An individual recently got offered a job that paid significantly more than what she is making now (more than $18k - which is the maximum 401(k) contribution). She currently makes $30k a year. However, this company does not have a 401(k) plan for their employees. After talking about it and researching, it appears that all the available retirement plans/options would never equal the $18k of a 401(k). Her current company offers a 401(k) plan and matches up to 4%. From a long-term planning point of view, is the bump in salary worth not having a 401(k)?
From a long-term planning point of view, is the bump in salary worth not having a 401(k)?
In this case, absolutely. At $30k/year, the 4% company match comes to about $1,200 per year. To get that you need to save $1,200 yourself, so your gross pay after retirement contributions is about $28,800.
Now you have an offer making $48,000. If you take the new job, you can put $2,400 in retirement (to get to an equivalent retirement rate), and now your gross pay after retirement contributions is $45,600.
Now if the raise in salary were not as high, or you were getting a match that let you exceed the individual contribution max, the math might be different, but in this case you can effectively save the company match yourself and still be way ahead.
Note that there are MANY other factors that may also be applicable as to whether to take this job or not (do you like the work? The company? The coworkers? The location? Is there upward mobility? Are the benefits equivalent?) but not taking a 67% raise just because you're losing a 4% 401(k) match is not a wise decision.
4% of 30k ($1,200) is dwarfed by an $18,000 base pay increase. At 48k maxing out IRA will take ~11.5% of gross income, so at current position (30k salary) 401k contributions would likely be limited to the matching portion anyway.
The long-term benefit of a deferred tax retirement plan can't fully be known since tax rates can change over time. If rates increase, the benefit can be mitigated. Personally, I only contribute to 401k enough to get full employer matching, and then I prioritize HSA, IRA, after those, some people like to go back to 401k to max, but I prefer other investments.
At this low of an income range, the increase in base pay is far too significant to worry over potential differences in tax-deferred vs after tax investments.
If she does take this job and not have a 401k, tell her to make sure she opens up an IRA account. It has a lower contribution limit ($5,500 a year for people under 55) and no sort of company matching, but has the same tax benefits a 401k has. It's definitely a wise investment if she doesn't have access to a 401k (still a wise investment even if she does)
A 401k is pretty good, but it's not magic.
- It's a tax deferred savings account. But you can have your own IRA which is also tax deferred. The limit isn't as high (5.5k vs 18k) but is that a cap that is going to be challenged?
- Remember that the 401k (and the IRA) is not tax free - it's tax deferred. This is nice but not perfect (you'll pay that tax when you take the money out in 40 years). It is also not necessary, as you can still save and invest for retirement using your regular after tax money. What's the cost of not having tax deferred savings? Very hard to say, but it's going to be far less than 50%.
- There's some 401k match from the company. This is free money, which is nice. But the scale is insignificant compared to the potential salary increase.
Personally, I'd consider a 30k salary with a 401k and a 2k employer match less valuable than a 36k salary, let alone a 48k salary. If worried about retirement savings simply set up that IRA and put in the full 5.5k allowance.