After nearly three months at your new job, you believe that you have a good understanding of your responsibilities, as well as the benefits of working at your company. However, you just received a letter from HR informing you of the opportunity to participate in the company's retirement plan. Under company policy, you can begin participating in the retirement plan after 90 days of service. As you review the informational letter, you realize that you are faced with some important decisions about saving for retirement. The company offers employees the opportunity to participate in a Section 401(k) plan. The company will contribute to the savings plan on your behalf, but you must first elect to defer some of your annual income into the plan.

The informational letter outlines the details of the Section 401(k) plan. You can defer up to 10 percent of your annual pay to invest in the plan. The salary deduction agreement allows you to defer your pay through a pretax payroll deduction from your pay each pay period. The company contribution to your retirement savings is a match of what you contribute; thus, you must first decide to defer some of your income into the plan. The company policy is to match 100 percent of what you set aside, up to the first 5 percent of your annual pay. Thus, for example, if you set aside 2 percent of your pay, the company will invest the equivalent of 2 percent of your pay. If you invest 5 percent of your pay or more, the company will invest the maximum match of 5 percent of your pay.

You know that retirement savings is important, so your initial reaction is that you should participate in the plan and set aside the maximum deferral of 10 percent of your pay. However, as you look at the numbers, you have some concerns. Your current pay is $1,500 per pay period, with 24 pay periods each year. If you invest the maximum of 10 percent of your pay, you will have $150 deducted from each pay, leaving you with $1,350. After tax and health-care insurance deductions, your take-home pay will be around $800 each pay period. As you consider your expenses, you worry that your take-home pay won't be enough. With a pile of bills, including rent, utilities, a car payment, and other expenses such as food and entertainment, you see that you will need to stretch your paycheck quite a bit. This concern over paying your bills makes you question deferring the full 10 percent of your pay. While you know that you should start your retirement savings now, you have at least 40 years until you retire.

As you review the letter, you learn that you have a week to make your decision. You must first decide whether or not to participate in the plan, and if you do, you need to page 124decide how much of your pay to defer each pay period. Further, you will also need to decide how to allocate your contributions to the plan. The letter discusses several investment options that include high-risk mutual funds as well as lower-risk federal government bond funds. You decide to take advantage of an upcoming informational meeting mentioned in the letter to learn more, and you start to think about your options.

1. Do you think that you should defer part of your pay to invest in the Section 401(k) plan?

2. If you choose to invest, what percentage of your pay would you defer to the Section 401(k)

Answer rating: 100% (QA)

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