Here’s something that always makes us a little bit sad: People staying in a job they hate because of the benefits. One of the benefits people bring up most often (next to health insurance) is the employer match on their 401(k). People feel stuck in soul-sucking work because they are tethered to the benefits package.
This is understandable. Health insurance and planning for your family’s future – pretty important stuff!
When clients bring up benefits, we let them know the employer match might not be all it’s cracked up to be, and there are other ways to save and leverage your money that might make more sense for you.
With a 401(k), you can’t touch this money without a penalty until you hit age 60. Sure, it keeps you from blowing your retirement fund at the casino, but it also keeps you from really leveraging it for the forward momentum you could be seeing right now. There are smart ways to do this without relying on an employer match.
Let’s take a look at two scenarios, one with an employer-matched retirement fund, and one funding a rental property. I think you’ll find that you definitely have options when it comes to retirement planning, options that will move you toward money freedom even before retirement.
Let’s say, for round numbers, you earn $100,000 at the company you work for. Your employer will match up to 6% of your salary if you put 6% into the company 401(k) plan. So over the course of a year, you put in $6,000 and the company matches that with $6,000. So for your time over the course of a year – around 2,000 hours, if you work 48 weeks of the year, you get $6,000 in a retirement fund. Meanwhile, that and the $6,000 you contributed are tied up for potentially decades before you can access it. It is definitely one way to go, and a way many people choose.
But consider the rental property scenario: Let’s say you purchase a property for $75,000 and decide to put 15% down. So with a down payment, closing costs and some fixes to get the property into shape as a rental, you end up shelling out $15,000. You finance $65,000 at 5.5% because it’s not your primary residence. That is a mortgage payment of about $370, with taxes and insurance escrowed at $200 for a total monthly expense of $570. If you rent the property for $800, that is a monthly net profit of $230 for an annual cash-flow of about $2,760.
So, the employer match wins, right? Because you’re only making $2,760 on the rental property compared with the $6,000 a year you are getting from your company. Not so fast. There’s more to the equation here. You are also benefitting from equity accrual, in this case about $1,000 in the first year. So now you are up to $3,750. And you’re not done yet. Home prices average 1-2% growth per year. At a 1% growth rate, that’s another $750 – so now we are up to $4,500.
There is one more factor to consider here, the most important one: your time. We would estimate the total time from researching the home to putting in an offer, closing, cleaning, getting it rented, legal work, and everything included would take 200 hours of work. That is 1/10th of the 2,000 hours you are giving up in your full-time job to get nearly the same return. And the return on the rental should increase year over year, as equity and value increase.
You should not have to stay in a job you don’t love just for the benefits. There are many ways to get the equivalent of an “employer match.” If you have Uncommon ideas and want help with taking action to make a better future for you and your family, this is exactly what we do – put your dreams into action! Contact us here and let us know how we can help.