401K Calculator

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401K Calculator: How to Calculate Retirement Savings?

We work hard so that one day we can enjoy a fun retirement, right? However, many people don’t realize how important it is to use a 401k calculator. If you don’t keep track of your savings account, then you might find you don’t have the funds to enjoy the retirement you’ve been planning for. 

Employers should also use 401k growth calculators to evaluate how they are contributing to their employees’ retirement plan. To understand how to use 401k calculators, we should look at them in more detail. 

The 401K Explained

Research shows that only 42% of employees use the 401k plan their company offers, despite how beneficial it can be. The employer-sponsored plan enables employees to put a set amount of their paycheck into the fund, and the company matches the amount. 

The fund grows due to tax advantages  (401k accounts are tax-deferred) and there are many options an individual has to make investments and increase their financial outlook for retirement. It’s important as an employer to consider which fund choices you’ll offer and employees should understand their options. 

Common choices for 401k funds include stock funds, money market funds, company stocks, and bond funds. Companies offer a variety of funds, so employees should always do their research. 

Benefits of 401K Plans

There are many benefits 401k plans offer, including financial security, tax advantages and they’re also ideal for businesses to create the right impression with their potential employees. 

Growth

Using your 401k fund means you can take advantage of compound growth. While simple interest rates can yield positive returns, compound interest enables you to accumulate money over time. 

Many people struggle to save and often dip into their retirement funds. However, 401k funds are difficult to access until retirement age, so employees can save for their future and not worry about losing money along the way. 

Employer Contributions

While most people think employer contributions are only beneficial for employees, business owners can take advantage of 401k policies. Companies that offer 401k funds to their employees, can expect more loyalty. 

Simplicity

Once you’ve planned your investments, 401k plans are easy to maintain and require little input. 

Tax Deductions

The biggest advantage of 401k plans is that everyone received tax deductions when they make contributions. If a 401k deduction comes from a paycheck, then it’s automatically classed as tax-free until you make a withdrawal from the fund. This means that you can save money each year on your taxable income, so you’ll enjoy a better quality of living while still saving for retirement. 

It’s important to note that while 401k plans offer many income tax benefits, you do need to follow the rules set in place by the IRS. If you reach the age of 70 and haven’t made a withdrawal, you’ll be subject to a penalty. Early withdrawals also incur a penalty payment, which serves as an incentive to let the fund grow. This penalty calculator is ideal to see the potential repercussions of not following the IRS rules. 

Employer Benefits

In a competitive market, employers need to consider their employee’s wants and needs more now than ever before. Many turn to specialist companies such as FutureFuel for advice on how to introduce benefit packages and 401k plans. 

Just as offering flexible benefit plans is helpful for employers, so are 401k plans. Employers might wonder why they should choose to implement a 401k matching plan. The fact is, there are benefits on both sides and business owners often find 401k plans are less stressful than traditional pension plans. 

While traditional benefit schemes required employers to decide on investment options, the 401k is left to the employees’ control. This means that employers only have to match the amount paid in, instead of worrying about financial implications. 

Perhaps the biggest benefit of 401k plans is the tax incentives for employers. While the IRS doesn’t require that an employer match their employee contributions, most do because it increases retention levels. If a business implements an employer matching contribution plan, they can receive tax breaks

Using The 401K Growth Calculator

Using a retirement calculator 401k plans are manageable, and you can predict how much money you’ll receive when you retire. After choosing what you’d like to invest in, you should check your fund to see if you’d like to make changes. 

What Does it All Mean?

If you’re new to the world of 401k plans, then you’re probably quite confused. However, our calculator makes it easier for both employees and employers to monitor their contributions. There are plenty of confusing terms with 401k calculators, but we’ve simplified them so you know what you’re dealing with! 

Percent to Contribute

Employees choose how much of their annual salary to contribute each year, and employers match the amount. Most companies allow their employees to contribute 100%, but this is unlikely as people need money to live on. 

Contribution Limits

Companies have annual contribution limits, based on an employee’s annual salary multiplied by the percent they contribute. There are many things to take into consideration, such as age, earnings and the total number of contributions. This helpful guide from The Balance can help you understand contribution limits more. 

Starting at age 50 or older, a “catch-up” provision allows an additional $6,000 contribution to the 401(k) account.

Annual Return Rate

Your annual rate of return depends on which investments you select. For example, the Standard & Poor’s 500 (S&P 500) 10-year rate of return for 2016 was 6.6%. However, investing can be volatile and it’s difficult to predict the future. With an investment return calculator, 401k plans can produce hypothetical results, based on past trends and how the investment forecast looks. 

Annual Salary Increase

Most people receive a yearly salary increase, and the calculator takes this into account. Once an employee receives an increase, their employer contributions will increase. For example, if someone receives a salary of $50,000 dollars and their employer contributes 5% of the salary, their initial contribution of $2500 dollars will increase depending on how much the salary rises. 

Employer Contributions

This part of the calculator is important for both employers and employees because it shows how much the fund will grow depending on employer contributions. Most employers match a percentage of their employees’ contributions. 

Employers often choose a maximum percentage of a salary when contributing to 401k plans. This protects employers from losing money when an employee increases their contributions. For example, if an employer states they’ll match the first 6% of an employee’s salary, they’ll continue to pay the same amount each year unless the salary increases. 

Setting up a 401k fund for your employees doesn’t have to be difficult, and it can prove to be a very advantageous employee benefit. If you’re an employer, then our 401k match calculator can help you evaluate how well your incentive is working, and what returns your employees will see. This will give a clear idea of what are the actions to be taken regarding 401k plans and other retirement savings, such as Social Security and IRA.