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A 401k and an IRA are both tax-advantaged accounts that incentivize saving/investing for retirement. They both restrict withdrawals from the account in exchange for deferring or excluding taxes. There are Traditional and Roth options for both accounts which is a different question altogether (I have an answer here for IRAs but it is applicable to 401ks as well: Alexander Yuan's answer to Individual Retirement Account (IRA): Is a Roth IRA better than a traditional IRA?). If something is just labelled a 401k or IRA, it is assume to be a Traditional type account.The quick rundown of the differences are the following: you have more flexibility investing in an IRA, you have a higher contribution limit for a 401k, and your employer potentially matches contributions in your 401k (basically gives you free money in the account). But let's go into some more detail.401kA 401k plan is an employer sponsored retirement plan. Not all employers offer one, but many large companies do. Most offer only a Traditional 401k, but there are some companies with Roth 401k options. The employer chooses which type of account to offer and has it set up with a plan manager. There are usually specific funds available for you to invest in within the account. You usually just fill out a form to assign how much of your paycheck you would like to put into the account and how to divide it up into the different options.There are some restrictions on withdrawing the money put into this account but you get tax benefits in return. These restrictions and benefits depend on with type of contribution you make (Traditional vs Roth). The annual contribution limit is fairly high (in 2015 it is $18,000 if you are under 50 years old, $24,000 if you are over 50).The big advantage to contributing to your 401k is employer matching. Your employer may match your contribution which means as you put money into the 401k, your employer will also give you money to put into the account. For example, if your company has 100% matching up to 4% of your income and you make 100k annual salary, you can contribute 4k and your company will put in 4k. This effectively makes your annual salary 104k with 8k being paid to you through your 401k. If the company's matching was only 50%, they will put in 2k when you put in your 4k in the example above. However, the company matched amount usually vests over some period of time which means if you leave the company, you only get the amount you are vested in. For example, if your company has a vesting schedule of 4 years evenly distributed, then in the first example above with 100% matching, you would get claim to an additional 1k each year. You are also always 100% vested in your own contributions. So let's take that example and say you don't contribute anymore after the first year. If you leave after 3 years with the company, you would be entitled to 3k of the 4k match from your first year as well as your own 4k contribution plus whatever gains that 7k earned in the account.Individual Retirement Account (IRA)An IRA is an individual retirement account, meaning you will have to set it up yourself. You will need to reach out to a broker (Charles Schwab, Fidelity, TD Ameritrade, etc.) to set up an account and you decide whether you want to open a Traditional or Roth type. You manually move money into the account which has a smaller annual contribution limit ($5,500 in 2015, $6,500 if you are over 50) relative to the 401k.You get the same restrictions and tax benefits in the IRA for the same type of contribution (Traditional vs Roth), but there are income limits to making these contributions. The main benefit of using an IRA is investment flexibility: you aren't restricted to the investments made in the account. You can invest in individual stocks or mutual funds or index funds of your choice.

There is a number of variables needed to come up with a decent estimate of where we should be in terms of the retirement funding account value at any selected age, here in this question at age 45. I will provide some estimates below, but let’s first review the key moving parts that will have impact on the number needed. I will walk below step by step through a potential process to arrive at that amount needed today.You have two distinct parts below. First the rough description of the process to arrive at the magic number and then a sample calculation. The below is not an attempt to offer any financial advice but rather an attempt to provide some level of education what are the key parts to the process. If the first part seems too confusing at first, then just jump to the second part where a sample calculation is provided.So here we go.Part 1 or the methodology.The amount needed at retirement is primarily driven by the expected expenses at retirement. One way to arrive at the annual amount needed in retirement is to look at what we spend today (per month on average times 12) and then reduce it by certain factor (because at retirement we expect to spend less than we do today, no work related expenses, including commute, no children expenses, possibly mortgage and other debts are paid off by retirement and so on). Popular factor is 80% of today’s income or 20% reduction. I would tend to say that the actual factor could vary from that 80% depending on individual lifestyle. Many retirees see a lower ratio, even 60% or less of what they were spending at age 45 is being reported. But that varies per household and is very subjective. So the key question is what do you think you will need in retirement income versus what you spend today?Then adjust it for income tax due on that income. Say you expect to pay 15% income tax at retirement (you rate will vary, depending on your total income and the state where you will live in retirement). You would then divide the prior result by 85% (100% minus the assumed tax rate of 15%).We need to also adjust for future inflation. Dollar today most likely is worth more than it will be at your retirement. We want to maintain the purchasing power at retirement. So we need to assume some average inflation rate over the entire time from today until retirement. For example if we assume average 3% inflation rate over the next 20 years, then one dollar today will need $1.83 in 20 years in order to maintain its purchasing power from today. Using the Time Value of Money calculator helps us find that multiplier.Once we make an assumption of what we will need per month in retirement, then we want to deduct from that amount any other sources of recurring retirement income, like Social Security income, pension (if available) or income annuities we already possess that would provide some form of recurring income at retirement.Next we want to assume a safe rate of withdrawal from that retirement account from which we will draw that income at retirement. Again, opinions differ on that, though many believe that something between 3 and 4 percent would be a reasonable rate of annual withdrawal to that account to last for at least 30 years. No guarantees, but a reasonable assumption based on a prior study.Next we take the amount from the step 2 above and divide by the percentage from step 3. That will give us account value that would be needed at the start of retirement.Then we make an assumption of the rate of return we would make on our retirement account between today and the start of retirement. Whether this would be 8% or 4% or any other value would depend on how we are invested today and what we think is the likely rate of return for our investment portfolio between now and the time of retirement.Final step is to use a financial calculator Time Value of Money function that can be found online and calculate from there. We would enter there the value from step 6 as the Future Value, we would enter the Rate of Return from step 7 and we would enter our annual contributions to the retirement account as Payment. Then we would click on the Present Value to see what would be needed today in the retirement account.Lastly, we need to assume that in addition to the monthly income we will need some additional money on a side and separate from the account that pays us monthly income at retirement. That extra account would be used as our reserve for unexpected large expenses at retirement, like extra medical bills, roof repair, new appliances, roof repair, etc.You would also account for the spousal income at retirement if that applies to you. That means you would have some retirement account value to take income from and so would your spouse, if applicable. That would reduce the amount needed in your retirement account as your spouse would also contribute.Part 2, an example of the calculation.So let’s make some assumptions and the use them to calculate an estimate what should we have at age 45 to be ready to retire at age 65. Keep in mind that the calculation below is just a very rough estimate. To arrive at something much closer to the actual number you would want to work with a financial professional who would have access to a much more complex tool. So take the below with a grain of salt, we are just trying to arrive at some estimated number, not the very exact number.Expenses today after tax are at $6,000 a month or $72,000 a year. We assume that at retirement we will need 75% of that, which equates to $54,000 annually at retirement.We adjust up for income taxes (assumed 15%) which will take us to $63,530 needed before taxes.Then we adjust for inflation. Assuming average inflation at 3% that will take us to about $115,000 needed to purchase the same at retirement what $63,530 would buy today.We assume that Social Security will pay us $32,000 (in future dollars adjusted for inflation) at age 65, which can be derived from the Social Security website when you log in and run their estimator there. Also our spouse is expected to get $29,000 a year in future dollars. We have no other sources of retirement income. So we take that $115,000 from the step above and deduct both Social Security incomes to arrive at $54,000 needed annually from the retirement account.Next we assume that it will be safe to withdraw 3.5% from our retirement account for the account to last for our lifetime.Now we take $54,000 from step 4 and divide by 3.5% from step 5 to arrive at $1,543,000 needed in the account value at the start of retirement.Based on our current risk preference we will assume that our retirement portfolio will likely earn 7% annually between now and retirement.The final step is to calculate where we need to be today in terms of the retirement account value. That would be the total value of retirement accounts between you and your spouse.Assuming that we contribute annually (actually we do contribute with each payroll, here we just try to do a rough estimate) say $6,000 between us and our employer, we would need the retirement account value to be at $335,000.If we increase our total annual contributions (between us and our employer) from $6,000 to 10,000 then the value needed today would be about $293,000.If we change the rate of return to 8% and increase contributions to $10,000, then we would need today $233,000.To that amount we also need to add a separate account set aside for large unexpected expenses at retirement, which would add to the total number.Again, the above is a just a very basic walkthrough through the process. If you want to get to something closer to an actual number applicable to you, sitting together with a trusted financial professional who has access to much more complex tools would be a better approach. Most likely the input would be adjusted for additional factors not covered above as I was trying to keep as simple as possible something that is very complex in nature.There is a whole bunch of additional fudge factors not covered above.What about if we cannot work to age 65? Say we become sick and cannot work or become laid off and cannot find a job anymore?What if we become unemployed temporarily between now and retirement?What if we did not pay off that mortgage by retirement or acquired new debts?I think that one of the best general advice in the retirement area out there I saw was:increase contributions to the retirement account today to whatever our budget can afford,pay off high interest debts as quickly as possible,adjust our lifestyle today away from spending left and right to spending to the minimum whatever is acceptable to you. How much of the stuff do we truly need and does everything need to be replaced so soon?Even if we arrive at retirement and still do not have that magic number calculated above, most of us will adjust to whatever we have at that time. We will make changes to make it work one way or bother. As much as we can.Hope that helps.

I'd recommend searching each term you're unfamiliar with individually, or starting with some general reading on personal finance and investing. Do not put money into anything you don't understand or anything that looks too good to be true.For Individual Retirement Acounts (IRAs), questions and answers like these should help you out: What is an IRA and how does it work?Hedge Funds: In layman’s terms, what is a hedge fund?The very basic answer for those two are "an IRA is a type of tax-advantaged retirement account" and "a hedge fund is a type of investment vehicle"Generally speaking, it's a good idea to invest first in tax-advantaged accounts like IRAs, 401ks (employer retirement accounts, called 403bs for non-profits), and Health Savings Accounts (HSAs) when applicable. While doing that, you want to consider things like your risk tolerance and appropriate asset allocation (what types of investments you put your money into). A very simple asset allocation could be 80% stocks, 20% bonds, or you could split that up into different classes of stocks and bonds. Risk tolerance is very important for this. If you are the type of person who would sell everything once stocks start falling (like this week, for instance), you want to make sure your investments are relatively low risk. Otherwise, you might fall into the "buy high, sell low" trap.I'm a big proponent of passive investing and would recommend resources like the Bogleheads Wiki for some guidance on how to get started understanding a lot of these terms. After you get some basic financial knowledge, you can put most things on autopilot and do fairly well. You might also want to just stop by your local library and check out a handful of books on investing basics or financial basics to get a good understanding of the general advice out there.