In order to ensure that you can retire at a reasonable age and live comfortably, it is important to set aside money for your retirement. While there are a variety of methods at your disposal, one of the most beneficial is the 401(k). You may be asking: what is a 401(k)? And how do you go about calculating your 401(k)?
A 401(k) is a retirement account provided by employers with great benefits and tax savings. It is an important tool to help create a retirement nest egg. It is offered by a vast majority of employers to help you prepare for your future by setting money aside from each paycheck.
Here is what you need to know about this retirement method and how to go about calculating your 401(k) to make the most of your savings.
What 401(k) Options Are There?
You are limited to two choices, although approximately half of employers who participate in a 401(k) program only offer the traditional option.
This standard offering allows you to deposit a set amount of tax-deferred money from your paycheck into a special account that is accessible upon retirement. This money is then taxed as income upon being withdrawn.
The second variety is a Roth 401(k). It functions essentially the same way, except that the money deposited is post-tax, so you will not have to face taxation during withdrawal.
Ultimately, it’s just your preference as to whether you want to save tax money at the beginning or end of the process.
What Makes a 401(k) a Good Idea?
So, why should I use a 401(k)? One of the biggest benefits to using this retirement savings method, other than saving money in a tax-beneficial manner, is that most employers will offer a match program.
When you make deposits into the account, employers may offer to provide a contribution of their own that can be anywhere from 50% to 100% of what you put into the account. They will likely cap their contribution at a value of around 5% of your total income. In other words, that’s free money for your retirement!
If you are starting late or fall behind on your retirement goal, you are allowed to deposit an extra $6500 beyond the maximum limit (usually around $21,000) once you hit the age of 50!
How Do I Know How Much to Contribute to My 401(k)?
Before you can make this determination, you need to figure out another important detail: your retirement budget.
Your Retirement Goal
It can be really difficult to decide how much money to save for your retirement. A lot of factors determine how much income you will require..
Some of your costs, like health and medical expenses, may increase as your health declines. Other factors can reduce your income requirements. For instance, you may have payed off large debts and you won’t be setting aside money for retirement anymore.
You will also need to consider what your goals are for your retirement. Are you planning to live a minimalist lifestyle, or do you want to travel and see the world? How much income you are going to require will help you determine how much you need to save.
Online retirement calculators can help you come up with a ballpark figure and determine whether you are on track to achieve your retirement goal. If you are behind, you will want to consider adding more to your 401(k), perhaps taking advantage of the higher limit available to those over 50.
401(k) Calculator
Once you know where you stand on your plan, you can make use of one of the most beneficial online tools at your disposal: a traditional 401(k) calculator.
This technology will take care of the difficult calculations needed for you to decide how much you need to invest to meet your goals. There are a lot of options to help you with varying situations, too.
You can analyze the differences between 401(k) plans by comparing Roth 401K versus traditional 401K calculators to decide which is best for you.
A 401k profit sharing calculator can show you how to calculate your employer’s 401K match contribution. You’ll be able to see how that affects your retirement gains to help you meet your goal.
To get a grasp on how much you’re on track to save through your 401(k), quickly fill out some basic information in our calculator and click “calculate.”
This calculator can make it much easier to determine what you need to invest in your 401k to reach your ultimate retirement goal. If you’re not satisfied with the current trajectory of your savings, change up some of the figures in the calculator to see how a later retirement, higher salary, or another factor could boost your 401(k) savings.
What Else Should I Know About my 401(k)?
Understanding the finer details of how a 401(k) works can help you determine how you want to handle your contributions. Here is some key information you should know about 401(k)s.
Mutual Funds
401(k)s feature investments through mutual funds. Depending on how large your employer is, this can be an advantage because they often have access to discounts.
The limitation is that investment options are minimal, so you won’t be able to grow a diverse, cost-effective portfolio. With additional fees, it may prove an expensive option for investment. If that is the case, you may want to simply pay in enough to get the maximum value from your employer match to optimize your gains.
Restrictions
There is a pretty steep penalty of 10% (plus taxes) if you attempt to remove your 401(k) money before retirement age. To get the most out of your contribution (and your employer’s), you should plan to leave it there for its intended purpose.
If you leave your current job, there are transfer options available, so you won’t have to worry about losing your 401(k) in the event of a career change.
If your new employer does not offer the 401(k) plan, you can always transfer the money into an IRA account, which provides its own benefits.
Minimum Required Distributions
When you retire or reach the age of 72, whether you want it or not, you’re going to start receiving money distributions. They will begin providing you with the minimum amount unless you arrange another option.
Retirement Annuity vs. 401k
Many people want to know the difference between these two types of retirement programs. While they are similar, there are several major differences with an annuity.
An annuity is essentially an insurance contract that you fund with a lump sum or pay over time. When you retire, this insurance pays out for you, providing income.
The major differences are that with a 401(k), you have the potential for greater retirement income, but also more risk of running out of money.
With an annuity, you get less money but are guaranteed never to run out.
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