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How to size up retirement benefits when accepting a job

benefits_puzzleLet's say you're lucky enough to be weighing two job offers and you like both opportunities. When one offer comes in a few thousand above the other, it seems like your decision would be clear cut. But could you be missing something?

It is fairly simple to use salary as the deciding factor between job opportunities; however, benefits should be as much of a consideration as wages when considering an offer of employment. After all, benefits certainly have an economic value. And yet, employees talk about them in generalities, asking questions like "Do you have a retirement plan?" or "Do you offer healthcare?" rather than digging down into the details of a company's benefit package.

Not knowing the details can affect your finances -- and the impact could be significant. Here's how to size up an employer's benefits package when deciding on a job. The following are some examples of how you should factor benefits into any job offer.

How retirement plans differ: private industry vs. government work

Government jobs often don't pay as well as private sector jobs, but they tend to offer cushy benefits.

Take their retirement plans, for example. Working in the public sector for a state or local government, there is an 86 percent chance that you will have access to a defined benefit retirement plan, according to figures from the Bureau of Labor Statistics. On the other hand, if you work for a company in the private sector, there is only an 8 percent chance you'll have access to a defined benefit plan. Most likely, your retirement option will be a defined contribution plan like a 401(k) plan.

What's the difference?

Defined benefit plans
A defined benefit plan typically will fund a specific level of retirement payments for you based on your earnings and length of service. This offers you the security of knowing what your retirement payments will be as well as having those payments funded by your employer.

One key condition, though, is that there is usually a prescribed period of time you have to stay with your employer before you become vested in a defined benefit plan. That means if you change your employer before meeting that requirement, you could forfeit your retirement benefit altogether. That's fine for people who plan to spend a long time with one employer, but it's not so good for people who like the freedom to move around.

Defined contribution plans
With a defined contribution plan, the vesting requirements are likely to be less stringent -- but the employee is typically responsible for most or all of the funding. Also, the money available to you in retirement isn't guaranteed. It depends on how much you put into the plan and how that money was invested. Investment choices for your plan balance are also your responsibility.

So, as you weigh the option of working for a private employer versus the government, keep in mind that this is likely to make a fundamental difference in the type of retirement plan you have. This should be an important consideration in choosing a job.

Not all 401(k) plans are created equal

Even if you are choosing between two private companies which both offer 401(k) plans, it doesn't necessarily mean the retirement benefits are similar.

Defined contribution plans like 401(k) plans count on employees deferring part of their paychecks to fund their retirement savings, but some companies offer 401(k) matching contributions. This means that the employer will match some portion of the contributions you put into the plan. However, whether or not the employer offers matching contributions and how much of your contributions they will match varies from plan to plan.

Assuming you intend to participate in the 401(k) plan, the nature of the employer's matching contribution should be something you factor into any job offer. Key things to look at include the percentage of your contribution they will match, and whether there is a cap on how much they will match.

How to evaluate healthcare benefits

Now assume you are choosing between two jobs that both offer health coverage. What are some of the key things that determine how much those benefits are worth to you?

A starting point is the nature of the coverage -- how high is the healthcare plan deductible and what treatments are covered? Note that dental and vision coverage are usually outside the coverage of a standard healthcare plan; so if an employer offers additional plans to cover those expenses, it is a plus.

For many people, a critical issue is whether or not the employer offers a high deductible health plan (HDHP) option. If you are a relatively healthy employee who incurs minimal healthcare costs during the year, signing up for a high deductible can be a cost-effective way to reduce your health insurance premiums. Also, participating in an HDHP makes you eligible to have a Health Savings Account (HSA). HSAs offer excellent tax advantages that help you meet immediate healthcare expenses and build savings over time for future medical expenses.

Beyond the nature of the healthcare plans themselves, another key issue is how much an employer will kick in toward the health insurance premiums. This amount should be factored into any wage comparison you are making between two job offers.

The wage level may be the most immediate thing you think of when you consider a job offer, but ultimately the benefit package also has a great deal to do with how much the job is worth financially.

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