To determine the value of a 401(k) retirement plan over 30 years, we can use the formula for the future value of an annuity. In this case, the annuity is the contribution of 5% of the annual income, and the interest rate is the expected return on investment.
- If you contribute 5% of your annual income, which is $54,000 x 5% = $2,700, and the return on investment is 8.0% annually, then the future value of the 401(k) after 30 years is $2,700 x (FVIFA 8%,30) = $2,700 x (21.15) = $57,405.
- If the return on investment is 10.0% annually, then the future value of the 401(k) after 30 years is $2,700 x (FVIFA 10%,30) = $2,700 x (38.38) = $103,026.
- If you stopped making contributions five years earlier, then the future value of the 401(k) after 25 years would be $2,700 x (FVIFA 8%,25) = $2,700 x (17.20) = $46,840. This is a difference of $10,565 compared to the future value after 30 years.
In summary, the future value of the 401(k) after 30 years is $57,405 if the return on investment is 8.0% annually and $103,026 if the return on investment is 10.0% annually. If you stopped making contributions five years earlier, the future value of the 401(k) would be $10,565 less.
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