Author Topic: Resigning + Losing 401K Match  (Read 2869 times)

oldtoyota

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Resigning + Losing 401K Match
« on: March 11, 2014, 07:32:03 PM »
Hey there--

I found some attractive job opportunities and want to apply for them. I'm six months away from being fully vested in the company 401K plan. The amount I stand to "lose" if I leave before then is $12K.

It struck me that maybe I could "make this money back" if my new salary was significantly higher. (I'm underpaid for my skill set, so a good jump in pay may not be out of the question.)

What would be the best way to go about calculating how much more I would need to earn in salary to make up for what I'd lose by leaving the 401K plan now?

Who knows? It might take me six months to find the right job and so this might not even matter. Just in case things happen fast, I thought it would be good to know.




madmax

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Re: Resigning + Losing 401K Match
« Reply #1 on: March 12, 2014, 01:13:22 AM »
Hey there--

I found some attractive job opportunities and want to apply for them. I'm six months away from being fully vested in the company 401K plan. The amount I stand to "lose" if I leave before then is $12K.

It struck me that maybe I could "make this money back" if my new salary was significantly higher. (I'm underpaid for my skill set, so a good jump in pay may not be out of the question.)

What would be the best way to go about calculating how much more I would need to earn in salary to make up for what I'd lose by leaving the 401K plan now?

Who knows? It might take me six months to find the right job and so this might not even matter. Just in case things happen fast, I thought it would be good to know.


Wouldn't even a moderate (5K) increase in your salary outpace the 12K + growth in the medium-long run (>3 years, with  6% market return) if you contribute to the new 401K plan?  Or am I missing something (sorry it's late at night). I would personally look at career growth, happiness, work/life balance along with the salary and make the switch.

Bateaux

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Re: Resigning + Losing 401K Match
« Reply #2 on: March 12, 2014, 01:52:25 AM »
The new job would have to pay at least $2000 a month better in combined benifit just to meet the principal loss.  That is a big increase in pay.

garrettld

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Re: Resigning + Losing 401K Match
« Reply #3 on: March 12, 2014, 06:02:50 AM »
At some point, a higher income will always make up for any related loss of funds, assuming positive investment returns. How quickly you reach that break-even point is determined by your rate of return and your additional savings from a higher salary.

If you're investing in something like CDs you can use your actual rate of return. If you're in stocks or whatever you'll have to estimate. Picking a lower rate of return will exaggerate the value of that $12k, meaning you'd need a more significant raise or a longer time period to make up for the loss of the $12k. This will give you a conservative estimate of how long it will take you to break even. If you're more optimistic, go with a higher rate of return.

For example, I'll assume a pretty low constant rate of return of 4%, compounding monthly. Then we'll compare an investment of $12k making 4%/yr with no additional contributions to an investment of $0 making 4%/yr with monthly contributions of $X.

$X is the additional savings per month you'll get in your new higher-paying job.

If you move to a new job and make $5k/year more than you used to, your break even point will be about 49 months, or 4 years and 1 month.

I threw together a quick spreadsheet and attached it to this post. Play around with the additional annual savings from your increased salary (remember to factor in taxes, if applicable) and the rate of return and you'll see the data and the line graph change. Once the "Difference" column is positive (black), you will have made up your $12k loss. You can also see this break-even point where the two lines cross each other on the chart.

Try setting the additional savings to a reasonable level and the rate of return at 0%. Watch the graph as you change it to 1%, then 2%, then 3%, etc. and you'll quickly get a feel for how the rate of return affects your break-even point. You can also hold the rate of return constant and change your additional savings in a similar way to see how your savings level affects things.

Lastly, madmax is right. $12k is insignificant compared your how happy you are in your job, and your new job could be farther away, increasing your commute time, or you could dislike your new job once you started working there. There are many other things to consider, so weigh those things against your expected break-even time period and you should be able to make a good decision.

I hope that helps, and good luck!

edit: It took me a while to figure out how Bateauxdriver was arriving at $2k/month. Then I realized (s?)he was just dividing your $12k by 6 months, and getting $2k/month, and while that's technically correct, I don't think it answers the question, really. Any increase in pay is essentially permanent, and you don't need to make up the $12k in 6 months, you just need to make it up before you retire (and hopefully well before you retire, if possible).
« Last Edit: March 12, 2014, 06:12:20 AM by garrettld »

oldtoyota

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Re: Resigning + Losing 401K Match
« Reply #4 on: March 12, 2014, 07:36:46 AM »
Lastly, madmax is right. $12k is insignificant compared your how happy you are in your job, and your new job could be farther away, increasing your commute time, or you could dislike your new job once you started working there. There are many other things to consider, so weigh those things against your expected break-even time period and you should be able to make a good decision.

I hope that helps, and good luck!

edit: It took me a while to figure out how Bateauxdriver was arriving at $2k/month. Then I realized (s?)he was just dividing your $12k by 6 months, and getting $2k/month, and while that's technically correct, I don't think it answers the question, really. Any increase in pay is essentially permanent, and you don't need to make up the $12k in 6 months, you just need to make it up before you retire (and hopefully well before you retire, if possible).

Wow.

This is awesome information. Thank you. I am glad I asked this question.

A few of you mentioned considering other factors. I definitely will. Commute, coworkers, and opportunities within the job all matter to me.

One of the most stressful things about a new job is not *really* knowing what you're getting into until you arrive. Unless you have a friend on the inside to give you the scoop, most jobs are accepted on partly blind faith.




Left Bank

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Re: Resigning + Losing 401K Match
« Reply #5 on: March 12, 2014, 09:10:37 AM »
If I were you I would pursue the opportunities.  It may take quite a while for you to actually get an offer and at that point you can think about all the pros and cons of the new job.  You could make quite the case for a sign-on bonus to cover this loss from leaving your current employer if it is a short time from vesting.