June 14, 2008
Your Money

A Primer for Young People Starting Their First Job


To the hundreds of thousands of young people who have landed entry-level jobs that come with health insurance and a retirement plan, I offer my congratulations. Things are tough out there right now, so you must be doing something right.

To the employers who are about to put them to work, however, I urge you to take another look at the pile of employee manuals that detail all your fabulous benefits. They’re boring. They’re confusing. And they start in the middle instead of defining things from the beginning.

Benefits administrators, from health insurance companies to 401(k) providers, are trying to help improve the situation, but most employers still have a long way to go.

So below, I offer a proper primer on health insurance, taxes and retirement plans for employees starting their very first jobs. Please pass it out with my regards.

Health Insurance

Priority No. 1 is to protect yourself from some huge expense that you cannot possibly afford. That is what insurance, in any form, is supposed to do.

As for health insurance, most of you probably won’t run up big bills anytime soon. But some of you will get appendicitis or crash your cars or end up in a psychiatric hospital for a stretch of time. And if any of those things happen, insurance should pay for a big chunk of the treatment.

Health insurance is expensive. Employers generally pay for some or most of it, but usually not all. You’ll probably pay your share of the cost in at least two ways.

First, your employer will probably take some money out of your paycheck regularly. This is called the premium. Then, there’s something called a deductible, where each year you have to pay at least the first couple of hundred dollars toward many kinds of medical expenses, like prescription drugs or doctor fees or payments to mental health practitioners. Finally, there’s the co-payment, a $15 (or $50 or $100) fee you pay for every doctor visit or prescription.

You may be able to choose from a few different types of insurance plans.

If you do, you will almost certainly be confused by the options. Most employers have a human resources or benefits staff member who can help. Don’t be shy. The only stupid question is the one you don’t ask. Ignorance can easily cost you hundreds of dollars.

For some more background, I’d also check out allaboutthebenefits.com, a Web site that the health insurance giant Aetna and the Financial Planning Association created for the young and confused.

Many employers now offer a new kind of insurance that pairs high deductibles (often more than $1,000) with some sort of savings account that you can use to pay for health expenses before your insurance starts contributing. Critics complain that these plans work only for the young and healthy. If you’re young and healthy, though, there’s no shame in signing up.

These new plans may not be ideal if you have a chronic condition, like asthma or diabetes, or see a chiropractor or psychologist regularly. If you do, add up the cost of your office visits and make a list of the prescription drugs you take. Then, see what your plans will cover and what kind of deductibles and co-payments are involved. Also, be sure to check if there is any kind of annual or lifetime limit on what the insurance will cover.


Sadly, a $36,000 annual salary won’t turn out to be anything close to $3,000 a month. One big reason is that your employer takes money out to send directly to the government for taxes.

When you start work, you’ll need to fill out a form called the W-4. This tells your employer how much money to take out of your check to pay federal income taxes. (Companies also usually hold back money for Social Security and Medicare taxes and state and local income taxes where they exist.)

If you’re young, single and don’t have any student loan debt, the W-4 is fairly straightforward as tax forms go, but it contains at least one line that may be confusing. Line A instructs you to enter a “1” if no one else can claim you as a dependent. Ask your parents whether they intend to do so this year.

If you do have student loan debt and plan to deduct the interest you’re paying, it gets a bit more complicated. There’s a good worksheet at paycheckcity.com that will take you through some questions and then fill out the W-4 for you. From the home page, look under “basic” and click “Form W4 Assistant.” To complete the worksheet, you’ll need to know how much interest you’ll be paying this year. Your student loan provider should be able to tell you what part of your monthly payment is interest.


Depending on how high your student loan bill is, putting something away for retirement may seem impossible. Vanguard, a mutual fund company that also administers 401(k) plans for employers, ran a survey that suggested that credit card debt was an even bigger impediment for those under 35. High rent can make saving seem daunting as well.

You may be facing down all three of these bills. Your student loans might average 6 or 8 percent interest, while your credit cards might run at 18 percent. Always make at least the minimum payment on time, since that will make it easier to get other loans later.

But if your employer offers a 401(k) or other similar retirement plan where it matches your contribution, pay careful attention. With these plans, you tell your employer to set aside a small portion of your paycheck before payroll takes out federal and other taxes (you don’t have to pay any taxes on this savings until much later).

Your employer may contribute one dollar for every dollar you put in, up to 3 percent of your salary. Or maybe it chips in 50 cents for every dollar you save up to 6 percent of your salary. The amount varies by employer, but this match is, in effect, an instant 50 or 100 percent “return” on your savings.

Consider this an optional raise. Turning it down would be a real shame. Nor will it cost you as much as you think. Saving 3 percent out of an annual salary of $36,000 amounts to roughly $20 a week. If you want to run your own numbers and test the impact of different amounts of savings, try the Salary Paycheck Calculator at paycheckcity.com, under “basic.”

Once you decide how much to save, you’ll have to figure out where to invest the money. Fidelity, another big 401(k) plan administrator, notes that in recent years the company worried about bombarding people with too much investment information. “Someone inside said that it was like we were trying to create a nation of Warren Buffetts,” said Michael Doshier, vice president for marketing for the retirement services division.

The fact is, the majority of Fidelity’s 401(k) customers don’t adjust their investments for years at a time once they put money in. If you think you may leave yours alone too, consider investing in something called a lifecycle or target-date fund, which is fast becoming a standard offering in retirement plans. These funds will have names like the 2050 fund, which correspond to the year when you’ll probably be thinking about retiring. Managers allocate the money (mostly in stock mutual funds now, though the investments get more conservative over time), and all you have to do is shovel more in.

Want to learn more or invest in other types of funds? An increasing number of employers offer one-on-one retirement savings advice.

Charles Schwab, which runs retirement plans and can also provide this sort of counsel, says the company has done well with younger workers. In 2006, among employees 25 and under, those who got 401(k) advice from Schwab achieved a 14 percent rate of return on average, according to the company. People under 25 who did not ask for help earned just 9.3 percent.

Past performance is no guarantee of future prowess. But hey, the advice is free. It can’t hurt to bounce your own plan off someone who actually thinks about all this for a living.

What do you wish had been in your manual? E-mail rlieber@nytimes.com.