What Is A Good Rate Of Return For Your 401(k)?

Whether you're new to the world of 401(k) plans or are looking to see how your investments stack up, having a general framework for 401(k) return rates can be financially beneficial, not to mention important for your savings goals. For starters, 401(k)s allow employees to move part of their salary into a specific investment account up to a set dollar amount each year. The 2024 401(k) contribution limit for employees, set by the IRS, is $23,000, while with employer contributions, the yearly total caps at $69,000.

A 401(k) account can allow you to plan and save for retirement in a more structured, and hopefully financially beneficial, way than simply leaving your money in your savings account. However, while these accounts can be extremely rewarding in the long term, there are 401(k) mistakes to avoid when taking advantage of them. Also, unlike a savings account or CD that might have a set rate of return, 401(k) return rates can vary significantly depending on a lot of different factors (some of which you have no control over whatsoever). While navigating 401(k)s can feel intimidating, it's important to take control of your money so that you can properly enjoy your eventual retirement. Let's dive into annual return rate goals for 401(k)s, as well as some things to keep in mind when managing yours.

Annual return rates for 401(k)s

The general rule of thumb for a solid average annual return rate on a 401(k) is between 5% and 8%. However, this return rate is based on several factors, from the overall market to maintaining a well- balanced portfolio. As the Financial Industry Regulatory Authority explained to Time, "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."

Other important factors to consider when assessing your current (or goal) rate of return is your own risk tolerance and 401(k) contribution amounts. Depending on your financial capacity to contribute more or less, you could see a significant fluctuation in your return rate. Similarly, more conservation investment choices can lead to a lower return rate than riskier ones. While 5% to 8% can serve as a good guidepost, ensuring you're comfortable with where your 401(k) is at, as well as whether it's on track to hit your personal financial and retirement goals, is the most important consideration. With that in mind, making sure to keep track of things like your management fees and ensuring that you're taking advantage of your employer's matching contributions as much as possible can benefit your overall rate of return.

Other 401(k) things to consider

The likelihood that your 401(k) will consistently produce the same return rate every year is slim. Since the majority of money tied up in 401(k) plans is actually invested in the stock market, returns are bound to fluctuate, given the volatility of the market. For instance, according to data from Bank of America Retirement and Personal Wealth Solutions, the average 401(k) account balance in 2023 (when the S&P closed out the year up nearly 24%) was $86,280, up around 13% versus the end of 2022 ($75,045). This means that ensuring your portfolio is diversified can be the key to minimizing losses and ensuring higher annual gains. A 401(k) typically offers investors between eight to 12 different investment options.

Another popular 401(k) option includes money market and mutual funds. Some choose to invest some of their total contributed money to these types of low-risk funds to protect themselves from loss. However, keep in mind that as low-risk, these types of investments also don't offer a high rate of return. It's also important to note that if you decide not to choose your investment types, then your 401(k) plan might automatically default to a target-date fund. While this can be an easier option in that it requires you to do no additional work, it could end up leaving you with less savings overall due to typically more conservative investments.