Salary is usually the biggest factor in a job offer package, but candidates should not discount the importance of other benefits when weighing whether to accept a position. Good healthcare benefits obviously carry tremendous weight. And taking advantage of retirement benefits could set you up very comfortably later in life with the right planning and discipline now.
Planning and discipline – choosing to save instead of spend — are the keys to most personal financial success, so it should be no surprise that the same elements are critical for making your employer’s financial benefits work for you. Here’s how to make the most of what your employer offers:
Understand the options. Most employers offer defined-contribution plans which allow the employee, the company, or both to sock away a certain amount or percentage of salary on a regular basis for the employee’s retirement. Some employers offer defined-benefit plans in which the employer promises fixed monthly payments or a lump sum distribution upon an employee’s retirement. The amounts paid are typically based on a formula involving years of service, salary and other factors. Government careers often offer pension plans.
In addition to encouraging a disciplined approach to saving for retirement, defined-contribution and defined-benefit plans offer important tax advantages. Contributions to retirement plans generate a tax deduction when they are made but are taxed when distributed to the retired employee at a later date. More importantly, there is no tax on the interest, dividend, and capitals gains made by such investments.
For young workers especially, defined-contribution plans offer valuable flexibility. Many people nowadays do not stay at one organization for their whole career. Defined-benefit plans are much more valuable for employees who work in the same organization for their entire careers because the retirement formula escalates benefits with pay raises. Many plans have vesting periods requiring that an employee participate in the plan for multiple years before the benefit formula kicks in. By contrast, an employee with defined-contribution plans can more easily move from one job to another without sacrificing benefits.
Moving within the same organization typically does not reduce benefits. For example, the military offers a good path to meeting career goals without accumulating debt and while accruing a pension for retirement.
The bottom line is this: If you sign up for a defined-benefit plan, you need to think about how much you value career flexibility. How many years you are going to need to be in the same job to make a defined benefit plan worthwhile. When does it vest?
Maximize your contributions. When you are negotiating your salary with a new employer, understand the value of an employer matching your contribution and what the terms are. If you can afford to, contribute the maximum amount allowed to your employer’s 401K plan. If your employer doesn’t offer a 401(k) – or even if they do — open your own Roth IRA, IRA or supplemental retirement accounts and maximize contributions to those, too. For those just entering the job market, starting salaries are often low, so retirement plans will not be accumulating huge amounts of wealth.
Consider the mix. Make sure that your employer does not have a plan with really high fees. If there is a menu of options, consider the one that has the cheapest fees. If the fees are low enough, think about a target-date retirement plan, because the fund automatically rebalances your retirement plan between stocks and bonds as you get older to keep the proportions reasonable. Younger workers might opt for a mix that is dominated by equities, which tend to be riskier than, say, bonds, but can produce bigger returns. Older workers might want to be cautious, to preserve the money they have accumulated.
Factor in your commute. Calculate the value of your time accurately when choosing where to work in proximity to where you live. Many people make the mistake of working too far from their homes. If you are not willing to move closer to a new job, make sure you do the math – it’s a financial calculation. An extra hour a day in the car—say 250 hours per year—is 10 percent or more of your work time. This is like a 10 percent pay raise to live somewhere else where you can save that hour. It is a financial decision that people often make poorly.
Now keep working! Working longer can be a very good financial decision, so put off retirement if you can. The big math on when to retire is this: Every year you work past your normal retirement age pays off double because you are still earning a salary while you work and you are not yet dipping into your retirement savings.
Albert S. “Pete” Kyle has been the Charles E. Smith Chair Professor of Finance at the University of Maryland’s Robert H. Smith School of Business since 2006.