NOTE: This program is meant as a guide only. No returns on investment are guaranteed. This program does not advocate any specific investment strategy, nor guarantee any results. Inflation and rates of return on your investments will fluctuate over time.
GENERAL PROGRAM USAGE
This program is very simple to use. As you can see, the program starts with some default values. Change the default values to reflect your individual situation, then click on “Calculate” (or press the Enter key) to analyze the data you entered.
You can view the results of the program in three different ways: the Spreadsheet, the $401K Balance Graph, and the Retirement Income Graph. Simply click on the button of your choice to switch between the different views.
Note: If you open a previously saved $401K Planner file, to see any of the three views you must FIRST click on Calculate. Then click on one of the buttons.
INPUT VALUES
Current Balance
Enter your current 401(k) balance (i.e., how much you already have saved in your 401(k) account).
Tip:
This number affects your portfolio significantly. Even though you don’t have much control over how much you have already saved (i.e., that’s water under the bridge), play with this number to see how important it is to start saving early.
Annual Interest Rate
Enter the estimated return you expect from your investments. If you already have some 401(k) savings, try entering the five- or ten-year annualized returns for the particular funds you have your money invested in. These returns should be listed on your quarterly 401(k) report. If not, ask your human resources or personnel representative.
Tip:
Play around with different values for this return to see what a huge effect it has on your 401(k) account growth. Even a one-percent change makes a radical difference over a period of years.
Note: This field is locked at 5% in the unregistered version. Once you register, you will be able to edit this field as much as you like.
Tip:
If you wish to see how your account grows in just raw dollars over time (i.e., to just see your contributions), then try entering zero for the Annual Interest Rate.
Annual Inflation Rate
Enter an estimated annual inflation rate into this field. Historical estimates for inflation typically range in the 3- to 6-percent range. For your savings to retain their earning power, the rate of return on your investments must beat inflation.
The inflation rate you enter will be used to inflate your “Retirement Income Goal in Today’s Dollars.” Over time, you will need more and more money to achieve this Income Goal (due to inflation). A dollar today has less spending power in ten years due to inflation. Thus, to maintain the same standard of living, your investments must outpace inflation.
Tip:
If you wish to see your analysis in today’s dollars, then enter zero for this value.
Current Age
This may be obvious, but the earlier you start saving the better. Enter your relevant data for all fields and look at the results. Now change the Current Age to 5, then 10, years earlier and see what a dramatic difference it can have on your portfolio’s growth.
Retirement Age
Enter the age at which you want to retire.
Tip:
If your savings strategy shows you haven’t saved enough money, then you might consider postponing retirement. (I know that’s not what you want to hear, though).
Annual Return During Retirement
Enter the estimated return on your investments once you reach retirement. Since most people invest more conservatively during retirement, this 401(k) analysis lets you take this into account.
Tip:
If you are considering multiple investments, enter the different investment returns and see what effect they have on your savings.
Current Salary
Enter your current Annual Salary.
Note: This field is locked at $25,000 in the unregistered version. Once you register, you will be able to edit this field as much as you like.
Tip:
To be the most generic, this program relies heavily on you entering values based upon a percent of your salary. While many plans have employees save this way, some use fixed contribution amounts. If your plan uses fixed amounts, you can still use this program, but it will take some pre-calculation on your part.
Example: Say your plan lets you contribute $2000 per year. Then enter, say, $20000 for the salary and enter 10% as your contribution percentage. And enter 0% for your estimated raise.
Annual Raise
Enter an estimated annual raise. You may want to average the raises you have gotten over your career or perhaps over the last five years and enter that value.
Tip:
Since this is a speculative amount, try to be conservative. However, if your raise does not keep up with the inflation rate you enter, then your 401(k) account is losing its spending power over time.
Your Contributions
Enter the percent of your salary that you will be contributing each year to your 401(k) plan.
Tip:
Of all the values you can input, this is virtually the only one you have some control over. Interest, inflation, etc., fluctuate yearly, and you can’t control those. You can, however, save more or less depending on your needs. This is the number you should play around with the most, since it is the one factor you can control in your strategic plan for building your retirement nest egg.
Company Match
Enter the percent of your salary your company will contribute to your 401(k) balance based on your actual contributions.
A lot of plans contribute based on a percent of the percent you are contributing (i.e., they match 50% of every dollar you contribute up to 6%). However, since you may save more than the matching cap, $401K Planner has been designed to be more generic by requiring you to enter the match based on the percentage of your salary.
Example: if you contribute 6% of your salary and your company will match 50% on the dollar up to 6% of your salary, then the company match is 50% x 6% = 3% of your salary.
Tip:
If you are unsure how much money your company will match, then speak to someone in your human resources or personnel department, or even call your plan administrator. I'm sure they would be happy to help you and while you're there be sure to give them a copy of the program.
Retirement Income Goal in Today’s Dollars
Enter your retirement income goal in today’s dollars. Ask yourself “If I retired this year, how much would I need to live comfortably?” $401K Planner will inflate this value over time to reflect the lost spending power of your savings over time. Again, your investment return is your way of “fighting back” against inflation’s effect on your savings.
Tip:
A good rule of thumb is to enter an income that is about 70% of the income you feel comfortable living on today.
PREFERENCES
To change the preferences go under the Edit Menu and select the "Preferences" menu item. The Preferences window will open up. In there you may choose the calculation type. There are two calculation types.
- "Interest Only" option: If you select this option, then during your retirement years you will be withdrawing only the interest on your principal for income. If you can live solely off of your interest, then you will have achieved Retirement Planning Nirvana.... that magical state where you can live as long as you want without worrying about an eroding standard of living. Those saving early for retirement can actually achieve this goal through persistent savings over long periods of time. Those closer to retirement who have regrettably not saved as long may want to use the next option...
- "Annuity Payout" Option: With this option your retirement income will be composed of both interest and principal. You simply enter the number of years you'll be in retirement (i.e. make a guess as to how long you will live once you reach retirement - pretty scary huh?) and the program will calculate how much money you can withdraw in equal payments. The big risk with using this retirement planning option is that if you live longer than what you predicted, then you will be broke (i.e. you are reducing your account through equal yearly payments that totally depletes your savings at the end of the term).
Tip:
If possible plan your savings strategy based on the "Interest Only" option. This type of planning is the most desirable since you do not have to know exactly how long you will live (i.e. you won't go broke if you live longer than you predicted). Shoot for the moon and if you miss you'll still be in outer space. If you plan now using the Annuity Payout, just keep in mind that at some point your savings will reach zero. What will you do if your balance reaches zero and you're still living? Hopefully, you want let it come to that.
UNDERSTANDING THE $401K BALANCE GRAPH
The graph shows you the growth of your $401K balance over time and includes the effects of your contributions, your company contributions, and the investment return on your savings. As you change input values, the axis scales automatically to fit the data onto the graph.
BLUE is the growth of your balance BEFORE retirement.
GREEN is the growth of your balance AFTER retirement, and takes into account withdrawals based on your inflated retirement income goal. (Note: in the current version of $401K Planner, only interest will be withdrawn. Your principal will not be touched.)
The program’s analysis assumes you will not withdraw more than the interest on your savings, which may or may not apply to your situation. However, the only way to guarantee you will maintain your standard of living throughout retirement is if you can live solely off interest. Once you dip into your principal balance, then your balance is guaranteed to reach zero within a finite number of years. Thus, you could go broke before you pass away. Not a pleasant thought.
UNDERSTANDING THE SPREADSHEET
The spreadsheet shows your 401(k) principal balance growth in numerical form. Under the $401K BALANCE column, the spreadsheet displays your growing and shrinking 401(k) balance based on your inputs.
The RETIREMENT INCOME GOAL column shows you how inflation affects your goal (i.e., you need a lot more money in the future to maintain your current standard of living due to the way inflation erodes your spending power over time). Notice that even in retirement your RETIREMENT INCOME GOAL is continually growing. Your investment return will need to beat inflation to maintain your spending power.
The RETIREMENT INCOME column displays the interest on your $401K BALANCE, which, in turn, is based on the number you entered in the “Annual Return During Retirement” input box.
Note: If the RETIREMENT INCOME GOAL column shows larger numbers than the RETIREMENT INCOME column, you have not saved enough to live off the interest only. To fulfill your goal, you would have to dig into your principal during retirement. This is because in the current version of $401K Planner, only interest is withdrawn.
UNDERSTANDING THE RETIREMENT INCOME GRAPH
This graph focuses on your retirement years and shows you whether your savings strategy will satisfy your retirement income needs. If you have saved too little, the red bars show you where your shortfall is (i.e., your income is less than your income goal). The green bars show you the interest on your 401(k) balance.
If you don’t see any red, then you’re in “401(K) Nirvana”... your income exceeds your goal. In this case, you will be able to live solely off the interest in your account, barring any unforeseen circumstances.
WARNING: This software is meant to be only an estimating tool. It is not meant to be exact for your situation, since other factors may be involved. This software does not take into account social security payments, pension payments, or any other source of income.
WARNING: This software is not meant to advocate specific investment strategies. You are entirely on your own in determining what to invest your savings in and for what returns.
No returns are guaranteed. Interest and inflation will vary each year, and this will affect your 401(k) balance. This software simplifies real life by using the same inflation and interest value every year. Again, this software is meant as a guide only.
Using $401K Planner for IRA Planning
To use $401K Planner for IRA Planning, enter zero in the “Company Match” input box, and enter zero in the “Annual Raise” box..
You also will need to cap your yearly contributions at the IRS maximum. I’m not exactly sure what the maximum contribution is for this year. Check with the IRS or your IRA account administrator for more info on that.
But let’s assume that the maximum you can contribute is $2000 per year (and I’m not sure that’s correct). To use $401K Planner, then you could enter a Salary of 20000 and a Contribution percentage of 10% to effectively set your contributions to $2000 per year.
REGISTRATION
To register this software, select “$401K Registration...” from the Apple menu. Read the information and directions in the scrolling text fully, then follow the directions if you choose to proceed with the registration process.
You will need the SoftLock ID and product # from the registration screen in order to register.
Thanks for using my software. And special thanks to Andrea Dencker for editing this manual.
