The Hobbit author J.R.R. Tolkien once said, “It is the job that is never started that takes the longest to finish.” High school students everywhere are reforming their procrastinating ways in the next few weeks and months as they head into the workforce and their first full-time jobs. When it comes to the newly earned cash in your wallets and bank accounts, consider this: Your paycheck is only one of many on-the-job financial considerations.
Putting Your Skills to Work
For Tristan Lovett, now 21, his career pathway started part-time. While still a high school student at Burlington County Institute of Technology in New Jersey a few years ago, Lovett began work at Radwell International, an industrial electronics repairer and reseller. The job paid well for a teenager, and upon graduating, he kept his position while starting college. An offer from Radwell, however, altered his course. “It was a bit difficult to balance [work and college] out and I had considered leaving work and going to school full-time. But when my company offered to make me full-time, I decided to put my skills to direct use rather than going to school first,” says Lovett.
Lovett’s full-time offer included a higher wage, health benefits and the opportunity to participate in a retirement plan. His decision to pursue a full-time career, however, rested mainly on the salary. “My proposed hourly rate was to be increased. That [played] a big part in my decision to become a full-time employee,” he says. He chose to remain on his parent’s health insurance plan and is now considering taking advantage of the company’s retirement benefits.
For teenagers just out of school, a first full-time job means the opportunity to trade working toward a good report card to working for a solid paycheck. Along with considering a regular wage, first time job seekers should also factor in other financial considerations. Following is a guide to three of them: health benefits, retirement savings and taxes.
Thanks to health care reform enacted by the federal government in 2010, young adult children may be covered under their parent’s health plan until the age of 26. This has enabled workers like Lovett to choose the option that makes the most sense based on “the amount of benefits and the price of the best-offered plan,” he says.
For those young adults who take advantage of company health benefits, most employers offer a choice of two or three plans, says Jim Bristow, financial planner for BCG Securities, a financial services company located in Delran, N.J. He adds that health benefit plans generally fall into one of four categories: Preferred Provider Organizations (PPO), Point of Service (POS), Health Maintenance Organizations (HMO) and Health Savings Accounts (HSA).
While there are many differences between the four categories, new employees can work with health benefit administrators at their jobs to discuss chief points of difference, such as deductibles, co-insurance and networks. Deductibles are the amount of money an employee contributes before an insurance company pays a claim. Co-insurance refers to how much of a claim an insurance company pays and how much an employee will pay, while networks detail which doctors are covered under the insurance plan and to what extent.
The answers to these questions often dictate the cost of the plan. For example, HSA plans with high deductibles often cost the least, while PPO plans with small deductibles, low co-insurance fees and a choice of doctors cost the most, notes Bristow.
How much of the health insurance cost actually filters to the employee depends on the employer. “The employer can pay 100% to zero of the cost. Generally, the employer and employee split 50% each,” says Bristow. When an employee contributes to his or her own health plan, money is deducted from each paycheck.
Although retirement may feel like light-years away, it is never too early to save. “Any chance of a comfortable retirement is going to be dependent on the employee making a conscious decision to save,” says Beau Adams, senior vice president of business development at Benefit Consultants Group in Delran, N.J.
Adams says that the best way to save for retirement is a tax-deferred savings program, such as a 401k, 403b or a payroll-deducted IRA. In this scenario, money is deducted from an employee’s paycheck before it is taxed, and it is taxed only after withdrawals are made. Aside from convenience and tax benefits, it also takes advantage of compound interest, a term that essentially means earning interest on past accrued interest.
Compound interest is a big reason why saving early is so important. “An employee entering the workforce today and beginning to save immediately has a good chance to accumulate the nest egg necessary to enjoy retirement. Unfortunately, far too many workers don’t begin this thought process until it’s too late,” adds Adams.
To make retirement savings more tempting, many employers offer a matching program, where the employer matches a portion of the employee’s savings. For example, an employer may match “50% of every employee dollar contributed, up to 6% of the salary,” notes Adams.
Adams suggests that young adults locate a retirement savings calculator online to determine how much should be saved each month, and then, “Start now. Enroll the moment you are eligible for your employer’s plan. Waiting until your 30s, 40s or later makes it nearly impossible to save enough for retirement,” he says.
While considering how much of your paycheck will ultimately go home, don’t forget that Uncle Sam needs his tax piece. Expect several deductions out of your paycheck. “Social Security and Medicare taxes will be the same no matter what you make,” says Dave Steenstra, a certified public accountant located in Houston, Tex. Steenstra adds that employees should plan on 6.2% of their income going toward a Social Security tax to fund retirement income for older Americans and 1.45% going toward Medicare, a federal health insurance program that covers most people 65 and older.
Federal and state tax rates depend upon income. On the federal side, the government can take as little as 10% to as much as 39.6%. State taxes vary, but in Lovett’s home state of New Jersey, the tax rates range from 1.4% to 8.97%, says Steenstra.
For Lovett, these deductions are taken in stride. “I’m making on average twice as much as I did when I first started. However, with this increase in pay, I’ve just recently noticed how much they deduct in taxes. It’s true when they say the more you make, the more they take. But, being only 21, I can’t complain at all.” Most importantly, Lovett still has lots of time to save.
What are three financial considerations you should make when starting a full-time job?
Why is beginning to save early so important? Explain.
Refer to the retirement savings calculator in the related links below to figure out how much you need to save for retirement. Not employed yet? You can estimate!