Your 401k 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 nest egg, including how early you start saving and when you leave the work force. Fees, expenses and early 401k withdrawals can affect your investment returns as well.
Here are eight factors that determine the final balance of your 401k:
When you begin saving
Workers who start saving for retirement in their 20s and follow through often have the most impressive 401k balances."The biggest influential factor is definitely when you start saving," says Josh McWhorter, president of Black Oak Asset Management in Cartersville, Ga.
Money you save in your 20s and 30s has decades of compounding ahead of it.
For example, a worker who saves $5,000 each year between ages 25 and 65 and earns 5% interest would have $634,199 in retirement. An employee who saved the same amount annually but didn't start until age 35 would have just $348,804.
Saving continuously
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 Ted Sarenski, an accountant who specializes in personal finance in Syracuse, N.Y. "The consistency gets you in the habit of doing it so when other things come up, you consider it a bill."
"If they don't have any type of pension plan, you should then do a contribution to an IRA," says Sarenski.
Retirement date
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 Rob Garcia, a financial planner and CEO of Rob Garcia Wealth Management in Templeton, Calif.Older workers are also eligible to contribute higher amounts to 401k's. Those 50 and older can tuck away $22,000 in a 401k in 2010, $5,500 more than the $16,500 younger workers can contribute to their tax-deferred account at work this year.
Earnings
Workers with higher earnings generally have an easier time saving some of that money for retirement. While 69% of wage and salary workers earning more than $50,000 in 2008 participated in a retirement plan, just a quarter of those earning less than $20,000 tucked money away for retirement, according to the Employee Benefit Research Institute.As you move up the wage ladder, consider having part of your raise directly deposited into a retirement account. In many 401k plans, those with higher earnings also get a higher dollar value for their 401k match. For example, if an employer matches 3% of pay, an employee earning $30,000 could get a maximum of $900, while a worker with a $70,000 salary could claim up to $2,100.
Employer contributions
An employer 401k match that is vested is an instant return on your investment. Maximizing your company's 401k 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 25 cents to more than a dollar for each dollar an employee saves."If you are comparing job offers, go with the company that has a match to their 401k rather than one that doesn't," says Sarenski.
