Guest post by Planswell
Whether you’re just starting out in your career, well on your way up the ladder, or already have the end in sight, hopefully you’re pleased with your work and the lifestyle it provides. If so, then the purpose of your financial plan is really quite simple: to sustain the lifestyle you enjoy both while you’re working and when you eventually retire.
Your career path and your financial plan are closely linked. If you have benefits at work, they are an important part of your plan. Here are some of the things to consider as you map out your career and your financial life.
Your cash flow
A lot of times, when people hear the term financial planning, they think about budgeting. It makes sense, because we’re all constantly dealing with the month-to-month balance of how much money we bring home, how much goes to bills, and what’s left over to save and invest.
That last category - saving and investing - is crucial to your long-term financial success. The more you can put away every month (and the earlier in your life that you start to do it), the better off you’ll be. One of the great things workplace benefits can do to help you free up more cash-flow for this purpose.
Every dollar you don’t need to spend on dental check-ups, medications, eyeglasses, physiotherapy or other covered expenses is a dollar you can invest. To give a simple example, if your benefits were able to save you $100/month and you invested at a 6% annual return, you’d have almost an extra $50,000 in 20 years.
If you’re ever trying to assess or select workplace benefits, keep in mind that coverage for your out-of-pocket expenses can be a lot more valuable than it looks, especially if you invest that extra cash flow.
One small problem with workplace savings programs is they can sometimes lead people to assume that their retirement savings are all taken care of. This usually isn’t the the case, and you really need to know for sure.
A handful of Canadians have what’s known as a Defined Benefit pension plan. With these plans, the benefit is defined for you. That means you know in advance what you will receive as an annual income once you retire. If you’re lucky enough to have one of these pensions, you need to look at how much it will pay you, then use your financial plan to supplement it if necessary.
Most Canadians with workplace savings have a Defined Contribution plan. With these plans, the amount you contribute each pay period is defined, but the benefit is not. What you ultimately receive will be a result of how well the investments within the pension fund perform. With these plans, it’s harder to know what you’ll receive at the, but a good financial planning process will give you a solid estimate, and from there you can top it up as needed.
One thing you definitely want to do as part of your plan is to maximize any savings that will be matched by your employer. If your employer will add a dollar when you add a dollar, that’s a guaranteed 100% return. It really doesn’t get any better than this. Yet, for some strange reason, Canadians pass up literally billions of dollars in “free money” every year by not making the most of this opportunity.
Many workplace benefits programs come with with some insurance. It’s fairly common to have life insurance, critical illness insurance, and accidental death insurance included as part of your benefits.
This is great, because insurance is a very important part of any financial plan. All you have to do is meet someone who got sick, missed a year of work, and had to raid their life savings to understand how insurance can step in when needed to maintain your lifestyle.
The risk with workplace insurance policies is similar to investing - the amount and type of insurance is likely valuable and helpful, but probably not exactly everything you need to be truly covered. Again, you need to know for sure.
A good financial plan will use formulas to determine the ideal coverage amounts to provide smooth financial sailing even if there’s an accident, illness or death in the family. It’s not a lot of fun to think about, but armed with these calculations, you can top-up your workplace coverage and breathe a little easier.
Build from the ground up
Workplace benefits are a great foundation for your financial plan. Working with a traditional financial planner (or, as we recommend, the new breed of digital financial planner), you can analyze what your benefits cover, what they don’t, and the most effective ways to make up the difference.
The beauty of this approach is you get to live a good life in the years and decades ahead, and you get to feel just a little more smart, confident and financially secure right now.