401(k) Savings Calculator
A 401(k) can be one of your best
tools for creating a secure retirement. It provides you with two
important advantages. First, all contributions and earnings to your
401(k) are tax deferred. You only pay taxes on contributions and
earnings when the money is withdrawn. Second, many employers provide
matching contributions to your 401(k) account which can range from 0%
to 100% of your contributions. The combined result is a retirement
savings plan you can not afford to pass up.
Definitions
- Annual salary
- This is your annual salary from your
employer before taxes and other benefit deductions. Since your
contribution and company match are based on the salary paid to you by
your employer, do not include any income you may receive from sources
other than your employer.
- Percent to contribute
- This is the
percentage of your annual salary you contribute to your 401(k) plan
each year. Most employers permit employees to contribute up to 15
percent of their salary to a 401(k).
- Annual contribution limits
- Your total
contribution for one year is based on your annual salary times the
percent you contribute. However, your annual contribution is also
subject to certain maximum total contributions per year. The annual
maximum for 2006 is $15,000. If you are over 50, a "catch-up" provision
allows you to contribute an additional $5,000 into your 401(k) account.
It is also important to note that employer contributions do not affect
an employee's maximum annual contribution limit. The table below lists
the maximum contributions and catch-up contributions for each year
through 2006.
Year | Employee Contribution limit | Additional "catch-up" contributions for workers 50+ |
2003 | $12,000
| $2,000 |
2004 | $13,000
| $3,000 |
2005 | $14,000
| $4,000 |
2006* and after | $15,000
| $5,000 |
It is important to note that some employees are subject to another
form of contribution limitations. Employees classified as "Highly
Compensated" may be subject to contribution limits based on their
employer's overall 401(k) participation. If you expect your salary to
be above $95,000, you may need to contact your employer to see if these
additional contribution limits apply to you.
Current age- Your current age.
- Age of retirement
- Age you wish to retire.
This calculator assumes that the year you retire, you do not make any
contributions to your 401(k). So if you retire at age 65, your last
contribution happened when you were actually 64.
- Current 401(k) balance
- The starting balance or current amount you have invested or saved in your 401(k).
- Annual rate of return
- The annual rate of
return for your 401(k) account. This calculator assumes that your
return is compounded annually and your deposits are made monthly. The
actual rate of return is largely dependant on the type of investments
you select. From January 1970 to December 2005, the average compounded
rate of return for the S&P 500, including reinvestment of
dividends, was approximately 11.4% per year. During this period, the
highest 12-month return was 61%, and the lowest was -39%. Savings
accounts at a bank pay as little as 1% or less. It is important to
remember that future rates of return can't be predicted with certainty
and that investments that pay higher rates of return are subject to
higher risk and volatility. The actual rate of return on investments
can vary widely over time, especially for long-term investments. This
includes the potential loss of principal on your investment.
- Annual salary increase
- The annual rate you
expect your salary to increase. We assume that your salary will
continue to increase at this rate until you retire.
- Employer match
- An employer match is in
addition to your annual contributions. It is based on a percentage of
your annual contributions. This range can be anywhere from 0% to 100%.
For example, let's assume the employer matches 50% of the
employee's contributions up to 6% of their salary. The employee earns
$100,000 per year and contributes 10%. The results would be:
- $10,000 from the employee
- $3,000 from the employer (which is 50% of $6,000 or 6% of the annual
salary).
- Total: $13,000
Please read the definition for "Employer maximum" for a detailed
description of maximum employer matching contributions. It is also
important to note employer contributions do not affect the maximum
amount allowed to be contributed by an employee.
- Employer maximum
- This is the maximum
percent of your salary matched by your employer regardless of the
amount you decide to contribute. For example, let's assume your
employer has a 50% match, up to a maximum of 6% of your annual salary.
If you have an annual salary of $25,000 and contribute 6%, your annual
contribution is $1500. With a 50% match, your employer will add another
$750 to your 401(k) account. If you increase your contribution to 10%,
your annual contribution is $2500 per year. Your employer match,
however, is limited to the first 6% of your salary and remains at $750.
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