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Monday, July 29, 2013

A 401(k) Savings Calculator

Source: Capital Pixel
Ever wonder what your 401(k) balance will be if you save more? How about if you get a higher return or if you delay retirement? These questions are actually quite easy to answer and fun (maybe not for everybody!) to explore.  An important bonus is that you are left with a better feel for your path to a successful retirement.

Your 401(k) balance is worth thinking about because, for most people, it will be a major pillar in retirement.  The rule of thumb is that 4% can be drawn down without running out of money.  So, how do you figure what it will be 10, 20, 30 years from now?

Actually it is quite easy with the calculator at  The inputs are self explanatory.  Note that there are 2 inputs you have direct control over:  years until retirement and contribution rate.  And 1 input you have partial control over - the portfolio return.

Here is an example of the inputs for a worker making $78,000/year and saving 4% with an employer match:

Source: Yahoo Finance

The really good feature about these calculators is that it is easy to vary the inputs.  As you think about reaching a savings goal, there are really only three steps you can take.  You can save more, delay retirement, or get a higher return.  You can play around with the first 2, although most people push back and say they are at the max on how much they can save and don't want to delay retirement. The third option is not obviously directly controlled.  The markets are going to do what they are going to do.

It is worthwhile still, though, to think about performance.  I would say that the 8% return used in the calculation would be achievable with a 60% stock/40% bonds + cash portfolio.  To get a higher return would likely require a higher stock allocation--although THERE ARE NO GUARANTEES!  The markets are going to do what they are going to do.

Another point to understand about market returns is that the sequence of returns is important when contributions are being made.  Think about it like this:  there are various ways to get an 8% return.  You can have high returns in the early years and lower returns in the later years to average to 8% or vice versa.  It makes a difference whether the lower returns occur when balances are high, etc.  Because of this, you'll want to revisit the calculator at least every couple of years.

Here is a sample output table from the calculator:
Source: Yahoo Finance
 One way to use this output is to work backwards and view the ending balances as the targeted amount you need at various years to be on track to reach a given number.

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