A 401(k) retirement savings calculator can be a valuable tool for creating a secure retirement. It offers two key benefits. Firstly, all contributions and earnings in your 401(k) grow tax-deferred, meaning you only pay taxes when you withdraw funds. Secondly, many employers offer matching contributions to your 401(k) plan, which experts consider similar to recieveing free money.
The matching amount can differ by employer, typically ranging from 50 to 100 percent of your contributions. Together, these features make a retirement savings plan that is too hard to miss.
Some 401(K) Calculator Definitions
Here are some definitions of basic terms you need to know:
- Current Age: Your current age
- Current 401(k) Balance: It indicates the starting amount or the current amount you have invested or saved in your 401(k).
- Retirement Age: This is the age you wish to retire. The calculator assumes that in the year you retire, you won't make any contributions to your 401(k) account. So, if your age of retirement is 65, your last contribution would actually be made when you are 64.
- Percent to Contribute: It represents the percentage of your annual salary that you contribute to your 401(k) plan each year. Most employers allow employees to contribute up to 100% of their salary to a 401(k).
- Annual Increase in Salary: This is the expected annual percentage increase in your salary. The calculator will assume that your salary will continue at this rate untill your retirement.
- Annual Salary: This is the yearly gross income you receive from your employer before any taxes and benefit deductions. Your contributions and any company match are based on this salary, so don't include income from sources other than your employer.
- Annual Contributions: Your total contribution for a year is calculated by multiplying your annual salary by the percentage you choose to contribute. However, your annual contribution is subject to specific maximum total contributions that apply annually. For 2025, the limit is set at $23,500.
Employers aged 50 or older can make an additional "catch-up" contribution of up to $7,500 into their 401(k) account plan. It's crucial to note that the employer's contribution does not impact the employee's maximum annual contribution limit.
Employees may also face another form of contribution limitation if they are classified as "Highly Compensated". This could impose certain contribution limits based on the overall participation in the 401(k) by the employer.
If you expect your earnings to be $160,000 or more in 2025, it is advisable to check with your employer to see whether these additional contribution limits are applicable to you.
- Annual Rate of Return: This is the expected annual return on your 401(k) account. The calculator assumes that the return is compounded annually with the deposits made every month. The actual rate of return depends largely on the investment type you choose.
While the Standard and Poor's 500 (S&P 500) stock index has historically provided about 10 per cent return over the long term, short-term returns can be volatile over short-term periods, leading to fluctuations.
Fixed-income investments, like bonds, are generally less volatile but tend to offer lower returns compared to other stocks.
Keep in mind that the scenarios discussed are hypothetical, and future return rates cannot be anticipated with precision. Higher potential returns typically come with more risk and volatility. The actual rate of return on investment can vary significantly over time, including the risk of losing the principal amount that you invested.
- Employer Match: An employer match is an additional contribution given by your employer based on the percentage of your annual contributions. This can vary from 0 to 100 percent.
For instance, suppose an employer matches 50 percent of their employee's contributions up to 6 percent of their salary. If the employee earns $100,00 per year and contributes 10 percent, the outcome would be as mentioned below:
- $10,000 from the employee
- $3,000 from the employer (which is 50% of $6,000 or 6 percent of the annual salary)
- It makes a total of $13,000.
Refer to the "Employer maximum" definition for a thorough explanation of maximum employer matching contributions. Additionally, it is vital to remember that employer contributions do not change the maximum allowable contribution amount from the employee.
Remember that matching contributions might be subject to a vesting schedule, so ensure to review your plan information for details.
- Employer Maximum: This specifies the highest percentage of your salary that can be matched by your employer, regardless of your contribution amount. For instance, if your employer offers a 50 percent match up to a maximum of 6 percent of your annual salary, and if you earn $25,000 with a 6 percent contribution, your annual contribution would be $1,500.
With a 50 percent match, your employer would then contribute an additional $750 to your 401(k) account. However, if you increase your contribution to 10 percent, your total annual contribution would be $2,500 per year, but your employer match, limited to the first 6 percent of your salary, would remain $750
