Stretch your Base Pay

The end of the year is nearing and thoughts about compensation and bonuses are natural. Unfortunately, that conversation hasn’t always gone my way. But there other ways to increase net pay employer without directly getting a raise. As long as your employer offers a retirement account via a defined contribution or defined benefit plan  (for example 401(K), SEP IRA, Pension, etc – see here for a list of all types of retirement accounts), you can force more pay through a contribution match benefit. If you’re annoyed and saying, “oh man, another planning strategy where you have to put off benefits until later”, I hear you. Think about this way: the more your employer contributes to your retirement plan, the more you can spend your own money to further other goals or spend it on something you enjoy today.

Your employment contract should state that they’ll make a contribution match to your retirement account up to X%. What that means is however much you contribute as a percentage of your salary, your employer will contribute the same amount up to their stated limit. 

For example, let’s say my employer offers a 100% match up to 3%. if I make $100,000/yr and contribute 3% of my pay to a 401K (pre-tax account), I will be investing ~$3,000 every year and my employer must contribute an additional ~$3,000 every year. Keep in mind this is on top of my regular salary. If I contribute $2,000 a year, my employer will contribute $2,000. However, if I contribute $5,000 my employer will still only contribute up to $3,000. Each benefit plan is somewhat unique, so be sure to double check the specifics on yours.

In addition to more money, retirement plan contributions allow the employee to experience levered returns without taking on the risks of leverage. The employee contributions are your funds to keep—you don’t have to pay it back like borrowed funds. That may be obvious, but now when you think of what this means in terms of losses, the investments within the retirement account would have to lose more than 50% of their value for the employee to lose more money than his/her initial contribution. Even at 50% losses, the employee’s balance would be a $0 change based on what they put in themselves. On the flip side, let’s say the investments gain 50% in value—that translates to a 100% increase in the employee’s account because the investments made from the employer’s contributions are invested the same way. As an investor, you gain downside protection with upside potential.

At this point you know I’m a sucker for the power of compounding. Let’s assume I make $100,000 for the rest of my life, investments continue to generate an annualized 10% over the long term, and my employer matches contributions up to 3% of my salary. Same amount invested on my behalf, same earnings (%), yet twice as much value in the account with the match. Theoretically it’s obvious, yet not taken advantage of in real life by so many of us. Saving is a lot easier when someone else is helping you.

Years3% Contribution w/ Match3% Contribution w/o Match
0$6,000$3,000
5$46,294$23,147
10$111,187$55,594
15$215,698$107,849
20$384,015$192,008

You may not get the big raise or bonus you think you deserve at year end, but that’s out of your control—so focus on what you can control. Be sure to maximize all the resources that are available to you to get your raise another way.

Compliance stuffs
Just remember, I’m not your financial advisor so the information may or may not best apply to your situation and you should get formal advice prior to doing anything. The information/data that is shared should be double checked by you and any conclusion that is driven based on past data is not to be interpreted as my advice for your future. I will do my best to only write what I think is true and right, but mistakes happen and we’re all learning together – this is meant to be a conversation. My employer has nothing to do with this blog – in fact, they’re probably upset I’m writing here instead of working.

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