What Is The Average Rate Of Return On A 401k?

A 401k is a key part of many retirement portfolios. It offers tax advantages, employer contributions, and a diversified investment mix that can grow over time through compounding—all with less day-to-day management. Below, we break down the average returns you can expect and ways to get the most out of your 401k.

Average 401k Return Explained

Over time, a well-diversified 401k—typically made up of stocks and bonds—returns about 5% to 8% annually after inflation, according to SmartAsset.

If your portfolio leans more heavily into stocks, your return may be closer to the 10% historical average annual return of the S&P 500 (before inflation). In fact, Nerdwallet reports that the average 401k return in 2024 was 9.7%.

Factors That Affect 401k Returns

Several variables impact your actual returns. Here’s what to keep in mind:

Asset Allocation
- More stocks = potentially higher growth, but more risk.
- More bonds = lower risk, but lower growth.
Market Conditions
- Bull markets boost returns. Bear markets can cause temporary declines.
Fees
- Investment and administrative fees reduce your net return.
Contribution Timing
- Regular contributions take advantage of dollar-cost averaging, helping to reduce timing risk.
Employer Match
- Employer contributions significantly boost your account’s overall performance.

10 Ways To Maximize Your 401k Returns

Here are some actionable tips for maximizing your 401k returns:

1. Maximize Contributions

Meet the Match: Always contribute enough to get the full employer match.
Hit the Max: For 2025, the IRS limit for employee contributions is $23,500 (or $31,000 if you’re over 50 due to catch-up contributions).

2. Diversify Your Investments

Balance your portfolio across stocks, bonds, and other options.
Consider target-date or index funds for automatic, low-cost diversification.

3. Regularly Rebalance Your Portfolio

Over time, your asset mix can drift. Rebalancing keeps your risk level in check.
Use auto-rebalancing features if your plan offers them.

4. Minimize Fees

Opt for low-cost index funds or ETFs.
Avoid excessive trading, which can lead to extra fees and missed growth.

5. Take Advantage of Tax Benefits

Traditional 401k: Lowers your taxable income now.
Roth 401k: Offers tax-free withdrawals in retirement.

6. Increase Contributions Over Time

Use auto-escalation or increase contributions with each raise.
Even a 1–2% boost each year adds up over time.

7. Invest According to Your Age

Younger Savers: Favor stocks for long-term growth.
Near Retirement: Shift toward bonds or cash to protect your savings.

8. Avoid Early Withdrawals

Loans and early withdrawals reduce long-term gains and may incur penalties.
Keep an emergency fund outside of your 401k to avoid tapping into it.

9. Take Full Advantage of Catch-Up Contributions

If you’re 50 or older, take advantage of higher contribution limits to boost savings quickly.

10. Stay Informed and Proactive

Review your plan each year.
Use employer-provided tools and resources.
Stay updated on market trends to make informed decisions.

By focusing on long-term growth, smart planning, and steady contributions, your 401k can become a powerful tool for building retirement security.

Need help optimizing your retirement savings? Contact Zynergy Retirement today.