Question

Job A offers a salary of 53500, and the firm will contribute an amount equal to 5 percent of your salary to the retirement plan. Job B offers a salary of 57000, but they do not have a retirement plan. They are both located in the same area. If all other factors are equal, which job opportunity is bette? Explain your reasoning.

Answer 1

Job B is better.

Explanations:

No.1) On the basis of net pay of employee:

Job A: In this case 5% is contributed by employer; therefore, we assume that the same 5% also to be contributed by the employee. The employee-contribution is to be subtracted from the gross pay in order to get the net-pay amount. Employee contribution in pension = Gross pay × Employee contribution rate = 53,500 × 5% = $2,675. Net pay = Gross pay – Employee contribution = 53,500 – 2,675 = $50,825.

Job B: There is no retirement plan. We assume that the whole 10% is contributed by the employee in the same retirement plan as above. Employee contribution in pension = Gross pay × Employee contribution rate = 57,000 × 10% = $5,700. Net pay = Gross pay – Employee contribution = 57,000 – 5,700 = $51,300.

Since Job B has bigger amount of net pay, it is better.

No.2) On the basis of retirement plan:

Job A) The accumulation of fund in each year is the aggregate of employer’s contribution and employee’s contribution; since both are contributing at 5% on gross pay, total contribution in each year = Employee contribution + Employer contribution = 2675 + 2675 = $5,350.

Job B) There is only employee’s contribution. Total contribution in each year is $5,700.

Job B has higher accumulation in each year; therefore, it is better than job A.