FV of 401k Contributions

The Future Value of 401K Contributions equation calculates the future value (FV) of a series of equal investments on a biweekly basis.   The formula uses a person's salary (AS), the percent of their salary contributed to their 401K (pK), the annual return on investment of their 401K (r) and the number of years (y) in the future for the Future Value computation.

This formula computes the compounded investment interest based on 26 contributions to the 401K.  This models contributions made in biweekly payperiods.  

Inputs

Enter the following:

• (AS) - This is the annual salary
• (pK) - This is the percent of salary contributed to the 401K
• (r) - This is the annual rate of return (e.g. interest earned) on the 401K investments
• (y) -  This is the number of years in the future for the Future Value calculation

Example

Contribution Match at 10% of Base Pay

Assume an employee is making $125,000 per year and contributes bi-weekly to the 401k plan at the 10% maximum employer match. The employee allocated their contribution to a mutual fund which returns 5% annually.
Using the equation for future value of an annuity above, the value of the $12,500 match at the end of the year would have been $12,805, growth of $305 for the year.
If the chosen fund actually delivered a negative rate of return, down 4% for example, then the dollar value in the account at the end of the year would have been $12,262, a loss of $238 for the year.

Contribution Match at 8% of Base Pay

To demonstrate the fact that maximizing the contribution is the most significant factor, we recalculate the return using an 8% match (pK) versus a 10% match (pK).  In this example, we use the same salary (AS) and annual rate of return of 5% (r). Under this set of circumstances, the contribution for the whole year is only $10,000 and the compounded value at the end of year would be $10,244.12.