you turn age 65, you can take penalty-free withdrawal from the HSA for non-medical expenses. There is a list of investment options to choose from in the HSA plan which might make sense if you’re trying to accumulate a large balance for retirement. Don’t forget about a company’s contribution to the HSA each year – this is “free” money!
The 2022 maximum contribution for single coverage is $3,650 and for family coverage, it’s $7,300. And if you are age 55 or over, you can deposit an additional $1,000. Furthermore, if your spouse is over age 55, you can open a spousal HSA for them and deposit $1,000. Don’t forget about your company contribution to your HSA each year – this can be “free” money! Cox will contribute up to $500 if the employee is the only person covered by the plan, $750 if the employee and one other person are covered (i.e., employee and spouse), and $1,000 if three or more people are covered. It is important to note that the maximum contribution includes both the employer + the employee contribution. It is important to not exceed these maximum amounts.
Cox employees who are eligible to receive a benefit from the Cox Pension Plan and are age 55 or older when they leave the company may be eligible for the Cox Retiree Healthcare Plan depending on their hire date and years of full-time service. The Cox Retiree Healthcare Plan has different coverages in place for before age 65 and after age 65.
Finally, we’ve seen many executives have insufficient liability insurance through their home/auto/umbrella policies. If you were to become involved in litigation without proper protection, your balance sheet and possibly paycheck could be at risk. Have your home/auto/liability insurance plan reviewed every few years. It may save you money and more importantly, address potential gaps in your coverage.
As a fee-only firm, CI Brightworth does not sell insurance but instead, provides objective advice and analysis on this often-confusing topic.
Every adult needs at least a basic estate plan consisting of a will, a financial power of attorney, and a healthcare directive. These documents should be drawn up by a qualified estate attorney and reviewed at least every five years. As the estate tax laws change, your family dynamics change, and you build your wealth, periodically reviewing your legal documents is necessary to protect your wealth and ensure that your final wishes would be fulfilled. Remember, beneficiary designations for life insurance and retirement plans need to be coordinated with your overall financial and estate plan.
Understanding the “ins and outs” of your company’s compensation and benefits plans is absolutely critical to making wise decisions, maximizing the options presented to you, and putting the pieces of the puzzle together into one coordinated strategy. Having a financial advisor who is knowledgeable and experienced with executive compensation strategies, and who will do a “deep dive” into your plans can provide you with more confidence and peace of mind as you navigate your career. It will help put you on a better path to achieving your financial and life goals.
If you have questions about your financial strategy or would like a second opinion, we are happy to sit down with you to discuss your unique situation in more detail.
This information is based on information deemed to be factual and reliable. Please also refer to the Cox company plan documents and your benefits department.