Many people save and invest in a 401(k) plan with the hope that they can accumulate enough to eventually pay for retirement. In addition to your savings rate and employer contributions, your 401(k) investment returns have a big impact on your final account balance. The average 401(k) return can vary, depending on factors such as how consistently you save and the number of years you have until retirement. The amount of risk you’re comfortable taking will also play a role.
Use the following guidelines as you estimate the return you might get on your 401(k) plan:
— 401(k) basics.
— How much money will a 401(k) make over 20 years?
— How much money does the average American have in their 401(k)?
— 401(k) fees.
[READ: How Much Should You Contribute to a 401(k)?]
401(k) Basics
A 401(k) plan is available through employers and is designed to be a retirement account.
Employees can contribute to the plan up to a set limit every year. They can also opt to invest a certain amount every month and deduct it from their paycheck. Some workplaces also offer matching contributions for employees up to a certain amount.
How Much Money Will a 401(k) Make Over 20 Years?
The amount you place into a 401(k) and the investments within the plan will impact your level of earnings. “Consider historical averages, typically ranging from 6% to 8% annual returns,” says Jared Weitz, CEO and founder of United Capital Source Inc. in Garden City, New York. “The power of compound interest means your money can potentially double every 10 years with a 7% return.”
Online calculators can help you estimate how much your 401(k) will earn over 20 years. You can put in the current balance, how much you contribute and the estimated annual rate of return, along with any employer matches. Some 401(k) calculators to try include:
— AARP’s 401(k) calculator.
— Vanguard’s retirement income calculator.
— The Annuity Expert’s 401(k) calculator.
Suppose you earn $50,000 annually and set aside 10% of your wages each year. Your salary increases by 10% annually, and you are currently 45 years old with a 401(k) balance of $1,000. With an annual rate of return of 7%, you could expect to have $497,444 by the time you retire at 65.
“Assuming your 401(k) balance is currently $100,000, it will grow to $320,713 if the constant annual rate of return is 6% and nothing is added to the account over 20 years,” says Mark Charnet, founder and CEO of American Prosperity Group in Sparta, New Jersey. “If you were to add just $100 per month at the same 6% return, it would add $46,204 to that figure, making the total value $366,917.” However, that amount might be too low to cover your retirement expenses, especially after accounting for inflation over the coming decades.
What Is the Average 401(k) Contribution?
The rate of 401(k) savings among Americans during the second quarter of 2023 was 13.9%, according to data from Fidelity. This reflects a combination of employee and employer contributions.
“When deciding how much to contribute, aim for 10% to 15% of your income and maximize employer matching if available,” Weitz says. If you’re not sure whether your workplace offers matching contributions, reach out to your human resources department. You might find there is a match available to help you boost your savings every year.
Building the Right Portfolio
While you may want some of your funds in a 401(k) plan, you may decide to keep other savings in different accounts. You might look into IRAs, stocks, bonds or real estate investments. As you build a portfolio, talk to a financial advisor about your risk tolerance and retirement timeline. “Adjust for inflation when calculating future values, and remember to regularly monitor and adjust your contributions and investments as your goals evolve,” Weitz says.
How Much Money Does the Average American Have in Their 401(k)?
During the second quarter of 2023, the average 401(k) balance was $112,400, according to data from Fidelity. This reflected an increase from the second quarter of 2022 among all generations. Gen Z workers had the highest balance increase, with 66% more in their accounts compared with the year before.
Maximum Contribution Limit
In 2023, you’ll be able to put up to $22,500 in your 401(k) plan. If you’re 50 or older, that limit increases to $30,000. You could calculate how much to set aside each month to reach the amount.
How Much Should I Contribute to My 401(k)?
A good starting point to determine a savings goal is to review your budget. For a 401(k), “at minimum, one should contribute the amount needed to earn the maximum employer match,” says Robert Johnson, professor of finance at Heider College of Business at Creighton University. “Contributing the max to your 401(k) also reduces your tax bill.” You might aim to set aside a certain percentage of your income each year and adjust it if your financial situation changes.
[What Is the Average Retirement Savings Balance by Age?]
401(k) Fees
There are several fees attached to your 401(k) plan. These include:
— Investment fees.
— Plan administration fees.
— Individual service fees.
Average 401k Fee Range
The amount you’ll pay in 401(k) fees can depend on your plan provider and the amount in the account. On the low end, your plan could charge less than 1% of the total assets. However, others have higher fees such as 5% or more.
Look up your rate of return and the fees you pay in your 401(k) statements as you evaluate your portfolio and build a long-term savings plan.
More from U.S. News
What Does a $2 Million Annuity Pay Annually?
What Is the Average 401(k) Return? originally appeared on usnews.com
Update 09/21/23: This story was published at an earlier date and has been updated with new information.
