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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money is withdrawn.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.
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Definitions
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Annual salaryThis 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 contributeThis 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 limitsYour 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 2009 is $16,500. Starting at age 50 or older, a "catch-up" provision allows
you to contribute an additional $5,500 into your 401(k) account. It is also important
to note that employer contributions do not affect an employee's maximum annual contribution
limit.
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 $110,000 or more in 2009 or was $105,000 or more in 2008, you may need
to contact your employer to see if these additional contribution limits apply to
you.
Current ageYour current age.
Age of retirementAge 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) balanceThe starting balance or current amount you have
invested or saved in your 401(k).
Annual rate of returnThe 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 dependent on the type of
investments you select. From January 1970 to December 2008, the average annual compounded
rate of return for the S&P 500, including reinvestment of dividends, was approximately
9.7% (source: www.standardandpoors.com). During this period, the highest 12-month
return was 61%, from June 1982 through June 1933. The lowest 12-month return was
-39%, which happened twice, once from September 1973 to September 1974 and again
from November 2007 to November 2008. Savings accounts at a bank may pay as little
as 1% or less but carry significantly lower risk of loss of principal balances.
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 generally 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. It is not possible to invest directly in an
index and the compounded rate of return noted above does not reflect sales charges
and other fees that funds and/or investment companies may charge.
Annual salary increaseThe annual rate you expect your salary to increase.
We assume that your salary will continue to increase at this rate until you retire.
Employer matchAn 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 maximumThis 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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Information and interactive calculators are made available
to you as self-help tools for your independent use and are not intended to provide
investment advice. We can not and do not guarantee their applicability or accuracy
in regards to your individual circumstances. All examples are hypothetical and are
for illustrative purposes. We encourage you to seek personalized advice from qualified
professionals regarding all personal finance issues.
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