By Blanche Sheppard
You know those silly AFLAC commercials, where someone looks super worried as they sort through their bills in anticipation of an upcoming procedure, but then the annoying duck pops up and reminds them that they are covered? This article isn’t about the duck, but it is about considering how a new child impacts your benefits. The duck probably seems more exciting right about now….
I don’t usually write about benefits for the Vantage Point, but then again, I’m not usually about to go on maternity leave. If you’re a plan administrator, you might have employees who will need to consider the impact that a new dependent will have on their benefits. As an employer, you might want to consider how your organization can support said employees before, during, and after such an occasion.
- When choosing a Medical plan for your growing family, consider the family deductible and out of pocket maximum. Does anyone require frequent visits outside of preventative care? How will an aggregate versus embedded deductible impact the family’s benefits?
- Do you offer Short-term Disability (STD) coverage? Many STD policies cover 6-10 weeks of maternity leave at a percentage of the employee’s pre-disability weekly earnings. These policies are also helpful if an employee needs to be out for a sickness or injury. You can consider this a “peace of mind” type of coverage. The employee has the peace of mind knowing that they have some income while they are out, and the company has the peace of mind knowing that their employee is taken care of in the event that they need to be absent. If you do offer short-term disability, you might prep the paperwork before the employee is scheduled for maternity leave, as this will smooth the process.
- Once a baby is born, or adopted, they will be eligible to come onto your group Medical plan. You will want to add them to the plan within 30 days of their birth or adoption, because both count as qualifying events. For a new baby, you might not have their social security number right away. That’s ok! Insurance companies know that this is the case, and will follow up on it later on.
- Consider the benefits needs of a new baby versus an older child. An infant might not need ancillary Dental or Vision benefits, as the pediatric Dental and Vision embedded in many Medical plans will be sufficient. An older child will need periodic check up’s.
- Do you have Voluntary Worksite benefits? Some employers work with carriers like AFLAC and Colonial Life to offer employee-paid coverage that can supplement health insurance. Some even offer incentives for regular doctor visits!
- Are you subject to FMLA? Groups subject to FMLA must allow employees with a new child, through birth or adoption, to take time off for bonding. If you’re interested in a quick overview, the US Department of Labor has quick Fact Sheets that include definitions of organizations subject to FMLA and overviews of what that means in regards to new dependents.
By Tiffany Stock
“Put your phone down” has become a common request in my house with a teenager and pre-teen. Have you ever thought about the impact smartphones have on all of us, even when you aren’t “looking” at your phone? Check out this study published by the Harvard Business Review on how having your smartphone near you impacts your cognitive capacity. After reading this article, some of their points definitely resonate with me and I will think twice about having my phone nearby the next time I’m in a meeting or am working on a project.
An open enrollment period is a short period of time when you can enroll in or make changes to your employee benefits elections. Possible changes include adding or dropping coverage, adding or removing dependents, or enrolling in benefits for the first time.
Open enrollment is your opportunity to take advantage of important benefits, such as health, vision, dental and life insurance, a health savings account (HSA), and a retirement plan.
The decisions you make during the open enrollment period can have a significant impact on your life and your finances, so it is important to weigh your options carefully and to make your decisions during the open enrollment period.
Failure to comply with your employer’s open enrollment deadline could result in a loss of coverage for you and your loved ones. Missing this deadline also means that you could be unable to make changes or enroll in benefits until the next open enrollment period.
One exception to this rule is if you experience a life-changing qualifying event that would trigger a special enrollment period (SEP). Events such as getting married or divorced, having or adopting children, or losing eligibility for other health coverage can trigger special enrollment rights. In some cases, you can also qualify for special enrollment if you become eligible for a premium assistance subsidy under Medicaid or a state Children’s Health Insurance Program (CHIP).
If you think you might qualify for a SEP, contact your HR manager. If you have not recently experienced a life event, but have missed the open enrollment deadline, you should also contact your HR manager to find out whether you have any other options.
Options for Obtaining Health Coverage
If you miss your employer’s open enrollment deadline, there are a number of ways in which you can try to obtain health insurance; however, the availability of some options will depend on their enrollment deadlines.
- Spousal Benefits:
If your spouse receives benefits from his or her employer and the open enrollment period is still open (or coming up), you may be able to enroll in coverage through your spouse’s plan.
- Young Adult Benefits Under a Parent’s Plan:
If you are younger than 26 years old, you may be able to be added as a dependent on your parent’s plan. If your parent’s plan offers dependent coverage, this option should be available to all children under 26, regardless of whether or not you are employed, married, have children or are a student. However, this option is likely available only if your parent’s work-based plan offers coverage for family members and if the open enrollment period for that plan has not yet closed.
- State Insurance Marketplace
Depending on the timing, you can consider buying health insurance from the Health Insurance Exchange Marketplace. Marketplace coverage is only available for purchase during an annual open enrollment period, unless you qualify for a SEP. (See the SEP section of www.healthcare.gov to check). Similar to employer-based plans, a SEP can be triggered if you experience a qualifying life event.
If the health insurance your job offered was affordable and covered the majority of your health care costs, you will not be eligible for a health insurance subsidy to help you pay your monthly premiums for a Marketplace plan. However, you may have more health plan options to choose from, including some lower-priced plans that would provide coverage for you until the your employer’s next open enrollment period. For more information, or to enroll in a Marketplace plan, please visit www.healthcare.gov.
Medicaid provides health coverage to low-income adults. Medicaid does not have open enrollment periods, which means that you may apply at any time. Eligibility for Medicaid varies from state to state, so be sure to check www.medicaid.gov or your state’s Department of Health website to see if you qualify for this option.
- Short-term Health Insurance
If you are concerned about not having health insurance and are not eligible for any of the other options, you can consider purchasing a short-term health insurance policy from a private insurance company. These are temporary plans for those who are awaiting longer term, major health coverage. They generally do not cover pre-existing conditions, are not guaranteed-issue (meaning that you are not guaranteed coverage) and are subject to state and insurance company limits on how many times this type of insurance can be renewed. Most importantly, short-term insurance is not considered “minimum essential coverage” under the ACA, which means that even if you are able to enroll and maintain coverage until the next open enrollment period at your workplace, you may be subject to paying the individual mandate penalty (see below) with your federal tax return.
What Happens If You Don’t Take Any Action?
You could remain uninsured until the next open enrollment period opens up. However, accidents and diseases can strike at any time, so the cost of being uninsured can add up quickly.
As explained, there are other options for you to obtain health insurance if you have missed your open enrollment deadline. However, many of these are costly, not as beneficial as employer-provided benefits, have limited availability, are highly difficult to attain or are unattractive. In addition, many employers offer other benefits besides dental, vision and health insurance. If you miss the enrollment deadline, you could experience loss of these other benefits as well.
FSAs, HRAs and HSAs
Many employers offer one or more health spending accounts as part of their benefits packages. Depending on which type of account your employer provides, missing the open enrollment deadline will result in different consequences.
- Flexible Spending Account (FSA)
FSAs are tax-free and are only available with job-based health plans. As a result, if you missed your open enrollment deadline, you will not have ample funds in your FSA, and you will have to pay out of pocket for any costs your insurance does not cover. Also, if your employer usually makes a contribution to your FSA, you would miss out on that. Your taxable income will also be higher if you are not making pre-tax contributions.
- Health Reimbursement Arrangement (HRA)
A HRA is an account set up and funded by your employer. While some employers allow unspent funds to be carried over to future plan years, most do not. In the event that you have unspent money in your account and your employer allows carryovers, you would need to remain HRA-eligible (enrolled in the company health plan) to access those funds. Therefore, if you miss your employer’s open enrollment deadline, you will typically lose access to your HRA as well, and you will have to pay out of pocket for any costs your insurance does not cover.
- Health Savings Account (HSA)
An HSA is an account, owned by you, in which you can contribute either pre-tax or post-tax income. If you miss the open enrollment deadline to make contributions to this type of account, you will be unable to contribute pre-tax amounts to your HSA using payroll deductions, and your taxable income will be higher. Also, if your employer makes any contribution to the HSA, you would miss out on that.
However, you can still make contributions to an HSA if you are an eligible individual, and you can deduct any amounts contributed. If you missed the opportunity to set up an HSA through your employer, you can still set one up on your own with a bank or other HSA custodian if you are an eligible individual.
Although you can certainly pay out of pocket for additional health care costs, without tax-advantaged funds, these expenses can be overwhelming. If your employer offers either an FSA or HSA, it is true that you are typically the only contributor to these accounts. However, the money you are contributing is pre-tax. Missing out on either of these will result in your post-tax budget taking a hit. Be sure to enroll in a health spending account that your employer offers before the open enrollment period closes so that you can receive the health care that you need without having to empty your pockets.
Don’t Forget About Your Other Benefits
Additionally, if you’ve missed open enrollment, you will be missing out on a lot more than just health care benefits. Some other benefits that you may be losing out on include the following:
- Life Insurance:
If you have lost coverage or do not have ample coverage for the next year due to missing the open enrollment deadline, consider buying a term life policy from a third-party to ensure that you and your loved ones will be taken care of if anything should happen to you. Talk to RISQ Consulting for more information on this option.
Although it may seem like missing a year of contributions to an employer-matched plan is not a big deal, setting yourself up for a comfortable lifestyle after retirement should be a top priority. If you are worried about falling behind on saving for retirement after losing out on the ability to make contributions to your employer-sponsored retirement fund, consider setting up an individual retirement arrangement (IRA) or a Roth IRA on your own. You should also reference your tax withholding statement and make adjustments to your allowances accordingly as you will no longer be receiving the tax break on retirement deductions from your paycheck.
Disability insurance replaces some of your income if an injury or illness prevents you from working, which can ease the financial burden on a household. Short-term disability (STD) pays you a portion of your income for a short period of time (generally between nine and 52 weeks) after you run out of paid sick leave. Long-term Disability (LTD) pays you a portion of your income
A new year brings new issues for HR professionals to contend with. Some challenges are similar to previous years (overtime uncertainty), while others are more unique and complicated (legal marijuana and employment). Despite inherent difficulties, staying tuned in to these six trends can keep you ahead of the game in 2019. Ignoring them will only put you behind.
Below are the top trends to monitor in the coming months.
1. Opioids, Marijuana and the Workplace
Opioids have been concerning employers for the last few years, and quietly ravaging the country for even longer. In 2017, the opioid crisis was declared a national emergency due to tens of thousands dying each year from prescription painkillers. Many of these tragedies started with a legal prescription after a common medical procedure.
Beyond their deadly risks, opioids also cause absenteeism and performance issues in the workplace. Opioids are difficult to detect in a drug test and even harder to perceive without one. Knowing this, it’s critical to modernize your drug policy to address opioids and offer resources for alternative pain management strategies.
Legal marijuana is also complicating drug policies. Similar to opioids, marijuana is increasingly difficult to detect, with the growing popularity of oils and edibles. Moreover, the drug is legal for medical use in 30 states, making testing legally tricky.
You may find it easiest to adjust your drug policy to focus on workplace performance. For instance, clearly prohibiting impairment at work or the promotion of drug use through paraphernalia. Adopting a zero-tolerance policy may backfire with state laws, so be sure to have legal counsel review your policy before enforcing it.
2. Leave-related Issues
Did you know that 47 percent of employers were very challenged by cross-state leave laws and 43 percent found it extremely difficult administrating leaves in general, according to a recent XpertHR survey? With ever-expanding legislation, it’s not too surprising.
Multistate businesses must contend with different state laws, but even smaller employers can find themselves juggling laws between localities. Without proper guidance, handling common requests like family leave, sick time and reasonable accommodation under the Americans with Disabilities Act can be a nightmare.
The first thing employers must do is determine which leave laws apply to them, remembering that certain localities might have different rules. Other aspects, like which leaves can be used concurrently and proper leave documentation should come next. And, of course, proper employee communication is a must—not just putting policies in a handbook, but posting leave notices as well.
3. Soaring Health Care Costs
Paying over $15,000 annually for each employee’s health care in 2019 sounds like a bad dream, but it’s the real cost trend. With rates surpassing $680 and $20,000 for single and family coverage, respectively, employers are scrambling to cut costs wherever they can. Yet, that can be easier said than done.
Some organizations are encouraging workers to utilize telemedicine or virtual care as a way to trim costs. By “visiting” a doctor online for minor health issues, patients can save a trip to the hospital. And, since it’s virtual, everyone saves money.
Another cost-saving strategy is the consumer driven health plan (CDHP) model. This strategy empowers employees to control their health care decisions and choose care that best suits them. Since employees use a savings account to help offset costs from their high deductible health plans, they are incentivized to pick more affordable options.
4. Wage and Hour Concerns
Hire more workers or pay overtime? That’s the question growing businesses must ask themselves. With overtime changes looming in the first quarter of 2019, you may think it’s easier to hire more workers at lower salaries. But, depending on your situation, that may not be true.
Many states are primed to raise their respective minimum wages in 2019. What’s more, the majority of those rates are already higher than the federal minimum. If you’re considering hiring more workers, check to make sure you know how much you’ll have to pay them in your state. The same goes for federal contractors.
As for salaried employees, it looks like we won’t know anything about the overtime rule until at least March 2019. This leaves the current overtime threshold at $23,660. Experts expect that number to increase to between $32,000 and $35,000—far lower than the $47,476 rate initially proposed in 2016. This means you should keep watching for regulatory updates in the coming months.
5. New Technologies
HR is always looking for new ways to streamline and improve its processes. In 2019, it appears that people analytics and recruiting technologies will be at the forefront of the trend, according to professional HR organization Toolbox.
People analytics is a way of tracking things like employee engagement data, training program effectiveness or ad placement success. The practice examines human data and crunches the numbers so you have a better idea of the return on investment. Need to know if your employees feel appreciated? Want to discover which methods employees are using to communicate with each other? This is where people analytics can help.
Similarly, recruiting technologies are also looking at human data to help create efficiencies, namely in targeting and optimization. Advanced technology can help recruiters hone their efforts to find talent where they are, instead of waiting to stumble upon suitable candidates.
At the backbone of all these new technologies is advanced artificial intelligence (AI). The unseen wizards that run your most complex software are getting more intelligent each year. AI can help schedule appointments with recruiting candidates, create personalized experiences for users, and help employees with tasks like open enrollment, vacation requests and training. Soon, there won’t be much that AI cannot track and offer you solutions for.
6. Upskilling Employees
If you have a new task that requires new skills, do you hire a new employee for the job? The current trend says no—you upskill current workers. Upskilling is the process of training current employees in new skills and responsibilities. According to a McKinsey study, 62 percent of executives think automation will require them to retrain or replace over a quarter of their workforce.
Obviously, replacing employees is less cost-effective than offering more skills training, but is it easy? That depends on how you go about it.
As was previously mentioned, advanced AI is making training easier and more personalized for employees. AI can provide real-time feedback, recognize the areas in which employees need help and adapt to individual learning styles. While advanced training software may be pricey, it’s certainly less than the cost of replacing a quarter of your workforce.
Top Cyber Predictions for 2019
The average global cost of a data breach has risen to $3.86 million, magnifying the need for companies to be aware of all potential threats. Here are just a few of the threats that cyber security experts have forecast for 2019.
Artificial Intelligence (AI) as a Weapon
With AI being so young, it is still vulnerable to attacks that can affect its operations. However, AI could also be used defensively to identify new threats and better protect systems from attacks.
A Lack of Security in the Cloud
As organizations are adding more data to the cloud, they’re not practicing good enough housekeeping to secure that data, making them a top target for cyber criminals.
5G Network Vulnerability
As 5G takes the place of 4G, the market for 5G infrastructure is expected to grow by 118 percent annually through 2022. Although that rate of growth may be profitable for cellular networks and providers, it creates new vulnerabilities as well. Instead of connecting to a Wi-Fi router, 5G devices are expected to connect directly to a 5G network, making those networks more appealing targets to hackers while also making it more difficult for home and office users to monitor their devices.
Despite being the most secure method of authentication, biometric data can be stolen and altered. And sensors on smart devices can deteriorate with excessive usage, making them less reliable and easier to hack.
Criminals are targeting bank networks with malware, similar to the way they use credit and debit card skimmers to steal banking information and passcodes from unsuspecting customers. The result can be millions of dollars in losses and a lack of trust in major financial institutions.
The online gaming industry has seen massive growth and is expected to hit $2.2 trillion by 2021. This is an attractive target for cyber criminals who can easily pose as gamers and gain access to their credit card information.
More Targeted Spear Phishing
Devious cyber criminals are using tactics that involve breaking into an email system and learning as much as they can about their targeted victims. They use that information to take advantage of the trust built with another person and scam them out of money.
How to Secure Office IoT Devices
An internet of things (IoT) device is any smart device that is connected to the internet. Many of these devices are everyday objects—like watches or thermostats—that connect via Wi-Fi, allowing users to control them remotely or even collect data.
Employers pride themselves on using IoT technology to make their workplaces more modern and help them stand out from their competitors. Things like smart desks, video conferencing systems, security systems, smart TVs and intelligent HVAC systems are becoming more commonplace. Unfortunately, these same gadgets, as well as other IoT devices, can create a growing security threat for businesses who aren’t prepared.
There is a lack of consistency between manufacturing companies who make the IoT devices. They have different operating systems and different security measures, and some aren’t even capable of software updates. This makes it difficult for IT departments to prevent hackers from accessing IoT devices and gaining access to company networks.
That’s not to say that your organization shouldn’t use IoT devices altogether. You just need to take extra precautions. Here are a few ways to protect your valuable data while reaping the benefits of IoT devices:
- Consider multi-factor authentication or use certificates. Both are able to stall hackers who’ve managed to crack your password.
- Create a separate Wi-Fi network specifically for all IoT devices. If hackers access the IoT network, your separate business network should still be safe.
- Limit access to sensitive data. For example, IoT security cameras can expose sensitive information to hackers. Therefore, it is important to consider what the device has access to before setting it up. Be sure to also clear its storage on a regular basis. In addition, it’s important to never store critical business or personal data on these devices.
- In the event of a hack, be prepared to disable your devices and reset the factory settings at any time. If you regularly back up your devices, it should be easy enough to restore them and reconnect.
- Avoid installing third-party software. It’s easy to add functionality to IoT devices simply by installing additional applications. However, you should never install software from an untrusted source. Doing so can open the door to hackers.
- Turn off IoT devices when they aren’t in use. This may seem like a simple solution, but active devices are vulnerable to attacks. Just by switching off unused devices, you can improve network security overall.
Although IoT technology is likely here to stay, it is important to remember that it is still in its infancy. By taking proper precautions, you can enjoy its conveniences instead of letting it threaten your business operations.
On Dec. 14, 2018, a federal judge ruled in Texas v. United States that the entire Affordable Care Act (ACA) is invalid due to the elimination of the individual mandate penalty in 2019. The decision was not stayed, but the White House announced that the ACA will remain in place pending appeal. The Department of Health and Human Services (HHS) also confirmed that it will continue administering and enforcing all aspects of the ACA.
This lawsuit was filed by 20 states as a result of the 2017 tax reform law that eliminates the individual mandate penalty. In 2012, the U.S. Supreme Court upheld the ACA on the basis that the individual mandate is a valid tax. With the penalty’s elimination, the court in this case ruled that the ACA is no longer valid under the U.S. Constitution.
This ruling is expected to be appealed and will likely be taken up by the Supreme Court. As a result, a final decision is not expected to be made until that time. The federal judge’s ruling left many questions as to the current state of the ACA; however, the White House announced that the ACA will remain in place pending appeal.
The ACA imposes an “individual mandate” beginning in 2014, which requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. In 2011, a number of lawsuits were filed challenging the constitutionality of this individual mandate provision.
In 2012, the U.S. Supreme Court upheld the constitutionality of the ACA in its entirety, ruling that Congress acted within its constitutional authority when enacting the individual mandate. The Court agreed that, while Congress could not use its power to regulate commerce between states to require individuals to buy health insurance, it could impose a tax penalty using its tax power for individuals who refuse to buy health insurance.
However, a 2017 tax reform bill, called the Tax Cuts and Jobs Act, reduced the ACA’s individual mandate penalty to zero, effective beginning in 2019. As a result, beginning in 2019, individuals will no longer be penalized for failing to obtain acceptable health insurance coverage.
Texas v. United States
Following the tax reform law’s enactment, 20 Republican-controlled states filed a lawsuit again challenging the ACA’s constitutionality. The plaintiffs, first, argued that the individual mandate can no longer be considered a valid tax, since there will no longer be any revenue generated by the provision.
In addition, in its 2012 ruling, the Supreme Court indicated (and both parties agreed) that the individual mandate is an essential element of the ACA, and that the remainder of the law could not stand without it. As a result, the plaintiffs argued that the elimination of the individual mandate penalty rendered the remainder of the ACA unconstitutional.
The U.S. Justice Department chose not to fully defend the ACA in court and, instead, 16 Democratic-controlled states intervened to defend the law.
Federal Court Ruling
In his ruling, Judge Reed O’Connor ultimately agreed with the plaintiffs, determining that the individual mandate can no longer be considered a valid exercise of Congressional tax power. According to the court, “[u]nder the law as it now stands, the individual mandate no longer ‘triggers a tax’ beginning in 2019.” As a result, the court ruled that “the individual mandate, unmoored from a tax, is unconstitutional.”
Because the court determined that the individual mandate is no longer valid, it now had to determine whether the provision is “severable” from the remainder of the law (meaning whether other portions of the ACA can remain in place or whether the entire law is invalid without the individual mandate).
In determining whether the remainder of the law could stand without the individual mandate, the court pointed out that “Congress stated three separate times that the individual mandate is essential to the ACA … [and that] the absence of the individual mandate would ‘undercut’ its ‘regulation of the health insurance market.’ Thirteen different times, Congress explained how the individual mandate stood as the keystone of the ACA … [and,] ‘together with the other provisions’ [the individual mandate] allowed the ACA to function as Congress intended.” As a result, the court determined that the individual mandate could not be severed, making the ACA invalid in its entirety.
Impact of the Federal Court Ruling
Judge O’Conner’s ruling left many questions as to the current state of the ACA, because it did not order for anything to be done or stay the ruling pending appeal. However, this ruling is expected to be appealed, and the White House announced that the ACA will remain in place until a final decision is made. On Dec. 17, 2018, HHS also confirmed that it will continue administering and enforcing all aspects of the ACA. Many industry experts anticipate that the Supreme Court will likely take up the case, which means that a final decision will not be made until that time.
While these appeals are pending, all existing ACA provisions will continue to be applicable and enforced. Although the individual mandate penalty will be reduced to zero beginning in 2019, employers and individuals must continue to comply with all other applicable ACA requirements. This ruling does not impact the 2019 Exchange enrollment, the ACA’s employer shared responsibility (pay or play) penalties and related reporting requirements, or any other applicable ACA requirement.
By Natasha Kwachka
Lately productivity has been a huge topic of discussion. Some would say productivity can be achieved by a few simple habits put into action. Although I agree with creating positive habits that can contribute to efficiencies, I wonder if there is more that goes into productivity. I recently read an article that discussed taking small moments to disengage, also known as Quiet Time. It caused me to take a deep look inward and truly evaluate how often I took a step away from all the noise. Needless to say, my time spent in silence likely matches many Americans, who would describe this time as “slim to none.” There are huge gains to be made from taking small amounts of time completely dedicated to silence, removing the noise. Take a look at the article I came across.
The State of Alaska released a notice containing directions for Alaskans affected by last week’s earthquake to apply for grants and disaster relief, which can be found at http://ready.alaska.gov. This can be very valuable to those struggling to rebuild after damages incurred last week. Please direct inquiries for disaster assistance to this site and feel free to forward this notice to those looking for help. We also posted this on the RISQ website. The link at http://ready.alaska.gov for individual assistance ALSO applies for business disaster relief. Our office contacted the State Emergency Operations Center, a division of Homeland Security, this morning and confirmed businesses are eligible to apply for relief. If you cannot access the web, the hotline is 855-445-7131, or you can call the SEOC directly at 907-428-7100.
KTVA shared more information today on available resources for disaster relief:
Once you have reduced your debt and created a workable spending plan, you’re ready to begin saving toward retirement. You may do this through a company retirement plan or on your own. Here are a few of the places where you might put your money for retirement:
• Savings accounts, money market mutual funds, certificates of deposit (CDs) and U.S. Treasury bills. These are often referred to as cash or cash equivalents because you can get to them quickly and there’s little risk of losing the money you put in.
• Domestic bonds. You loan money to a U.S. company or a government body in return for its promise to pay back what you loaned, with interest.
• Domestic stocks. You own part of a U.S. company.
• Mutual funds. These pool your money with the money of other shareholders and invest it for you, making it easier to invest and to diversify your money.
Where Should You Put Your Money?
For goals you want to accomplish quickly, it’s best to put your money into one or more of the cash equivalents, like a bank deposit. For goals at least five years into the future, such as retirement, consider putting some money into stocks, bonds, real estate, foreign investments, mutual funds or other assets. Keep in mind that these options are uninsured by the federal government, so they carry the risk that you can lose some of your money. Generally, the longer you have until retirement and the greater your other sources of income, the more risk you can afford. For those who are retiring soon and who will depend on their investment for income during retirement, a low-risk investment strategy is more practical. But if you have more time before retirement, investing carefully in options such as stocks and bonds can help you earn significantly more than keeping all your money in a savings account. The greater the risk, the greater the potential reward, but only you can decide how much risk you are comfortable taking.
Since 1926, the average annual return of short-term U.S. Treasury bills, which roughly equals the return of other cash equivalents such as savings accounts, has been 3.9 percent. The annual return of long-term government bonds over the same period has been 5.3 percent. Large-company stocks, on the other hand, while riskier in the short term, have an average annual return of 11.7 percent.
Many experts advise putting at least some of your money in higher-risk, but potentially higher-returning, assets. These high risk assets can help you stay ahead of inflation, which eats away at your nest egg over time. Remember though, choosing investments is your decision – never invest in anything you don’t understand or feel comfortable with.
Reducing Investment Risk
There are two main ways to reduce risk. First, diversify within each category of investment. You can do this by investing in pooled arrangements, such as mutual funds, index funds and bank products offered by reliable professionals. These investments typically give you a small share of different individual investments and allow you to spread your money among many stocks, bonds and other assets, even if you don’t invest a lot of money. Your risk of losing money is less than if you buy shares in only a few individual companies.
Second, you can reduce risk by investing among different categories of investments. Generally speaking, you should put some of your money in cash, some in bonds, some in stocks and some in other investment vehicles. The factors that cause one investment to do poorly may cause another to do well. Bond prices for example, often go down when stock prices are up (and vice versa). By diversifying into different types of assets, you are more likely to reduce risk and improve return than if you put all your money into one investment or one investment category.
Deciding on an Investment Mix
How you diversify is called asset allocation. Your decision will depend on many factors, including how many years until your retirement, the size of your current nest egg, other sources of retirement income, how much risk you are willing to take, your current financial picture, and so on. Your asset allocation will also change over time. When you are younger, you might invest more heavily in stocks than bonds and cash. As you get older, you may reduce your exposure to stocks and hold more in bonds and cash. You also may change your asset allocation as your goals, risk tolerance or financial situation change.
Rebalancing Your Portfolio
Once you’ve decided on your investment mix and invested your money, some of your investments will go up and others will go down over time. Eventually, you will have a different investment mix than you intended. Reassessing your mix, or “rebalancing,” brings your portfolio back to your original plan. Rebalancing also helps you to make more logical investment decisions. Let’s say your original investment called for 10 percent in U.S. small company stocks. Because of a stock market decline, they now represent 6 percent of your portfolio. You would sell assets that had increased and purchase enough U.S. small company stocks so they again represent 10 percent of your portfolio.
How do you know when to rebalance? There are two methods of rebalancing: calendar and conditional. Calendar rebalancing means that once a quarter or once a year you reduce the investments that have gone up and add to investments that have gone down. Conditional rebalancing is done whenever an asset class goes up or down more than a certain percentage. This method lets the market tell you when it is time to rebalance.
Article adapted from the U.S. Department of Labor publication of the same title. www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/savingsfitness