Financial advice needed, please help...

[Night_Nurse]

I've just been hired for a new job with a company that offers a retirement savings plan for employees - well, they don't exactly offer it - if I do "nothing" within 30 days of my hire date, I then become a member of the plan automatically. Once I become a member, I can't elect to stop being a member until if/when I terminate employment w/this company. I can opt-out of the plan by giving them written notice within the 30 days, but it is with the understanding that once I opt out, I will "NEVER again have the opportunity to elect to participate while I am an employee of ____ Company."

The details: My pay will automatically be reduced by 2% up to the Soc Security Taxable Wage Base (SSTWB), and by 4% of pay over the SSTWB. _____ Company will contribute an annual amount equal to the amount taken out of my base earnings, plus an additional 2.5% of pay up to the SSTWB and 5% of pay over the SSTWB, to an account for me under the plan.

(I'm in my early 40s, and will be starting at a base pay of approx $50k/year. I have no retirement savings - I've spent the past few years working towards the goal of finishing school, in order to give myself and my kids a better life - and hopefully a "nest egg".)

Anyway, I'm not sure what those numbers will mean for me (sorry, math/finance are NOT my forte'). What do "up to the SSTWB" and "over the SSTWB" mean? The plan sounds good, but I don't completely understand it - and I don't like the idea that I have to decide within 30 days to opt-out, and once I decide - my decision is final. Where does my money go when it's taken out of my check? Investments? A bank? Is it like a tax-shelter? In light of the current economic crisis, I'm nervous about letting them do that - even though they say that they are going to match the funds (this is a large, reputable company, so I trust their word - it's the market and economy that I don't trust.)

Any sage advice will be MUCH appreciated!

Thank you :hi:

[MercutioATC]

1. Not enough info. You need to know what they're putting the money into.

That aside, putting pre-tax money away is generally a good idea...especially if the company matches your contributions.

[NMDemDist2]

2. nevermind,

i see you already crossposted it

[quiller4]

3. never turn down free money

and that is what an employer match is.

The Social Security Taxable Wage Base for 2008 is $102,000. That means that the first $102,000 any taxpayer earns this year is subject to Social Security and Medicare taxes. Wages paid of $102,000 in 2008 are exempt from Social Security taxes. In 2007 the Social Security Taxable Wage Base was $97,500.

If you enroll in your employer's plan, 2% of your wages will be subrtracted from your pay. That is your part of the savings. Then your employer will match your mandatory savings amount plus contribute an additional 2.5% of your base pay.

If I were in your situation I'd definitely opt in and I would ask if the employer would match my contributions if I increased them and if so by how much. The current economic situation would only prompt me to try and save more. I would never consider opting out.

[TACstrat]

4. SSTWB = Social Security Taxable Wage Base which in 2008 is

$102,000. All of your salary is below the SSTWB. Therefore, your company will withdrawl 2% of your salary ($1,000/year) and match your contribution with an additional 2.5% company contribution ($2250/year). The total contribution to the plan will be $3250 ($1,000 of your money and $2250 of the company's money). You need to see what they do with the money (invest in mutual funds, company stock, other?).

Without knowing all the details, I would typically recommend opting in to this type of plan (depending upon what they do with the money). The amount you contribute is probably tax deductable and you are automatically getting a return with the company match. Generally, you are entitled to 100% of your contribution in the event you quit or leave the company and a vested portion of the company match depending upon how long you stay with the company.

Make sure you read everything and make up your own mind before opting out.

[nosmokes]

5. you're putting away pre-tax uncome as

another poster pointed out, so you're generally gonna be ahead of the game. I would suggest that you get in touch w/ a reputable financial planner or CPA,, not someone that sells insurance or has another scheme going. stay away from ones that wanna have you fill out huge forms that are gonnna be fed into a computer and spit out which of their company's products you need to buy. You want a real pro that's gonna sit down a design a plan that's right for you and your situation. Ask your riends or other people you trust for recommendations. And thirty days is no reason to panic, but don't waste any time.

[TreasonousBastard]

6. Short answer-- go for it. Long answer...

The SSTWB is up over 100 grand now, so you don't have to worry about that for a while.

You put 2% of your pay into this, (around $1,000 a year) and they match that and and add another 1250 or so. Good deal so far-- for $1,000 you get $3250. Better deal if you're not taxed on that $1000. Check on how long it takes to get vested for their part of it-- if you quit next year their money goes back in the pot, but when does it go to you?

Now, the trick is that they like to put all the money in their own stock-- no,no,no. Remember Enron.

Put some of the money in their stock if it's a solid company (and they might require their contributions be stock) but spread as much of it as you can around in their other options. Should be stock, bond, and money fund choices. You should be able to change the percentages every so often should things change, even if you can't get out of it.

While their stock seems like the chanciest thing, remember that there's always the possibility the company might be bought at a premium. Shortly before I started at Firemans Fund it got bought out by American Express and eventually I kept running into millionaires with salaries of 30 grand or so.

Besides, even if the company tanks it's their money that bought the stock and your money is safe.

edited to fix stupid arithmetic mistake

[Newshues]

7. It's a fair deal

Basically

You give up 2% of your pay in pre-tax dollars up to the SS taxable limit - somewhere int he neighborhood of 95,000 and the company kicks in a total of 4.5%.

As pre-tax dollars you aren't likely to notice any difference in your take home paycheck. Maybe a couple bucks, maybe.

In essence, it is a free 4.5% of your base pay towards your retirement savings and 2% that you contribute out of your base pay. So 6.5% of your pay towards retirement. Not a lot and you should still seek to put away what you comfortable can on a regular basis in other retirement vehicles.

As to not trusting this stock market and current climate....you still have 20+ years of work ahead of you. While things are bad now this is a good time to get started. The markets will recover, things will get better.

Additionally, if you can manage it, stuff away 2 or 3k sometime in the next 2 years, tops, in some kind of index fund. I know it may seem like a lot to you and the market is very scary right now but we really are approaching a historic market bottom and 2 or 3 grand now could very well mean and additional 100+ grand in 20 years when you retire.

Take the retirement package and put away some extra that you can comfortably afford to.

[Night_Nurse]

10. What is an index fund? nt

[SheilaT]

13. An index fund is one

that intends to be an "index" of the market as a whole. I don't think it typically holds all of the stocks being traded, but some kind of representative mix. Index funds are often considered the best kind of investment for someone who knows very little about the market and doesn't want to, or isn't able to do the research and all to either buy individual stocks or figure out which other funds to buy.

[A HERETIC I AM]

16. Just to add a little to your post...

An Index Fund is typically designed to mirror the specific index it is modeled on. An S&P 500 Index fund will have shares of all 500 of the companies that make up the S&P 500. There are scores of different indexes. The Dow Jones 30 Industrials and the S&P 500 are the most well known but there is also the MSCI EAFE, Russell 2000, Lehman Aggregate Bond Index, Dow Jones Wilshire 5000 and many others.

[theothersnippywshrub]

8. You definitely should participate in the plan. Here's why:

You say that the "Company will contribute an annual amount equal to the amount taken out of my base earnings." That is a 100% return on your contributions from your "base earnings" and a larger return on your contributions from your pay in excess of your "base earnings." However, I am not sure what you meant by "base earnings." Read the plan documents carefully or ask the HR department for a written definition or explanation of the term.

You should have received, or will receive paperwork giving you several choices for where your account will be invested. Stock mutual funds, bond mutual funds and a combination of the two are typical choices. A money market fund also may be a choice. In the present economic and market conditions you probably want to consider one of the most conservative choices with the intention of changing your choice later when the economy begins to recover. Make sure you understand what your choices are and how often you can make changes. Also find out whether you can make exchanges between the available choices.

SSTWB is the amount of income on which Social Security taxes are paid. It is $102000 in 2008, and goes up based on inflation each year. Obama has proposed increasing this amount by even more than the inflation rate, but the current or future limits do not appear to affect you now.

The account will earn income without any tax liability until you begin to make withdrawals, at which time you will owe income taxes on the amounts withdrawn.

[Night_Nurse]

9. Thank you so much, everyone!

I didn't expect so many replies so quickly!

I haven't yet met with the benefits people of the company (that will happen during company orientation) to inquire about where the money goes, but on the form that I have, it states that I can "reallocate these funds" after receiving my retirement fund password. So, it does sound like I have choices in that respect. I'm pretty sure that I'm going to opt "in", but I still have time to do more research. My DU friends have given me a good start in that direction, though!

Thanks again :-)

[EmeraldCityGrl]

11. My husband has a similar plan...

He is offered the choice of one of two funds managed by Fedelity or, to have the funds deposited into a Money Market.

This weekend he checked his account to learn it has dropped over 25% in the last few months so opted for the Money Market.

Because the company matches contributions he is still way ahead.

[SheilaT]

12. Yes! Take the deal.

You will be investing in a down market, and your money will grow, more than you can imagine, over the years you have left. Being in your early 40's and having no retirement savings is a very bad place to be. Too bad you're not fifteen years younger.

Don't opt out. Do look at the choices given you. It should not be a mystery as to where the money is being sent. They probably have brochures to give you telling you all about it. It's possible you can direct the money in certain ways.

[Night_Nurse]

15. I know...

I'd love to be 15 years younger - and know then what I do now! But, better late than never - I hope. :-)

[A HERETIC I AM]

14. The "SSTWB" is $102,000 for 2008

From the Social Security Administration website;

Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit increases each year with increases in the national average wage index. We call this annual limit the contribution and benefit base. For earnings in 2008, this base is $102,000.

This sounds like a typical 401(K) plan and a very good one at that. The reason they automatically enroll you is because of the type of plan it is. They HAVE to offer it to everyone.

So if your gross pay will be $50,000, they will automatically deduct 2% from your pre-tax income every pay period. This would amount to $1,000.000 per year. (50000 X .02 = 1000)

You said "Company will contribute an annual amount equal to the amount taken out of my base earnings, plus an additional 2.5% of pay up to the SSTWB and 5% of pay over the SSTWB, to an account for me under the plan."

If my math is correct, that means they are going to give you another 4.5% on top of that $1000, or another $2,250 per year. Not bad. That extra $2250 is totally free money, it just comes with a restriction: that is you can not access it without penalty until you leave the company and turn 59 1/2 years old, whichever is later.

If you get promoted and at some point earn more than $102,000 with them, the amount they will contribute would be 5% on that amount over the $102,000 threshold.


My comments in italics.

. What do "up to the SSTWB" and "over the SSTWB" mean?
"Social Security Tax Wage Base". As I said in my Subject line, it is $102,000 per year. "Up to" means all the pay you make under that figure and over means...well...over!

The plan sounds good,
It IS a good one. Very generous.

but I don't completely understand it
You will receive a booklet that will completely describe everything. It will be about as exciting a read as watching paint dry, but it will (or should, anyway) describe everything in detail

- and I don't like the idea that I have to decide within 30 days to opt-out,
It might sound kinda crappy at the outset, but it is most likely a requirement the company has to comply with because of the type of plan they are using. I honestly don't think you should worry about it. This is a benefit for you and good fringe benefits are not to be sneezed at.

and once I decide - my decision is final.
Again, the reason for that is because of the type of plan it is. They are forced to offer this to everyone because of the IRS rules that govern such plans.

Where does my money go when it's taken out of my check? Investments? A bank?
You will more than likely have numerous choices, one of which may indeed be a "Bank Deposit Program" or something similarly named. Investments that are in the stock market will most certainly be available and they will almost assuredly include Mutual Funds. Most 401(K) plans use Mutual Funds. Some of them are "Institutional" classes of publicly available funds and others may be available to 401(K) plan providers exclusively. A buddy of mine worked for Penske Truck leasing for 20 years and one of the funds available in his plan was a "Stable Value Fund" run by a company that managed such funds strictly for the retirement plan sector, in other words, you and I could not buy into this fund on the market at any cost. You will not be forced to place money into a stock fund. There should be other avenues available.


Is it like a tax-shelter?
Sort of, but not really. The money going into the plan will be money that has not been taxed yet. If you have a long and fruitful career (And here's hoping you do!) and build up a sizable balance and you earn interest or have gains, neither is taxed on an annual basis. So in that regard, yes, it is "sheltered" from being taxed. You will pay taxes on the money when you draw it out during retirement. That's why they call these types of accounts "Tax Deferred" because the taxes are deferred until later on.


In light of the current economic crisis, I'm nervous about letting them do that
As I said above, you should be given investment options that are not in the stock market. Just remember that if you go very conservative, you are likely to only realize maybe 3 or 4% - 5% tops on your money. Investing in a well diversified Stock Mutual Fund portfolio can and historically has provided MUCH better returns.

- even though they say that they are going to match the funds (this is a large, reputable company, so I trust their word - it's the market and economy that I don't trust.)
The plan provider will have someone or several someones available for you to talk to about where to invest. Ask A LOT OF QUESTIONS AND DON'T BE INTIMIDATED!. Do NOT let someone say to you "Oh no, you should not do that, you should invest this way. I'll put you down for this" and direct your contributions in a way you are not comfortable with.

We are fortunate on DU to have as a member someone who works for a 401(K) plan provider and is very well versed about these plans. I'll PM Commonsenseparty and ask him to comment on this thread. He travels a lot and might not see this for a couple of days though.

Good luck! And congrats on the new gig!

[Common Sense Party]

17. You've already gotten some great responses. I can't add much.

I've just been hired for a new job with a company that offers a retirement savings plan for employees

Congratulations. Many employers don't offer any retirement plan at all

if I do "nothing" within 30 days of my hire date, I then become a member of the plan automatically.

This is known as automatic enrolment, and it's a good thing. Everyone knows they should be saving for retirement, but far too many employees do nothing out of inertia. Then one day they wake up and they're 52 years old, and haven't saved a dime for retirement.

Once I become a member, I can't elect to stop being a member until if/when I terminate employment w/this company.

I doubt if this is exactly as you describe it. Or maybe I'm understanding you incorrectly. It sounds like once you start contributing you can never stop contributing until you leave the company. I doubt it. What if you hit tough financial times and you really can't afford to keep contributing? Most 401(k) plans allow you stop contributing whenever you need, and then start again (but perhaps only after a waiting period).

More likely what the case is is that the money you contribute has to remain in the plan until you separate from service (leave the company). Then you can cash it out (bad idea) or roll it over to another 401(k) or an IRA (good idea).

I can opt-out of the plan by giving them written notice within the 30 days, but it is with the understanding that once I opt out, I will "NEVER again have the opportunity to elect to participate while I am an employee of ____ Company."

That sounds strange, too. I find it hard to believe that they will NEVER again allow you to get in. They may have entry dates only at certain times during the year.

The plan sounds good, but I don't completely understand it - and I don't like the idea that I have to decide within 30 days to opt-out, and once I decide - my decision is final. Where does my money go when it's taken out of my check? Investments? A bank? Is it like a tax-shelter?

You'll get more information. Don't sign up for anything until you've had a chance to look it over and make sure the funds are good. You probably have several stock and bond mutual funds to choose from.

In light of the current economic crisis, I'm nervous about letting them do that - even though they say that they are going to match the funds (this is a large, reputable company, so I trust their word - it's the market and economy that I don't trust.)

The match is a great benefit. Where else can you get free money? Now is a great time to be investing. The market hasn't been this low in four years.

[bain_sidhe]

18. Not only should you do it, you should increase the percentage if you can

I say that as somebody who isn't an expert by any means, but went through this same quandry several years ago.

Here's why you should increase it, if you can. It won't make that much difference in your pay check, but it'll make a BIG difference in your retirement savings.

Illustration: Your base pay is $50,000.00, right? Two percent of that is $1,000, which leaves $49,000 as your "base" pay. Taxes (fed and state) and Social Security/Medicare will take between 30% & 40% of that. Lets call it 30% for ease of calculation. That makes your take-home pay about $34,300, or around $660 a week.

Now, let's say you increase your contribution to 5%. Five percent of that is 2,500, making your gross pay $47,500. After taxes, your take-home pay is 33,250, or about $640 a week.

So, for $20 bucks less a week, or $1040 a year less, you get $1500 more of savings - and that's just your contribution. If your employer matches the entire amount, you get $3,000 more savings for your $20 a week. Not bad, I'd say. Even if they only go up to a 2% match, you're still ahead.

[Alpharetta]

19. visit a fee only financial planner

DU can give you a little advice, but you've got some catching up to do. You need PERSONAL ADVICE from a fee-only financial planner.

Insurance - you need disability, long term care, and life insurance to make sure your kids can get through college
Estate - you need a living will, and a will, and probably some other stuff like making sure your accounts are titled correctly
Retirement - you need to figure your savings rate, goals, and risk tolerance

A fee only financial planner will cost you some money up front but generally the money you spend on a fee only planner you'll get back in investment returns (avoidance of hidden investment charges) the very first year. And you'll save tons when he/she helps you pick out the right insurance.