The quality and performance of retirement savings plans offered by employers vary widely from one company to another. Even within the same company, workers often have the option to invest in a variety of asset classes. In order to make educated decisions about your retirement savings, you must know how your current 401(k) is performing financially. One way of doing this is to calculate your 401(k)'s annual return. This is an accounting ratio that measures the growth of an investment over time as a percentage.
Look for your 401(k)'s summary annual report. Businesses with a 401(k) plan are required to send their employees a summary annual report of their 401(k) plan every year.
Write down the current value of your 401(k) investments and the original value of the 401(k) at the beginning of the year.
Deduct the original value of your 401(k) from its current value. Divide the result by the original value and multiply by 100. This is your 401(k)'s rate of return. To illustrate, if the current value of your savings were $100,000 and the value at the beginning of the year were $90,000, your calculations would look like this: [($100,000 - $90,000)/$90,000] x 100. In this example, your rate of return would be 11.11 percent.
Items you will need
- 401(k) annual report
- The annual rate of return is only useful when measuring the performance of an investment in the short term. When comparing investments over a longer period of time, it is better to use more sophisticated ratios, such as the geometric rate, which takes into account the effect of rate compounding.
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