Employer Contributions to Retirement Can be More Valuable than Base Salary
Your base salary does not always tell the whole story when looking at compensation. We like to compare compensation by looking at salary, which is often a base and sometimes includes a bonus. When looking at salary we usually don’t include retirement benefits as a part of our compensation but it can make a huge difference down the road.
I was once offered a position with a small private practice in neurology. They were offering a lower than average base salary and did not have a clear description of a bonus plan. However, they were offering a great retirement plan with an automatic 10% contribution and another 5% match; so if I contributed 5% of my salary they would match another 5% plus the 10% automatic contribution for a total of 20% of my annual salary.
The one thing your base salary does not provide is compounding interest. By using a retirement calculator we can determine how much that money would be worth over time. If you worked for your employer for ten years and was getting a 20% contribution annually, assuming an 8% average rate of return and 3% annual salary increase you would have contributed $225,249 and the total value would be $340,710. That’s over $100,000 dollars more than what would have been given in your salary.
The longer you work for that employer and continue with that contribution amount the more that would grow. Using the same calculator, if for some reason you decided to quit that job and never contribute to your retirement again that money would continue to grow and over twenty more years you would have $1,678,611.
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Of course if you were to take a job with a higher salary and use the extra money from the higher salary to contribute to your retirement you could have similar results. The problem with that, is a lot people don’t have the discipline to take money out of their paycheck to contribute to their retirement so an automated system that is contributing a lot to your retirement can really pay off in the long run.
When we look at jobs we often like to compare them by base salary, but just looking at the salary does not always paint a clear picture of what you’re getting. If one job is offering $90,000 with 20% contribution to your retirement and another is offering $100,000 with 5% contribution it might be worth it in the end to take the one with the lower salary and the higher retirement contribution.
When you’re evaluating two job offers it is important to look at everything that is offered and not just the base salary. I recommended making a chart and comparing everything side by side. One of the most important things is the work environment and enjoying who you work with, so remember, as you search for new jobs and meet with potential employers that you are interviewing them just as much as they are interviewing you; and take everything into account, including the retirement benefits.
How much does your employer contribute to your retirement? Has a retirement plan swayed you in your decision in taking a job? Please comment below on the original article, share with your friends and sign up to receive future posts by email!
