Question

2. You just graduated and landed your dream job (congratulations). Your new employer offers a number of benefits including retirement savings. Five percent of your annual salary will go towards your retirement fund and the employer will match that amount.

2a. Please explain the basic structure of a retirement fund (how does it work?).

2b. Your retirement fund offers three different packages:

1. Invest in the S&P 500

2. Invest in small, start-up companies

3. Invest in government bonds with one-month maturities

Discuss the risk-return profile of each option. Which one would you choose?

Answer 1

2a) A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan", where a fixed sum is paid regularly to a person, or a "defined contribution plan", under which a fixed sum is invested that then becomes available at retirement age. Pensions should not be confused with severance pay; the former is usually paid in regular installments for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment prior to retirement.

2b)

1) Invest in S&P - low risk higher return how ever market risk prevail

2) Start up - High risk and high return (risk of loosing sum invested)

3) Govt Sec - NiL risk being sovereign bonds but offer low rate or return comparatively to the above 2

i would choose S&P accepting moderate risk