Employers are trying their best to keep their best talent. And, as more top executives and senior-level managers re-evaluate their careers after two years working from home, companies are trying to find new ways to entice them to stay.
While stock options, restricted stock and other deferred compensation plans have long been part of talent-retention plans, recent news reports say that more companies are instead offering cash bonuses. According to these reports, Alphabet, owner of Google, adopted a new cash bonus plan in October 2021 that lets the company give employees bonuses of nearly any size for nearly any reason. Amazon said in February it doubled its cash-pay cap for employees.
But with more money hitting bank accounts, it’s tempting for an executive making a healthy six-figure income to make an expensive purchase that eats up a large chunk of this cash. It’s even more likely for people to begin to stray from their budgets and spend more money. Lifestyle “creep” takes hold; with more money to spend, it’s too easy to be less disciplined. Then, when high inflation hits, a recession occurs, or their company downsizes them, it’s hard for people to pare back when times get lean.
A few years ago, one of my clients, a corporate executive, used a bonus to install a $75,000 swimming pool in her backyard. It may have seemed like a reward for a job well done, but the pool put a major dent in her goal to build her savings for her three children’s college education, which was right around the corner.
Whether it’s a big cash bonus or stock options and restricted stock grants, “What Matters Most” is a phrase I use to guide my clients. With that as background, here are some of the best ways to invest cash bonuses:
Increase Your Pre-Tax and After-Tax 401(k) Contributions
Retirement savers with a 401(k) can contribute up to $20,500 in 2022. Those savers ages 50 and older can make an annual catch-up contribution up to $6,500 in 2022 (no change from 2021), for a total contribution of $27,000. If you weren’t already doing this, now is the time.
Set Up Automatic Monthly Deposits in Key Accounts
Saving money for a child or grandchild’s college education has never been easier. Regular deposits to a 529 college savings plan will add up over the years, and in about 30 states, individuals and married couples may be able to deduct part of their 529 contributions from their state income tax return.
A 30-year-old saving for their retirement may need to save half as much money over their career compared with someone who starts saving when they are 40 years old, assuming similar …….