Advanced Personal Finance

The company I work for froze our pensions a couple of years ago. Now there’s rumor that retirees will soon lose their health benefits (these kind of rumors are almost always right). People here and elsewhere bemoan these developments and heap curses upon our executives for cheating them out of their retirement benefits.

I hate to be the one to break this to you…

Pensions and pension benefits are gone and they’re not coming back.

I don’t say this in a snooty ‘I’m saving for retirement, why didn’t you’ tone. You think I like losing money and benefits? Hell, no. I think it’s tragic. But it’s a fact.

I feel particularly bad for people around 50 in situations like this. What’s left of their pension isn’t nearly enough to live on and they probably haven’t been saving in a 401(k). If they have, those savings simply haven’t had much time to compound.

Is there any hope?

For people caught in the gap between ‘enough time to save on their own for retirement’ and ‘we got our pensions,’ there’s sadly little for them to do. Sure, there’s the catch-up provision on IRAs and 401(k)s. But there are still two problems with that - most people don’t contribute enough to get to the regular IRS maximum and even if they did, $5,000 (for a 401k) or $1,000 (IRA) more per year just ain’t that much.

For everybody else, check out this simple way to calculate if you’re saving enough for retirement. If you’re not, there’s still time. The Roth 401(k) is good for saving - use it. Put money away in your IRA. Do what you can, because relying on the promise of a pension is not a plan.

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Several years ago when my daughter was born, both my wife and I bought term life insurance (outside what we already had through our respective employers). I got the best (lowest) rate possible and my wife, because of family history, got a slightly higher rate.

Since then, things have changed for us. We’re expecting another baby this fall. And I’ve had a medical situation that, I am sure, would put me in a higher risk category. In short, if I wanted to get more life insurance, it would probably be more expensive than before. I say probably because life insurance rates are one of the few things that are decreasing in price.

So now I face the task of reevaluating our life insurance coverage and determining how much more life insurance to purchase, if any. I also have to factor in the likely fact that it’ll cost more than the original policy. So that brings up the question, what do you do when additional life insurance is too costly?

Factors in term life insurance cost

There are several factors that go into the cost of term life insurance.

• The length of coverage
• Your current age, health, and lifestyle
• Amount of coverage

What if you can’t afford more?

f this combination of factors puts additional term insurance out of your financial reach, you face a dilemma. You have to balance your need for insurance with your ability to pay for it. If the cost of an additional policy is truly out of reach, you can try these:

• Buy more insurance through your employer. Buying life insurance through your employer may not make sense if you’re young and healthy (you can get cheaper coverage outside the company) but if you’re older and/or in poor health, this makes sense for you.
• Make smart health decisions. Stop smoking (or using any form of tobacco). Lose weight. Control your blood pressure. It’s not only healthier, it’s cheaper. The cost of life insurance for smokers is out of this world compared to non-smokers.
• Make lifestyle changes. Believe it or not, when getting a quote, you’ll be asked if you fly a plane, skydive, or work at heights. All of these and more increase your rate.
• Buy the right kind of insurance. Even within term life insurance, there are two types. Level term policies never increase in price throughout the term of coverage. Annual renewable do. Look at the total cost of ‘ownership.’
• Get the right term. Carefully evaluate how long you need the coverage.
• Wait. It may make sense to wait for two reasons. First, rates will likely continue to fall or at least remain flat. Second, if your reason is medical, a sufficient period of time can mitigate the damage to your rate. In other words, if you put enough time between you and the medical event, your rate may improve.
• Do without. This may go against advice many would give. The bottom line is, if you can’t afford something, don’t buy it. That applies to life insurance, as well. Maybe instead of having college paid for if you die, your kids will have to do what millions of other kids do - take out loans and work through school.

What I did

Ok, so what did I do? I increased my coverage through my employer. I had been buying salary x 5 coverage and I increased it to salary x 6 and increased my AD&D (accidental death and dismemberment) to salary x 7. My thinking is, I’m young enough that, if I die, it’ll likely be because of an accident. The coverage costs a bit more than my rate on the outside-the-company insurance policy, but I believe it’s lower than if I tried to get more coverage now.

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One of my coworkers was looking at his 401(k) statement online when he clicked on the ‘Long Term Incentive’ tab that shows our stock options. Our out of the money options. The surprise - no, shock - came when he realized they’d been repriced! Apparently, unknown to us drones, the company had revised the strike price down for these options we all got a few years ago.

The company had done something that benefited employees and didn’t advertise it in the daily bombardment of corporate propaganda email. How many times does that happen? Like never. Not only that, but for some reason, the total number of options was slightly higher than it used to be (by around 5%).
What to make of this? My cynical side says there are two possible reasons. One, it’s a mistake that will be corrected by tomorrow. Two, it’s for real and in the unlikely event it benefits us workers, it will benefit management 100-fold.

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My wife and I are expecting our second (and last) child in early October. She just started a new job and her busy season is, you guessed it, Fall. So the plan is for me to help out as many days as possible when she has work to do and we’re going to just muddle through. Shortly thereafter, child number two will begin attending daycare. That situation is new to us - my wife stayed home full-time until our daughter was around two (she now attends a day school).

What I’m now wondering is should I take a leave of absence under the Family and Medical Leave Act (FMLA)? We’ve had enough advance notice (like, nine months worth) to begin saving a good chunk of money that presumably could be used in lieu of my salary for a few months. I’d really like to do it. In fact, I briefly fantasized about taking my turn to be the stay-at-home parent. Unfortunately, it just wouldn’t work out fiscally. My problem basically hinges on the money. While we could save enough to replace my income, that would be a fairly large amount of money and I have some sort of pathological aversion to spending large amounts of money.

I realize like three people have visited this site so this is a long shot, but has anyone done something similar or know someone who has? I’d be interested in hearing about the experience for and against.

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Mrs. KMC just started a new job and as part of the usual new job hassles, she had to sign up for benefits. We decided to keep my health and dental, but she also had the opportunity to take advantage of Flexible Spending Accounts (FSAs).

Flexible Spending Accounts

FSAs are great. If your employer offers them, take advantage of them. Here’s how they work. The company takes money out of your paycheck pretax (in the amount you designate, of course) for health care spending and dependent care. Later, you file for reimbursement of a covered expense and get a check.

How they work

We pay $800 per month for our daughter to attend daycare, so this is an opportunity to save money. You can have them deduct up to $5000 before tax. You just get your daycare provider to verify you spent the money with them (they provide tax ID and a signature), fax the form in, and get money back. My work also does this and even deposits the money into our checking account electronically. Pretty sweet.

Important note: the total amount you can put into an FSA is $5,000 for the household.  If both spouses have access to the plan, the total must be $5,000 or less for the year.

The health care version works similarly. Fill out form. Provide receipts. Fax form in. Get money.

The beauty part is that since the deduction comes out pretax, your out-of-pocket dependent and health care expenses aren’t costing you quite as much as they normally would. In other words, our $800/month daycare bill is costing us somewhat less than that in point of fact.

There is, of course, a catch. Because you have to determine at the beginning of the benefits year how much you want deducted over the course of the year, you may get the deduction wrong. If you have too little deducted compared to your actual expenses, no big deal. But if you have significantly more deducted than you actually spent, you’re in trouble because FSAs work on a ‘use-it-or-lose-it’ basis. If you don’t accrue expenses up to your deduction amount, you lose the remainder. However, don’t confuse accruing the expenses with filing for reimbursement. You’re typically allowed to file for reimbursement for a few months after the calendar year end (company policies vary). You shouldn’t be too worried about this, though, because you’d be amazed at what you can file for reimbursement. Over-the-counter drugs, glasses, Lamaze classes, rehab - they’re all covered (again, check your plan specifics).

One last thing to note about FSAs. You can typically change your deductions only under certain circumstances. For example, if your spouse loses his job, you can make changes. These ‘life events’ vary by plan.

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