Thursday, June 16, 2005

Why cost of living should never lower your salary

I recently renegotiated my salary with my current employer. I had a job offer in a different part of the country. I don't know what it is about negotiations that makes me go stupid, but in this case it cost me a lot of money. The first thing my current boss did was look up the difference in cost of living between my new location and my old. It was quite a bit more expensive to live in the new location. However, if I had been thinking straight, I would have told him: THAT DOESN'T MATTER.

The reason cost of living doesn't matter is retirement. If you are saving 5% of your salary in one location, I assume that you'll also save 5% of your salary in your new location. However, that 5% will be greater in the location with the higher cost of living and higher salary. Due to compound interest, when you are ready to retire, you will have significantly more money if you had worked in a high cost of living area than you had if you worked in a lower cost of living area.

Let's assume that you take a job in a lower cost of living for $75,000 a year. Let's also assume that your company matches 0%, the overall compounding rate is 10%, and you deposit 5% of your salary once every year. If you retire in 30 years, you will have $617,000. If you make $87,000 and everything else remains the same, you will have $715,000. That's almost $100,000 difference (and it will be even more over a longer period and with a good company match)! And whose to say you can't retire to a lower cost of living area where that $715,000 is worth even more!

Cost of living is a haze that we have been living in for too long. It's time to burn off the fog and see it for what it really is.


Alex Ludd said...

when are you going to go to law school?

Tanton said...

Well, judging by my track record, if I were a lawyer I would prove everyone innocent...right after they were executed.