How To Calculate 401(k) Growth

A 401(k) is a tax-advantaged retirement account funded by payroll deductions, often with an employer match that adds money when you contribute. Projecting it at retirement needs four numbers: the current balance, what you add each year, what the employer adds, and the return the investments are assumed to earn over the decades until you stop working.

The projection splits into two parts that are added together. The existing balance simply compounds, because it is multiplied by one plus the return for every year it stays invested. The yearly deposits form an ordinary annuity: each year's contribution grows for however many years remain until retirement, and the sum of all those growing amounts is your contribution plus the match multiplied by the annuity factor.

That annuity factor, (1+r)^t minus one all over r, is the heart of the calculation. It answers the question of what a stream of equal yearly deposits becomes when every one of them compounds at the same rate. A deposit made in year one has the full term to grow; a deposit made in the final year barely grows at all, and the factor weights all of them correctly.

The employer match is the reason to run this calculation at all. In the worked case the match adds 125,000 of direct deposits and, because those dollars then compound for decades, a large further share of the 709,421 of growth. Skipping the match is the single most expensive mistake available to a retirement saver, because it is an immediate return no market can promise.

Returns are assumed constant and the contribution is assumed level, which no real account delivers. A bad decade early hurts more than a bad decade late because fewer years remain to recover, so the sequence of returns matters as much as the average. Treat the figure as a planning anchor, never as a promise.

Moving from 7% to 9% return on the same inputs changes the answer by hundreds of thousands of dollars over a career, which is why the assumed return is the most sensitive input of all. Use a sober long-run figure rather than a bull-market one, and remember that fees quietly reduce the effective return every year.

Taxes are not modelled here. Traditional 401(k) contributions reduce taxable income now and are taxed as ordinary income on withdrawal, so the balance is not the same as spendable money. Roth contributions are taxed now and come out tax-free, so the same nominal balance has a different after-tax value depending on which you chose.

The formula assumes deposits land at the end of each year, which slightly understates the result. Monthly contributions grow a little more because each deposit compounds a few months longer, and the difference compounds too, but over a full career the gap is modest compared with the effect of the contribution rate itself.

A rough rule of thumb falls straight out of the formula: money roughly triples every fifteen years at 7.5%, so a balance grows about tenfold in thirty years before any new contributions. That single sentence is the same arithmetic the page computes, and it is a fast way to sanity-check any retirement projection you are handed.