Retun to Blog

Retirement

The Advantages of Using a 401(k) Calculator

6/11/21 8:00 AM

iStock-1163111044-1

You have been working hard throughout your career, putting in long hours, and feel like it is finally time to retire. Then upon checking your 401(k), you realize how little it's grown, even though you've been diligently contributing for years.

This situation is unfortunate but all too common. A Gallup poll found that 41% of working adults haven't thought much about how much they'll need in retirement. Only 32% said they tried coming up with a rough estimate of retirement spending. Finally, merely 20% came up with precise spending numbers. The reality is, many adults fail to realize how much money they need to contribute to their 401(k) to make their retirement dreams a reality. Using a 401(k) calculator is a helpful way to see if you're on track.

How Much Will I Need to Retire?

How much money you'll need to retire depends on many factors. The first thing to consider is your cost of living. Like California and New York, some places have high rent prices, making them more challenging to afford.

You'll also consider other things like food, clothes, travel, entertainment, pets, medical expenses and family. How will you spend your golden years? Will you travel the world or stay at home?

A 401(k) calculator can help you determine how much you'll have when you retire as you select what your expenses will be.

Getting the Most From Your 401(k)

70% of employers offer a 401(k) match. Still, since every employer’s plan is different, you’ll want to check the plan details for the amount your employer matches. Check your company’s plan and make sure you’re not leaving money on the table by not participating in their 401(k) plan and maximizing the match offered to you.

  • At a minimum, contributing as much as your employer match. If your employer matched at 3% contribution, make sure you contribute the same to maximize your retirement savings account earnings.
  • Further, you'll want to maximize allowable contributions. According to the IRS, employee 401(k) contributions for the plan year 2021 will once again top off at $19,500, with an additional $6,500 catch-up contribution allowed for those turning age 50 or older.
  • Doing a regular risk check to ensure your dollars are in alignment with your risk threshold. According to Investopedia, risk tolerance is the degree of variability in investment returns that an investor is willing to withstand in their financial planning. It's usually associated with a participant's age, income and investment goals.
    • When you are early or mid-career, you may be willing to take on more risk, and your investments will be more aggressive in pursuit of maximum returns.
    • However, in the late stage of your career or later in life, you may have a lower tolerance for risk. You will want to be more conservative in your investments as you reach retirement age.

If you’re unsure where your risk tolerance lies, use our Risk Assessment Test. Knowing your risk tolerance level will help you plan your portfolio and ultimately drive how you invest.

What Will a 401(k) Calculator Do for You?

It's difficult to determine how much you'll need in retirement. A rule of thumb is to replace 75% of your current income. If you currently earn $100,000 a year, you want to get $75,000 annually in retirement.

Using a 401(k) retirement calculator will let you know if you're on track to comfortable golden years. You'll input information about your current income, monthly contributions, and total net worth. The calculator will project how close you are to meeting your retirement goal.

The 401(k) calculator uses built-in assumptions such as:

  • Inflation is 3% annually.
  • Account balance grows by 7% a year.
  • Salary increases by 3% a year.
  • You will withdraw the recommended 5% annually after age 65.

This provides a handy snapshot of where you are and what more you can do. If you're behind, it's time to start putting more money in.

Things to Remember

Investing is a marathon, not a sprint. Consistent investing is the key to success. Most experts recommend that 15-20% of your salary goes towards your long-term investment goals. Your savings should increase when your paycheck does.

Even investing a little bit is better than not investing at all.

It's also crucial to build strong financial habits. Track your spending and look for areas where you can cut costs. Remember that any money you spend on non-essential items can just as effortlessly go into a retirement account.

Finally, avoid withdrawing early if possible. Taking a withdrawal before the age of 59 ½ will cost you in the short term (you'll have to pay certain taxes and a penalty on the early withdrawal). It will also cost you in the long term by decreasing the overall amount saved in the 401(k).

Are You Prepared for Retirement?

You don't want to live your retirement years working or worrying about money. Using a 401(k) calculator is a great way to chart long-term goals and determine contribution amounts.

Slavic401k is here to help. Our Retirement Path 401(k) Calculator can help you determine if you're on track to meet retirement goals. If you’re not, the calculator provides data on how to catch up.

Subscribe to the Slavic401k Blog