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One of the guys that I advise on a local college campus is making a decision, a big one. He is deciding which of the two job offers he is going to take. As background he is an engineer (granted, it is RPI, whose mascot is “the Engineers”. Watch out, we’ll use our slide rules on you and dis-integrate you!), 22 years old and has a very bright future. Like many of his ilk, he is seeking stability in an organization with growth potential. Both jobs offer these things and are in the same town doing essentially the same thing, so there is no difference in cost of living or those sorts of things. So what should Fred do?

The major difference is the benefits package. The first company (let’s call it Company Meatball) is offering him $63k a year with 401k, essentially no life insurance, and no disability coverage. Company Borg has an identical 401k in terms of matching and funds, but a superior overall benefit package in that there is a pension and an excellent life insurance program that will expand with Fred’s needs over time, while simultaneously funding a savings program for the employees. The problem is that my buddy will only be paid $60k per year to start at The Borg. There is however a guarantee that if he gets hurt or sick and can’t work he will get $54k a year even if he can’t come to the office. So we crunched the numbers.

Even though the Borg is offering less in pocket compensation than the Meatball up front, it is a much better package for one huge reason: the value of that benefits package. Let’s take a look at some of the components thereof:

  1. Pensions have gone the way of the dinosaur. So having this guaranteed income stream later is a huge deal in that it creates stability in retirement planning (there is very long retention in each firm. Many people still spend 20+ years at each), and is a large financial asset. Even if Fred only spends 10 years with the Borg, it makes the entire compensation package better than what the Meatball is offering. This benefit is of at least six figures value to Fred, and depending upon our assumptions could be worth over a million bucks to him.
  2. The life insurance is not important to Fred now, but he does realize that it could be critical down the road since he actually does have a girlfriend and thinks he’ll get married and spawn some little engineers later. The fact that this part of the benefits plan means he has essentially proactively dealt with the entire issue means that he does not have to devote mental resources to the issue, something busy people like.
  3. The savings account is a nice little bonus for the future, but not a critical factor until 20+ years down the road. Even though Fred likes stability and guarantees (similar to other engineers of the Millennial Generation), it is not a big deal to him now. But he acknowledges that it could be very huge in 35 years if he sticks around that long, an additional five figures to the comp package at least.
  4. The income guarantee is a big deal and the deciding factor of the equation. As an engineer Fred knows he has about a one five chance of being unable to work for over a year due to illness or injury, so he knows that the expected value of the guaranteed income stream (again, something attractive to Millennials) is worth six figures when all the numbers are crunched. This alone eliminates the gap in value between the compensation packages from the two companies.

Now here’s the rub: The Meatball and The Borg are THE SAME COMPANY. Both of these are based on going to General Electric and their benefits package. The $3,000 annual difference in the two packages is Fred getting individual DI insurance as opposed to the optional group plan (that he opts out of in our example), participating in the contributory pension, and buying some individual life insurance. When contrasted as two separate benefit plans from different organizations it makes it pretty easy to chose what to do. Unfortunately it is rarely boiled down this simply for a new grad to make the decision as to what to do for their financial future.

Fred is just a figment of my imagination. Actually, he is an avatar of the hundreds of young clients I have worked with in the past making these sorts of financial decisions. And he chose well, taking the lower up front compensation to never have to worry about his financial future.

Think about this for a moment.  If you save 10% of your income (Americans average only 6% savings, so you have to be over 50% MORE disciplined than average), after 10 years you would save the equivalent of one year of salary.  Pretty cool.

If you were then disabled and did not have disability insurance, you would have to draw down on those reserves.  A single year of disability would wipe out a decade of hard work.

Or you can buy disability insurance for ~1-2% of your salary and get to keep the fruits of that decade of savings.  You don’t chose to become disable, but you DO chose to save, and you should chose to protect those savings.

Due to tremendous requests, I have re-written “Top Tax Plays” into a 2009 version. This iteration is more in depth, not quite so sarcastic, and will also be available in paperback. Two major changes are the inclusion of some case studies so people can learn from concrete examples, and a section “Before the Bubbly”, subtitled “What To Do Before The End of the Year (That Your CPA Won’t Tell You Until it is Too Late)”. We hope this additions make the book even more valuable to you.
The book is being edited as I post this, so may be available electronically by the end of November, with paperback versions available in early December. More information will be posted on www.toptaxsavings.com