Investing in a 401(k) plan can be invaluable in saving for retirement. To make sure that you're on track to achieve the results you want when you retire, it's important to look at your performance periodically. Calculating your average annual return is a good way to see how you're doing compared to major stock market indexes and other key investing benchmarks. Below, we'll take you through a step-by-step process to calculate and assess your 401(k) performance.
Measuring true growth
The first step to coming up with an average annual return is to figure your total return. That calculation would be simple, except that you'll typically make regular additional contributions to your 401(k) account over time. You therefore can't simply take the ending balance and divide it by the starting balance.
Instead, take the ending balance and subtract out any contributions you made since the beginning of the period. Then divide by the starting balance. Subtract 1 and multiply the result by 100, and that will tell you the percentage total return.
Take your time
If you've measured a one-year period, then you're done: the answer you got above is your annual return. But if you've used a period other than a year, there's some more math involved.
For periods other than a year, you'll need to take the number you got by dividing the adjusted ending balance by the starting balance and then use an exponential calculation. For a two-year period, you'll need to take the square root, which on a calculator involves using the power key to raise the number to the 1/2 power. For a three-year period, you'd raise it to the 1/3 power, and so on.
Then, take the final answer, subtract 1, and multiply the result by 100. What's left is the average annual return.
Keep in mind that the longer the period of time you're measuring and the more added contributions you've made during the period, the less accurate this simple calculation will be. A more sophisticated calculation would use a time-weighted account balance to calculate the percentage rather than the starting balance. For most situations, however, both methods will produce results that are reasonably close to each other and that reflect your performance well.
The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involved in helping the world invest, better! If you see any issues with this page, please email us atknowledgecenter@fool.com. Thanks -- and Fool on!
The article How to Calculate a 401(k) Annual Return originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
