In the COVID Economy more than ever it can be significant how worker Salary Pacages are structured. Employer wage budgets are finite and employees’ after tax disposable incomes are rarely sufficient to meet living expenses.
Instead of HR setting wages by applying Industry Standards and common practice attention should be given to an Employee’s liftetime benefit of their employment.
The Retirement Crisis in America makes it imperative that total emoluments, including employment benefits provided by employers is adequate for workers not only while in a job but also when their worker days have ended.
In order for Employers to ensure this most wage packages need restructuring – starting – with a look at the numbers and assessing the merits of the allocation to after tax take home money and the amount going to Employee Benefits, particularly the Retirement Programs for workers.
While HR may be regarded as responsible for setting wage package parameters they might not be expected to have the knowledge and skills needed to be able to come up with the most financialy efficient wage plans. For instance a 401k Scheme which maximizes Personal Contributions by workers and Matching Contri utions by the employer even when designed by licenced Financial Advisers in most cases suboptimises the economic benefits for workers. The results show up when industry averages are looked at – with only 7% of workers wages being contributed to 401 retirement plans.
This is despite IRS Rules allowing maximum contribution by Workers of $19,500 & the same amount allowed as a Matching Employer Contribution in 2021. When a licensed Financial Planner is involved rarely do they recommend maximization of 401k funding – which thus means their clients retirement nest egg is less than what it could be.
The principal reasons are the financial adviser can not do math, are not capable of Economic Analysis and lack an understanding of cash flow management possibilities.
Thus the after tax cost of a Maximum Personal 401k contribution is $12,000
The difference between the $12,000 and $20,000 is a Tax Free $8,000 – the ROI is 8000 over 12,000 = 33% (Government Guanteed Return). A complication is witholding due to FIC A – which produces a tax rebate of only $4,000 to $5000. So on a Cash Flow basis ROI is closer to 25%
However that can be enhanced by leveraging – borrowing @ 5% from themselves;
The ROI in that instance is 33%. However with leverage obtainable by borrowing against the total of 401k investments of $40,000 a total of approximately $20,000 is obtainable; although only $12,000 of borrowing is needed after tax The ROI with an interest rate of 5% is close to 19000/300 X 100%
The $8,000 remainder can be added to the $4,000 tax rebate stemming from the Worker’s Personal 401k Contribution in addition supplemented by the savings an employer and worker both make on FICA (which no longer is payable. In this scenario tnere may be a short fall of under $1,000 which a portion of fund earnings should cover in the early years