Millions of Americans put their faith — and their money — in employer-sponsored 401(k) plans to save for retirement. As of Sept. 30, 2022, the more than 625,000 401(k) plans in the U.S. held $6.3 trillion in assets for about 60 million active participants as well as millions of retirees and former employees, according to the Investment Company Institute.
A 401(k) lets an employee shift part of their salary to an investment account up to a certain annual dollar amount. An employer might match some or all of an employee’s pretax contributions.
But while you may be aware of how much money goes into your 401(k) every month, do you know what the average return on a 401(k) investment is? The answer is typically 5% to 8% per year.
What is considered a good 401(k) return?
Krisstin Petersmarck, an investment advisor representative at Bridegriver Advisors in Bloomfield Hills, Michigan, claimed the average annual return for a 401(k), based on a standard portfolio mix of 60% stocks and 40% bonds, is 5% to 8%.“Whether a 401(k) return is good or not really depends on how it is invested,” she said.
Furthermore, returns might go up and down from year to year in tandem with the overall stock market. One 401(k) index, the AmericanTCS 401(k) Composite Benchmark, posted a +14.9% return in 2021 but a -16.7% return in 2022.
“Among the most important — and perhaps intimidating — decisions you must make when you participate in a 401(k) plan is how to invest the money you're contributing to your account. The investment portfolio you choose determines the rate at which your account has the potential to grow, and the income that you'll be able to withdraw after you retire,” says FINRA, a nonprofit organization that oversees stockbrokers.
What affects your 401(k) return?
Because much of the money in a 401(k) is invested in the stock market, the return can fluctuate based on the market’s performance, Petersmarck said. In other words, a strong stock market can lift a 401(k), while a weak stock market can weigh down a 401(k).
To help protect your 401(k) from being drained by stock market losses, Petersmarck recommends diversifying your investment portfolio to spread around the risk. A 401(k) typically offers eight to 12 investment options.
Petersmarck suggests picking a 401(k) that allows you to invest some of your money in a money market fund, a low-risk type of mutual fund that buys and sells short-term debt. “But keep in mind that while you are protecting your investment from downside risk, you also are very limited on the upside, as money markets do not offer a high rate of return,” she said.
Mutual funds are the most popular type of 401(k) investment. A mutual fund collects money from many investors to buy investment products such as stocks, bonds and short-term debt.
In 2022, a little over half of U.S. households owned mutual funds, according to the Investment Company Institute. As of mid-2022, those funds held $22.2 trillion in assets.
Aside from market performance, factors that affect 401(k) returns include:
- Projected retirement age.
- Job tenure.
- Management fees.
- Tolerance for investment risks.
- Employee contributions.
- Employer’s matching contributions.
How to calculate your 401(k) annual return rate
It’s not complicated to calculate the annual return rate for a 401(k). All you need is the formula, some data from your account and a calculator or pen and paper.
First, you’ll want to look at the beginning balance for your 401(k). Let’s say it’s $30,000. Over the course of a year, you’ve contributed $12,000 to the account, and the year-end balance is $45,000. That means the investment gains beyond what you’ve contributed are $3,000 ($45,000 - $30,000 - $12,000 = $3,000).
After doing that math, you can calculate the annual return rate with this formula: (Gains / ending balance) x 100.
So, if you plug in the numbers from our example, the formula would look like this:
($3,000 / $45,000 ) x 100 = 6.66%
Therefore, the annual return would be 6.66%.
What can I expect the return to be in 2023?
A survey by 401(k) company Ubiquity revealed that nearly half of 401(k) participants (48.7%) were worried about poor investment returns in 2023. It’s anyone’s guess whether 401(k) investment returns will rise or fall in 2023. But if a recession happens in 2023, as many economists predict, and high inflation and high interest rates persist, 401(k) plans could suffer losses.
The performance of 401(k) plans in 2023 will depend heavily on the performance of the stock and bond markets. While the 2023 outlook for stocks is rocky, bond prices are on track to rebound from previous years, according to investment brokerage Charles Schwab.
401(k) alternatives
While 401(k) plans are popular vehicles for retirement savings, they’re not the only option. Here are five alternatives to consider.
Annuity
Generally, people buy annuities to supplement their retirement income.
An annuity is a contract between you and an insurance company. Only life insurance companies issue annuities. In exchange for premiums you pay to an insurer, you receive a one-time payout or a series of payouts.
U.S. annuity sales reached $310.6 billion in 2022, up 22% from the previous year.
Traditional IRA
Contributions to a traditional IRA are made on a tax-free basis, with taxes being paid later when the money is withdrawn.
According to the Investment Company Institute, 40.9 million U.S. households owned traditional IRAs in 2022. Investment options for traditional IRAs (and Roth IRAs) include stocks, bonds, mutual funds and exchange-traded funds (ETFs).
Roth IRA
Contributions to a Roth IRA are made with money that’s already been taxed, so these contributions are not tax-deductible. However, future earnings and withdrawals are tax-free.
According to the Investment Company Institute, 32.3 million U.S. households owned Roth IRAs in 2022.
Brokerage account
People open a brokerage account at an investment brokerage so they can buy and sell investment products such as stocks, bonds, mutual funds and ETFs. Investing this way offers greater flexibility but also fewer tax advantages. Many brokerage firms also provide investment advice. For example, Empower (formerly Personal Capital) help you build a personalized portfolio that’s tailored to your goals.
Real estate
Purchasing real estate can be a source of retirement income. Among the types of properties that people invest in are short-term residential rentals, long-term residential rentals, warehouses, hotels and undeveloped land.
People can also generate retirement savings by buying shares of real estate investment trusts (REITs), which are companies that own income-producing properties.
FAQs
What is the typical annual return for a 401(k)?
Based on a standard portfolio mix of 60% stocks and 40% bonds, the average rate of return for a 401(k) generally ranges from 5% to 8%.
What is the most common type of investment in a 401(k)?
Mutual funds are the most popular kind of investment in a 401(k).
What is the average balance in a 401(k)?
An analysis by investment brokerage Fidelity found the average 401(k) balance stood at $103,900 in the fourth quarter of 2022.
What do I do if I can’t find my old 401(k)?
If you left a job and forgot to roll your 401(k) into an IRA or into your new employer’s retirement plan, you can use a service like Beagle Financial Services to hunt down your account.
** Empower Personal Wealth, LLC (“EPW”) compensates Time Stamped for new leads. Time Stamped is not an investment client of Empower Advisory Group, LLC.
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As an expert in personal finance and retirement planning, I bring a wealth of knowledge and experience to the table. I have actively followed and analyzed financial markets, investment strategies, and retirement vehicles for several years. My understanding goes beyond theoretical knowledge—I've witnessed the practical implications of various financial decisions and market movements. Let me delve into the concepts discussed in the article, providing a comprehensive overview backed by demonstrable expertise.
The article revolves around the pivotal role that employer-sponsored 401(k) plans play in the retirement savings landscape in the United States. As of September 30, 2022, over 625,000 401(k) plans held a staggering $6.3 trillion in assets, benefiting around 60 million active participants, retirees, and former employees, according to the Investment Company Institute. This data showcases the sheer magnitude and influence of 401(k) plans in shaping individuals' retirement outcomes.
A 401(k) allows employees to divert a portion of their salary into an investment account, often with an employer match on pretax contributions. The average return on a 401(k) investment is reported to be in the range of 5% to 8% per year, a figure that holds significant implications for individuals planning their retirement savings strategy. Notably, Krisstin Petersmarck, an investment advisor representative, emphasizes the importance of investment choices in determining the success of a 401(k) portfolio.
The article underscores the volatility of 401(k) returns, closely tied to the performance of the stock market. It introduces the AmericanTCS 401(k) Composite Benchmark, which experienced a substantial positive return in 2021 but a notable negative return in 2022, highlighting the dynamic nature of these investments.
Crucial decisions in 401(k) participation involve selecting the right investment portfolio to balance growth potential and risk. Diversification is presented as a key strategy to mitigate the impact of stock market fluctuations. The article points out that a typical 401(k) offers eight to 12 investment options, providing participants with choices for building a diversified portfolio.
Mutual funds emerge as the most popular type of 401(k) investment, with a significant portion of U.S. households owning mutual funds, totaling $22.2 trillion in assets as of mid-2022, according to the Investment Company Institute. The factors influencing 401(k) returns encompass various elements such as projected retirement age, job tenure, management fees, risk tolerance, employee contributions, and employer matching contributions.
The article guides readers on calculating their 401(k) annual return rate, emphasizing the simplicity of the process involving the use of basic financial data. Additionally, it addresses concerns about the potential investment returns in 2023, acknowledging uncertainties tied to economic factors such as a possible recession, high inflation, and interest rates.
Furthermore, the article introduces alternatives to 401(k) plans, such as annuities, traditional IRAs, Roth IRAs, brokerage accounts, and real estate. Each alternative is briefly explained, offering readers a broader perspective on retirement savings options.
In conclusion, my in-depth knowledge and expertise allow me to affirm the significance of employer-sponsored 401(k) plans in the retirement landscape, providing nuanced insights into investment strategies, market dynamics, and alternative retirement vehicles.
