A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary on a pre-tax or after-tax (Roth 401(k)) basis. Contributions grow tax-deferred until withdrawal in retirement. Many employers offer matching contributions, which is essentially free money added to your account. The projected balance is calculated using the future value of a growing annuity formula, compounding annual contributions and employer matches at the expected rate of return.

Employer matching is one of the most valuable benefits of a 401(k). A common match formula is 50% of contributions up to 6% of salary. For example, if you earn $80,000 and contribute 6% ($4,800), your employer adds 50% of that ($2,400). Not contributing enough to capture the full employer match means leaving money on the table. The IRS sets annual contribution limits, which are periodically adjusted for inflation. Workers aged 50 and over can make additional catch-up contributions.

The power of compounding makes starting early critically important. Even small increases in annual contributions can result in dramatically higher balances over a 30 or 40 year career. A 1% increase in contribution rate on an $80,000 salary adds $800 per year, which over 35 years at 7% growth could add over $110,000 to your retirement balance. Regularly reviewing and increasing your contribution rate is one of the most impactful retirement planning actions you can take.