QUESTION
melissa126978: 401k questions?
I am currently 22 years old. I put about $100 into my 401k every other week. I plan on contributing more in the future but for now I am just doing $100. My employer matches 50%. I have 2 questions.
1.) If I were to continue for the next 40 years at $100 every 2 weeks how much would I have in my account after 40 years.
2.) When is the earliest I can withdrawl funds from my 401k without being penalized.
ANSWER
Dear Ms. “melissa126978”:
(1) It depends. “How much” depend on measured how?
(100$ yours + 50$ employer) * 26 weeks * 40 years = 156k$
BUT, you really have to figure rate of return on investments and inflation. Which requires some guess work.
Rate of Return is because you are just not going to put them over in the corner or under your mattress. You’ll invest in stocks or bonds. You’re working hard; your savings should too.
Inflation is the evil government printing money dollars making yours worth less.
So lets make some assumptions.
You’ll use the old wall street rule of thumb that says 100 minus your age so you’ll put 78% in equity and 22% in fixed income. You’ll pick low cost mutual funds from Vanguard if offered.
When you start to amass your fortune say at 100k, you’ll begin using the other Wall Street rule of thumb “no more than 5% in any one thing” but that’s for another day.
So let’s say your 22% fixed income makes 5% and your 78% equity makes 8%. (0.22*0.05)= 0.0110 AND (0.78*0.08)=0.0624 OR your blended rate of return is 0.0734. Let’s assume the evil Federal Reserve has a 0.04 inflation rate. That reduces your real rate of return. SO your real rate of return in today’s dollars is 0.0224.
That gives you ~317k$ in 40 years.
So, my guess is you’d have about ~317k$ in today’s dollars or if you ignore inflation ~850k$ in future dollars.
Dial in a better or worse rate of return. You’re guess is as good as mine. (Mine is based on conservative Wall Street assumptions.) (If you listen to anyone’s sales pitch about investments, ask what the assumed rate of return is. I’ve had bozos tell me to assume 15%! I might as well assume I’m going to retire and win the lotto. Used car salesmen that can’t sell cars seem to sell investments.)
See the dollar isn’t a constant, your rates of returns will vary, and who knows what inflation or your tax rate will be in 40 years.
One things for sure, today’s common wisdom is that you’re better off saving than depending upon some employer, social security, or the tooth fairy to help you in retirement.
Pay close attention to YOUR 401k, what it is invested in, and the fees associated. The immediate 50% return of your employer’s matching contribution is nothing to be sneered at. BUT, if the investment choices are terrible, the fees high, or the provisions onerous, it may be a bad bargain.
On the face, grab it. BUT like the employees at Enron learned not all that glitters is gold.
(2) 59½ except for certain exception that you may or may not what to use.
Remember to take anyone’s investment advice, even mine, with a large grain of salt.
I’ll leave you with two more wall street rules of thumb.
“Anyone promises to double your money, do it yourself. Fold it in half and put it in your pocket. Firmly.”
“If you don’t understand EXACTLY how the earnings will be made, don’t invest.”
Good luck, and while I won’t be around in forty years, I’ll be rooting for you, from upstairs or down, give me a progress report on how my guesses are doing,
fjohn
Sources
http://www.uic.edu/classes/actg/actg500/pfvatutor.htm
http://www.studyfinance.com/lessons/timevalue/index.mv?page=19
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