We all want to save money and look for ways to reduce costs. When deciding if a location for your mobile employee is “high cost” or not, housing is just one of the many factors you should consider.
Looking at the right data, and understanding how to measure the differences between the two locations, is an integral part of calculating cost of living. This is why many organizations turn to established organizations like Runzheimer to assist.
The cost of housing may be higher by 50%, 75%, double or even triple in the new location…but this does not mean that the relocating employee will need two or three times the amount of money to live thereRob Kreiling
When evaluating cost of living, you should consider three areas: what will change, what may change, and what will remain the same.
What will change when relocating to a new area?
- Car insurance
- Utilities
- Gas
- State income tax
What spend could vary?
- Groceries
- Personal care items
- Recreation spend
- Entertainment spend
What will stay the same?
- Monthly car payments
- FICA taxes/Social security taxes
While housing is the most impactful area of cost of living, there are multiple components involved beyond just the house purchase or rental price. Below, we explore three areas that may impact an employee’s housing costs:
Utilities: Utilities can vary from state to state. If someone lives in Miami and is relocating to San Francisco, they would not be using their air conditioning as often as they would be when they lived in Miami. Chances are their utility bill will decrease because of this. But if the move is reversed – San Francisco to Miami – the air conditioning bill would increase drastically.
Insurance: In areas where hurricanes, for example, can impact coastal communities, homeowners’ or renters’ insurance costs can be significant.
*Taxes: Rob indicated that in some cases, there is a favorable cost differential for homeowners when factoring deductible items.
When asked about trending high cost areas, Rob explained how this can vary, “the first thing to think about is where are your mobile employees coming from and going to?”
“San Francisco Bay Area costs vary a lot depending on the region you are going to and whether you are a homeowner, or a renter. Someone who makes $60,000 vs $500,000 will experience very different living costs,” said Rob.
What should mobility professionals do?
Rob shares two best practices for mobility professionals who are relocating their workforce into high cost areas.
“First, a lot of companies use our data but it’s also about how they administer the payouts. What I mean by that is they’ll get our cost of living differential and see that it’s 12% more expensive here and this person makes $100,000. How do you pay that out? The most common payment method is to take the full differential of the first year, reduce it to two-thirds the second and one-third the third but depending on the company’s culture some do this in five years and some front load it. There’s a variety of different ways companies administer this. You want to make sure this works for your compensation structure because you still have to offer a competitive salary ongoing in that market. The COLA is there to help them adjust in that area.”
“Second, you can’t just look at two locations, i.e. the cost of living in Tampa and Boston is different by x%, because the cost for renters who are single vs. homeowners can vary significantly. You mainly see in high cost locations that the lower the salary the higher the cost of living differential. Reason being, someone who is making $50,000-60,000 might be able to live well in Nashville but if they relocate to New York City the cost of housing is that much higher vs. someone who is making $300,000-400,000 who is still going to experience an increase – but it is not likely to be as drastic a difference. It’s really situational based on if they’re a homeowner or renter, and their income and family size.”
Rob presented on this very topic at CERC’s recent Future-Proofing Mobility Conference alongside our very own Gail Reinhart, VP Western Canada, talking with mobility professionals on, “The Cost of Living: It’s Not Just About the Cost of Housing.”
Stay tuned for more insight into this topic as Gail talks about the challenges and solutions towards the high housing costs within Toronto and Vancouver in a future blog post.
*The preceding post contains information that should not be construed as tax advice. Any changes to your tax approach should be reviewed in consultation with your tax advisor.
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