The Present and Future Value of Your 401(k) and Why You Need to Know Them

What that statement will tell you is the amount that you’ve already saved. It will also give you an idea of the speed with which your savings are growing. What it won’t do is tell you whether you have the amount you need to be able to retire at the level you want.

Retirement planning often talks about the “present value” of a retirement fund. The present value is the amount of money in your account today. That money will grow. As you—and your employer—add more money to it. And as the interest compounds, the value of your fund will increase.

The amount that your fund will be worth when you retire is the “future value” of your fund.

To calculate the future value of your 401(k) when you retire, you’ll need to know:

• When you plan to retire;
• How many payments you intend to make before your retirement;
• And the rate of return you can expect to earn before you retire;

Some of that information you’ll have—or at least you can make a good guess at. While you might not be sure exactly when you want to stop working, you probably expect to do it around the age of 65. That will tell you how many more years you expect to work, and how many monthly payments you can expect to make before then.

The Value of a Future Calculator

The interest rate is a little more complex. There’s no guarantee that rates will continue to grow as they did in previous years, but you can use previous rates as a guide. In general, you can expect your 401(k) to grow at a rate of between 5 percent and 8 percent each year.

Plug those figures into a future value calculator and you’ll be able to see exactly how much you can expect your 401(k) to be worth at any point in the future.

The big question is whether that amount will be enough. That’s much harder to know. Like insurance agents, pension planners will often try to estimate a retiree’s life expectancy. The more years you’ll enjoy after retirement, the more money you’ll need to have saved before retirement.

Average life expectance for men in the US is about 76. For women it’s about 81. If you retire at 65, you can expect to enjoy your retirement for between 11 and 16 years. But these are average figures. Many people live longer than those averages—and you’ll hope to be one of them. You’ll also want to play it safe and aim to outlive your retirement payments.

You can try to come up with a rough calculation. If you expect to live 20 years beyond retirement, you could look at your current annual expenses, trim away any fat, and multiply that amount by 20. If the future value of your 401(k) at retirement is lower than that amount, you’ll need to make bigger contributions.

It is very hard though to estimate how long you’re going to live after retirement. Aiming for post-retirement income that’s about 20 percent lower than your current earnings is much easier.