DIGNITAS

A PRACTICAL GUIDE TO

5
A Dignitas Briefing Paper

MANAGING YOUR ANNUAL BONUS

SMART TIPS FOR NAVIGATING THE 2013 BONUS SEASON

Incentive Compensation 2013: Leveraging Hard Work and Opportunity.

Incentive compensation provides individuals the chance to enjoy the fruits of their labor. Through planning and smart decision making, individuals can leverage their annual bonus into an opportunity to achieve their savings and investment goals, while also making the types of purchases that will increase their overall happiness and satisfaction. So how do you know if you are making good financial decisions? Dignitas Briefing Paper is your guide for considering your options on how to optimize your 2013 bonus compensation. It covers five important tips for how to allocate your bonus compensation that will help protect you and your family over the long-run.

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A Practical Guide to Managing Your Annual Bonus By Nicholas Delgado

About the Author

A Practical Guide to Managing Your Bonus

By Nicholas Delgado Nicholas Delgado founded Dignitas to provide clients with personalized, high quality and independent advice and solutions that allow them to simplify their lives. With 15+ years of experience in the financial services and wealth advisory industry, Nick has become a go-to advisor for start-up/high growth entrepreneurs, seasoned executives and individuals entering their second life.

Follow Nick on Twitter @DignitasCWO

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One: Pay Yourself First.

Consider maxing out on your annual 401(k) contribution, which for 2013 is at $17,500. The catch-up contribution limit for employees age 50 and over is $5,500, for a total of $23,000. Once youve achieved your retirement savings contribution limits, work towards achieving your 2013 savings targets early in the year. If after youve received your bonus you have surpassed the 2013 Social Security wage base of $113,700, consider saving all or part of the 6.2% payroll tax for the remainder of the year.1
1) Internal Revenue Service Guide 1036 http://www.irs.gov/pub/irs-pdf/n1036.pdf

Decrease your taxable income by up to $17,500 by maxing out your 401(k) in 2013.

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Two: Defer Compensation.

Tax rates have gone up. Have you calculated whether or not you are impacted by the new marginal federal income tax rates and Medicare taxes? Marginal income tax rates are now at 39.6 percent for income in excess of $400,000 for individuals and $450,000 for joint filers. In addition, Medicare taxes have gone up from 1.45 percent to 2.35 percent for earnings in excess of $200,000 for individuals and $250,000 for joint filers. A new 3.8% Medicare tax on some investment income for taxpayers with earnings in excess of $200,000 for individuals and $250,000 for joint filers will also take effect in 2013.2 Consider deferring a portion of your bonus if you expect your 2013 bonus to be higher than normal to mitigate higher marginal tax rates. Many companies offer non-retirement deferred compensation plans to highly compensated employees. Deferred compensation refers to a financial arrangement where a portion of an employees earned income is paid at a later date from when it was earned. Because income is deferred to a later date, an employee does not pay income tax on deferred amounts until the funds are actually paid to the employee.
2) Source Internal Revenue Service Guide 1036 http://www.irs.gov/pub/irs-pdf/n1036.pdf

Marginal income tax rates are now at 39.6% for high income earners.
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Three: Pay Off Debt.

If you have a significant amount of consumer debt, paying down existing debts should be a high priority. For maximum savings, start by paying off credit cards with the highest interest rates first. After youve allocated money for short and long-term savings and paid off consumer debt, consider using any excess reserves in low yielding cash or deposit accounts to pay down lower cost debt such as your home mortgage or any outstanding student loans. This can lead to substantial long-term savings over time by decreasing the duration of the loan and the amount of interest payments you will make.

High income U.S. households had a median of $8,000 in 3 credit card debt in 2010.
3) Source: Federal Reserve Bulletin http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf

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Four: Update Your Insurance Plans.

Confirm that you have sufficient insurance. Premiums for term insurance are relatively inexpensive for people in good health up to about age 50. A full-time employee with a family should factor in final burial expenses, outstanding mortgage balances and other debts, education expenses, and income replacement needs. Review your need for additional insurance coverage after major life events such as marriage, having a child, or when you have significant changes in income. If your income and assets have increased significantly over the past few years you might want to also consider an umbrella policy. An umbrella provides liability coverage over and above your standard auto insurance or homeowners insurance. It offers protection against large liability claims or judgments. Umbrella premiums can be as low as $200 to $300 per year for $1 million of additional liability protection.

Calculate your insurable needs to determine if you are adequately insured.

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Five: Align Discretionary Spending to Your Goals

Enjoying the reward of receiving an annual bonus can be amplified when you align discretionary spending to your goals. If spending more time with your family is a priority, then consider spending resources on family activities such as family passes to cultural attractions or a family vacation. Or, if you are planning on achieving a healthier lifestyle in 2013, then you might want to consider purchases such as a new bicycle, or hiring a nutritionist or personal trainer. Researchers at Harvard and the University of Virginia have found that the types of purchases, their size and frequency, and even the timing of the spending all affect long-term happiness. Spending money for an experience such as a dream vacation, concert tickets, cooking classes or sporting events has been shown to produce longer-lasting satisfaction than spending money on material objects.4
Source: The New Yoork Times http://www.nytimes.com/2010/08/08/business/08consume.html

Research has found that spending money on an experience produces longer lasting satisfaction than spending money on material objects.
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Dignitas Can help you achieve results.

Dignitas is a multi-family office and wealth management firm. We provide clients with independent and objective advice and solutions beyond the traditional investment management and financial planning model. Our full-service life management platform orchestrates a collection of business and personal services to support our clients whole life needs. To continue the conversation, please contact: Nicholas Delgado Principal | Chief Wealth Officer nick@mydignitas.com Twitter: @dignitascwo 312.651.6131 Dignitas 111 E. Wacker Drive Suite 2606 Chicago, IL 60601 www.mydignitas.com
Dignitas is an Investment Advisor Registered with the State of Illinois.

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