8 Factors that Determine Your Final 401(k) Balance
Your 401(k) balance on the eve of retirement obviously depends on how much you save over your working life and on the performance of your investments. But there are other factors that influence the size of your next egg, including how early you start saving and when you leave the workforce. Fees, expenses, and early 401(k) withdrawals can affect your investment returns as well.
Here are eight factors that determine the final balance of your 401(k).
When you begin saving.
Workers who start saving for retirement in their 20s and follow through often have the most impressive 401(k) balances. "The biggest influential factor is definitely when you start saving," says
It is important to save regularly for retirement. "Make it like a payment, almost like your utility bill and your car payment or your school loan," says
Delaying retirement packs the double punch of giving you more time to save and shortening the number of years over which your savings must be spread. "Now you've got a couple more years to accumulate, and you have a couple less years to spend it, so your need is going to decrease," says
Workers with higher earnings generally have an easier time saving some of that money for retirement. While 69 percent of wage and salary workers earning more than
A employer 401(k) match that is vested is an instant return on your investment. Maximizing your company's 401(k) contribution will pay off in retirement. "You want to do at least what you need to do to get that match in full," says Sarenski. But some employer contributions are far more generous than others, generally ranging from less than
Retirement savers need to balance safety with the need to build wealth. "As your retirement account gets larger, if you don't manage those assets properly, that can have a huge affect as you approach retirement," says Garcia. "Getting more conservative closer to retirement is usually the right choice." Once you find an asset allocation that balances your needs for rewards and safety, stick with it regardless of daily stock market updates. "I think diversification is the key and not to chase returns," says
401(k) fees and expenses cut into investment returns. "If you're paying an extra 1 or 2 percent in fees in addition to investment costs, that's going to play a huge role in your overall investments over time," says Garcia. In extreme cases, fund expenses can even cancel out your growth. "If there are 3 percent fees, you could actually be going backwards," says Sarenski. "The higher the fees, the less growth you are going to have on your 401(k) plan money."
401(k) withdrawals before age 55 come with a 10 percent penalty in addition to income tax on the amount withdrawn. These early withdrawals can have a devastating effect on your final retirement account balance. For example, consider a 401(k) account holder born in 1970 who consistently saves 6 percent of pay annually from age 21 to age 65 and who gets a 3 percent employer match. If that person cashes out his or her balance once at age 35, it will result in
Personal Finance - 8 Factors that Determine Your Final 401(k) Balance
(c) 2010 U.S. News & World Report