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

401ks are an important part of a retirement portfolio, offering tax advantages, employer contributions, and a diversified mix of stocks and bonds, which can lead to compound growth over time with less direct management. Here is a look at the average rate of return investors can expect from a 401k.

Average 401k Return Explained

Over the long term, 401k plans invested in a diversified mix of assets, typically including stocks and bonds, have historically returned around 5% to 8% annually after adjusting for inflation (SmartAsset).

If heavily invested in stocks, the average return may align closer to the 10% historical average annual return of the S&P 500 before inflation. According to Nerdwallet, the average annual return for 401ks in 2024 was 9.7%.

Factors That Affect 401k Returns

The average rate of return on a 401k varies depending on factors like investment choices, market conditions, and the time frame considered. When thinking about your 401k returns, be sure to consider the following:

Asset Allocation:
- Higher stock allocations may result in higher returns but greater volatility.
- A more conservative mix, with more bonds, may result in lower but steadier returns.
Market Performance:
- Bull and bear markets significantly impact returns, especially in the short term.
Fees:
- Expense ratios and administrative fees can reduce net returns.
Contribution Timing:
- Regular contributions, regardless of market conditions, allow for dollar-cost averaging, which can help mitigate timing risks.
Employer Match:
- Contributions from employers effectively boost returns for the employee.

10 Ways To Maximize Your 401k Returns

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

1. Maximize Contributions

Contribute Enough to Get the Employer Match: Many employers match contributions up to a certain percentage. This is essentially “free money” and should always be maximized.
Aim to Contribute the Maximum Allowed: 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

Mix Asset Classes: Allocate your investments across stocks, bonds, and other options based on your risk tolerance, time horizon, and financial goals.
Include Index or Target-Date Funds: These can provide broad diversification with lower fees.

3. Regularly Rebalance Your Portfolio

Adjust for Market Changes: Over time, your allocation may drift due to market fluctuations. Rebalancing ensures your portfolio stays aligned with your intended risk level.
Consider Automatic Rebalancing: Many 401k plans offer this feature to simplify the process.

4. Minimize Fees

Choose Low-Cost Funds: Expense ratios can eat into your returns over time. Opt for index funds or ETFs with low fees.
Avoid Frequent Trading: High turnover in your account can result in unnecessary fees and missed growth opportunities.

5. Take Advantage of Tax Benefits

Use Pre-Tax Contributions: Contributions lower your taxable income in the current year.
Consider Roth 401k: If offered, Roth 401ks allow tax-free withdrawals in retirement, which can be beneficial depending on your expected tax bracket.

6. Increase Contributions Over Time

Auto-Escalation: Many plans let you automatically increase contributions yearly.
Raise Contributions with Raises: Boost your 401k savings when your salary increases.

7. Invest According to Your Age

Younger Workers: Prioritize stocks for higher growth potential since you have a longer time horizon to weather volatility.
Older Workers: Shift to more conservative investments like bonds or cash equivalents as retirement nears to preserve capital.

8. Avoid Early Withdrawals

Avoid Loans or Withdrawals: Withdrawing early not only incurs penalties and taxes but also misses out on compounded growth.
Use Other Savings for Emergencies: Maintain an emergency fund outside of your 401k.

9. Take Full Advantage of Catch-Up Contributions

Once you turn 50, you’re eligible for higher contribution limits. Use this opportunity to supercharge your retirement savings.

10. Stay Informed and Proactive

Review Your Plan Annually: Assess your investments, contribution rate, and performance.
Leverage Employer Resources: Many plans offer financial advisors or tools to help optimize your strategy.
Stay Educated About the Market: Understanding investment trends can help you make informed decisions.

By following these tips and maintaining a long-term mindset, you can maximize your 401k returns and build a strong foundation for retirement. Have questions about your 401k? Contact Zynergy Retirement today.