Maximize Your Retirement With a 401k Calculator
We discuss 401(k) plans a lot.
That’s because retirement planning is important to us. Retirement can represent a quarter of a person’s life. Social security helps, but 401(k)s offer so much more for retirement savers. And 401(k) calculators can help make sure you get the retirement you deserve.
Using a 401(k) calculator forces you to think about your retirement in new ways. They offer great opportunities for making important decisions and maximizing your retirement contributions.
It’s a great tool for retirement planning. And we want to help you learn how to get the most out of using a 401k calculator.
Benefits of 401(k)
401(k) plans offer many benefits to those saving for retirement. Combined, these benefits help make 401(k)s some of the most reliable, trusted, and popular retirement savings plans available. Best of all, most workers qualify for a plan!
Some of the most popular benefits of a 401(k) include:
One thing you can expect from your 401(k) account: it will grow. How much it grows depends on your contributions and understanding your risk tolerance level (one of our retirement mastery principles). But, even when choosing low-risk investments (such as mutual funds), it will grow. Growth is usually slow—but consistent.
And slow, consistent growth is important. 401(k)s are designed to grow over a long period. It might not seem like a large amount by the end of your first year of contributing. But, after several decades, this growth can build an account big enough to help provide for you in your retirement.
It’s like the tortoise and the hare: slow and steady wins the race.
Employer match programs
Employer match programs are nothing short of free money in your account. Through one of these programs, whenever you contribute to your 401 k, your employer would make their own matching contribution—up to a point, at least.
Usually, employers will only match a certain percentage of your contributions. For instance, suppose you contribute 7% of your income to your 401k. Your employer might match contributions up to the first 5%. Each employer is different, so consider asking what kind of contribution matching your company offers.
401(k) plans can actually lower your income taxes. That’s because 401(k) contributions are tax-deferred. This means each contribution you make is its own tax deduction, lowering your taxable income and your yearly tax bill. Even as your 401(k) grows each year, you won’t pay income or capital gains taxes on that growth.
Once you retire and start taking distributions, you’ll have to pay taxes on that income. However, most people have a lower income in retirement than they did while working. So, even in retirement, your 401(k) distributions offer a lower tax bill. This can provide you long-term tax advantages simply by having (and contributing to) your 401(k)!
Once you sign up for a 401(k), you don’t usually have to make active contributions to your account. Most employers automatically deduct contributions directly from your paycheck.
It’s simple. It’s easy. And, best of all, it helps make sure that you make 401(k) contributions regularly. Whenever you get paid, so does your account.
How a 401k calculator can be helpful
401(k) calculators (such as this one) are an important tool for retirement planning. All it needs is some basic information about you and your 401k, such as your:
- Current age
- Planned retirement age
- Salary (and salary increase rate)
- Current account total
- Contribution amount (and employer match amount)
Some 401 k calculators may ask for additional information; others might ask for less. Once you’ve input your information, the calculator gets to work. 401k calculators can be extraordinarily helpful when planning for retirement because they:
Determine retirement income
Using your information, the calculator figures out how much money you might have in your account when you retire. Many calculators also estimate the average lifespan to help you determine what your yearly and monthly income might be. Though it’s only an estimate, this can give you a pretty good idea of the income you can expect during your retirement.
When figuring out how much you’ll need to retire, it’s helpful to calculate inflation. Some 401k calculators do this automatically. This is important because it can add perspective to your retirement income. Though your estimated account total might look like a lot of money, inflation can lower its value.
Sometimes, the difference can be surprising.
Estimate early withdrawal costs
Something to keep in mind about your 401k plan is that it’s your money. If you wish to take an early withdrawal from your account to make a big purchase (such as a home or car), you can. But remember, because your contributions are tax-deferred, you must pay income tax on any withdrawal you make.
Unfortunately, that’s not all. 401(k) plans are intended for retirement. Withdrawing money before you reach 59.5 years of age can incur added penalty fees. The result: you receive much less money than you remove from your account.
401(k) calculators can help you determine how much money you’d actually receive should you take an early withdrawal. This way, you can make sure you take out the right amount to get the money you need. Then, it won’t be such a surprise that, if you withdraw $10,000, you only receive $6,000.
I should note that financial advisors don’t recommend early withdrawals. Once that money leaves your account, it can’t continue to grow. Replacing large amounts to your account can take years and cost you something you can never get back: time.
How to use the information
So, a 401k calculator provides a lot of information. But that’s only one piece of the puzzle. Just as important is learning what to do with that information. The good news is you can use the calculator’s output to help improve your retirement planning.
For instance, you can use 401(k) calculator results to:
Create and meet goals
The strongest retirement plans are goal oriented. It’s important to take the time to figure out how you’d like to spend your retirement and how much income you’ll need. A 401k calculator’s estimates can help you determine whether you’ll be able to afford the type of retirement you want.
You can create specific goals based on your estimated income. You can occasionally revisit the calculator to make sure you’re on track to meet your goals.
Or you can make adjustments to improve your retirement income. That brings us to our next point.
401k calculators give you the freedom to tweak the numbers you input to see how they change the results. I highly encourage you to do this because it can help you figure out what adjustments can help you build your dream retirement. And with decades until retirement, small changes can have a big impact.
As you experiment with the calculator, you can figure out exactly how much you need to contribute in order to afford the retirement you want. This can help you decide whether to increase your contributions, improve your 401k growth rate, or even find new employment as needed.
Maximize employer match
Most 401(k) calculators help you determine how much your employer contributes to your account. You can use this to your advantage to figure out how much more you can earn by increasing your contributions.
If you don’t already meet your employer’s contribution limit, try tweaking the information you put in as if you did. The results of maximizing your employer’s contribution match amount might surprise you! And the good news is that changing your 401(k) contributions to meet that limit is usually simple. Consider asking your employer how to do so.
Increase annual return
As we mentioned before, 401(k) plans grow slowly. But they’re completely adaptable to you and your goals. If the calculator shows that your annual return rate won’t help you meet your retirement goals, you can change that. A financial manager or advisor can help you find new investments for your 401(k) plan that match your desired return rate.
Keep in mind that increased returns mean increased risk. Your advisor can help you find a return rate that both gets you closer to your goals and matches your risk tolerance level.