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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Scandium on June 19, 2015, 12:37:00 PM

Title: How to value 401k employer contribution
Post by: Scandium on June 19, 2015, 12:37:00 PM
My current employer has a pretty generous, and I think unusual, 401k contribution of a flat 10% of salary (Although they wait as long as possible so I don't see it until September the year after!). With my max contribution this means I add ~$27k per year, and it will only go up. Pretty good I think.

For a variety of reason I've started thinking of looking for other employers. My question is how do I value this contribution vs other offers? Of course if I'm offered a 25% pay raise it's easy, but what what if it's more even? Say potential employer A has a 5% match. Even if they offer me a 10% pay bump, that's less then 5% jump when considering the 401k. And since that would be taxed, effectively only a ~4% pay increase. And any subsequent raises are also less valuable there regarding the 401k. I really like the extra boost this give on top of my max contribution.

Yes I'm aware it's only differed tax, but let's assume I can get my rate down in retirement.

Am I overthinking this? Is putting the same amount (or more, ideally) into my taxable about the same? Do I just add up base salaries plus contributions and compare the numbers?

ps: not sure if this fits here on in investor talk. Feel free to move.
Title: Re: How to value 401k employer contribution
Post by: Axecleaver on June 19, 2015, 12:57:10 PM
I'd consider your current employer to be offering a salary 110% of your current salary. A flat 10% is unheard of, congrats! Use that number to compare to other jobs. The fact that you get deferred taxation is an additional benefit, but harder to quantify. You could assign value to it by knowing what your likely tax rate would be in retirement, and adding back in the delta between your rate now and the tax savings at retirement. The option to be taxed at a lower rate later is quantifiable
Title: Re: How to value 401k employer contribution
Post by: MDM on June 19, 2015, 01:06:21 PM
Tax-deferred money is not the same as taxable money.  The question of which is better, however, depends on a few things, e.g., the fund fees in the 401k.  But if you expect a lower tax bracket on withdrawal the 401k is almost certainly better.  Of course, the question is "how much better?"

The '401k vs Taxable' tab in the case study spreadsheet ( might be a starting point for you to do a more detailed analysis if interested.  As configured it looks only at a single contribution, but with a little editing starting in cell B102 you could look at multiple years of contributions.  Don't know if this would be easier or harder than starting with a blank sheet.
Title: Re: How to value 401k employer contribution
Post by: expectopatronum on June 19, 2015, 01:13:57 PM
Possibly unpopular opinion coming up, but I would evaluate the new employer primarily based on opportunity, potential, location, flexibility, culture, and so many other things as long as they were in the general ballpark of your current salary. Granted, I hear that switching jobs/employers is an opportunity for pay bump.

But for leveraging purposes, then yeah, I'd calculate that in. (As in - "I'm currently compensated at $X, can you match that?" type of conversation, where X is 110%.) You could get super detailed and calculate the total value including all the benefits (health insurance? PTO?) and then compare it to the new place...but. *shrug* I wouldn't worry too much about the minutiae if you otherwise like the job offer.

Then again, my opinion is slightly colored by the fact that I currently hate where I work.
Title: Re: How to value 401k employer contribution
Post by: Insanity on June 19, 2015, 02:10:01 PM
I took a position without a 401K and asked for roughly 5% more and they gave it. 

I can put that full 5% into the 401K and it would be roughly the same .  I struggled with this, but ultimately the job opportunity is worth it.
Title: Re: How to value 401k employer contribution
Post by: Proud Foot on June 19, 2015, 03:03:47 PM

I recently did this myself. My former employer gave 10% to retirement regardless of personal contribution as well as fully paying for the employee's health insurance. When I switched jobs I considered both of these in my calculation for evaluating the new offer. I compared to the offer to 110% former salary plus the cost of insurance at the place I received the offer from. From there I was able to have a better compensation number to use for comparison.  Because the offer I received was above my compensation number I went ahead and took the job. (prior to receiving the offer I had determined the new company to be a good fit for myself and family, as well as providing advancement for my career. the only thing necessary then was a sufficient offer)
Title: Re: How to value 401k employer contribution
Post by: forummm on June 19, 2015, 05:34:27 PM
The 10-22 month delay really throws a wrench in the calculations too. That's really odd. By the time it shows up, you've already "earned" almost another whole year of match--but then have to stick around another year to get it. I think the long delay probably equals out to the tax savings. You are earning 0% returns on that money while you don't have it. And when you eventually quit that job, you will not be seeing all the match you've "earned" but hasn't been deposited yet. So why not just call it 110% of your salary?
Title: Re: How to value 401k employer contribution
Post by: Scandium on June 19, 2015, 08:18:53 PM
Thanks for the inputs everyone, lots of good points to consider. Calling it 110%  of salary is definitely the easiest, and probably what I should do.  Maybe aim for a few percent extra since I'll be after tax.. I read the average for job change is a 15%  increase, I think I'd be ok with that or better with a 5% match. It's just if it's less I'll have to think hard.

But yes,  the job environment, location etc is obviously important, this is just another point in the calculation.

Forummm; a coworker said the delay is max allowed by law. (?). I think I'll still get it the year after if I leave. If you're employed on 12.31 or something, I have to look into it. Maybe I leave January 1st..