What Is the Average Rate of Return on a 401(k)? (2024)

Even in times of economic uncertainty or an impending recession, it’s important not to let up on your retirement savings goals. For many people, a 401(k) is at the heart of their retirement strategy. You can contribute up to $22,500 per year in pretax earnings — and up to $30,000 if you’re age 50 or older.

How quickly can that money grow if you make consistent contributions each year that you are in the workforce? To find out, you’ll need to know the average rate of return on a 401(k).

What Is the Average 401(k) Return Over 20 Years?

The average rate of return on a 401(k) ranges from 5% to 8%. However, the typical 401(k) holds a mix of roughly 60% stocks and 40% bonds, so it’s also subject to the whims of the larger marketplace. If the stock market is down, your 401(k) investment may also be showing smaller returns.

For instance, last year the average 401(k) dropped by 20%. However, since a 401(k) offers a well-balanced portfolio with a mix of stocks and bonds, the loss of a down stock market won’t hit as hard as it would if you held all your investments in the S&P 500. When stocks fall, bond yields tend to rise, which can help balance your 401(k) returns.

Since a 401(k) is a long-term investment, you don’t have to worry about downturns as long as you keep your money in your account. Historically, by the time you plan to retire, your 401(k) should have made you roughly 5% to 8% in returns.

Factors That Affect Your 401(k) Returns

The returns you’ll see on your 401(k) balance depend on more than just the stock market’s performance. Some other factors include:

• Fees: Depending on your employer’s plan, you could pay anywhere from 0.2% of your total investment up to 5%. Experts at Yale University called anything above 1% in fees a “rip-off.”
• Asset allocation: Different 401(k) plans have different risk/reward structures. Target-date funds, for example, start with higher risk and higher reward investments and grow more conservative as you approach the year you plan to retire.
• Contributions: The more money you put in, the more you’re likely to have upon withdrawal. Make sure you take advantage of your employer’s matching program, if it’s available.

How Much Do Americans Have Saved in Their 401(k)?

Based on a recent Vanguard survey reported by GOBankingRates, the average 401(k) balance for people 65 and up is just $279,997, with the median balance at $87,725. That means roughly half the people have less than $87,725, and roughly half have more than that saved. Those numbers are up from 2021, according to figures from The Empower Institute.

Fidelity Investments recommends you have roughly 10 times your salary saved in a 401(k) by age 67. So it’s clear that many people are behind in their retirement savings, at least if they have the bulk of that savings in a 401(k).

401(k) Returns vs. S&P 500 Investments

Between 2002 and 2021, the U.S. stock market as a whole showed an average return of 8.91%. This is somewhat higher than the average rate of return for a 401(k) today.

If you look at — a mix of 500 of the largest companies traded in the U.S. — the rate of return rises to 10.326% between February 2003 and February 2023. That’s significantly higher than the average return for a 401(k) right now.

In fact, Warren Buffett recommends consistently buying an S&P low-cost index fund whenever you can, especially when the market is down. “Keep buying through thick and thin, and especially through thin,”Buffett famously said.

That doesn’t mean you should neglect your 401(k), however, especially if your employer matches funds.

Advantages of a 401(k)

A 401(k) may not offer the best return compared to the S&P 500, but it provides several advantages, especially for people who don’t want to spend a lot of time managing their retirement investments.

Pre-Tax Contributions

First of all, contributions to your 401(k) are made pre-tax, which means you can reduce your tax liability in any given year. Of course, you’ll need to pay taxes when you withdraw the funds, but you may be in a lower tax bracket at that point or have fewer expenses as a retiree.

Easy To Open and Manage

A 401(k) is easy to open, especially if your company’s benefits department can help you. And you don’t have to worry much about managing it — that’s mostly done through the company’s plan, though you may have some choices to make.

Employer Matching

If your employer matches funds, it makes sense to max out your 401(k) to take advantage of the free money. You won’t get that benefit with stocks, bonds, ETFs or other investments you make privately.

Borrowing Against Your 401(k)

Finally, if you face an emergency, you can borrow against your 401(k) and pay it back to yourself with interest over time.

This isn’t always the wisest financial choice, according to experts. But if you have years until retirement, a 401(k) loan can help you pay off high-interest debt, fund home improvements or buy a house. There are no taxes and penalties.

You should only take this step if you plan to stay at your current job long enough to pay off the loan, however, or you could owe a lump-sum payment if you leave your job.

Maximizing Your 401(k)

If your 401(k) isn’t providing the returns you’d like to see, you should speak to your fund manager to see if you can reallocate your assets.

You can also speak to a financial advisor and see if you can find a better return with a different plan. There’s no rule saying you have to invest in your employer-sponsored 401(k). However, if your employer matches funds, you don’t want to leave that money on the table. Consider maxing out your 401(k) to claim that free money from your employer and taking any extra cash and investing in the stock market, ETFs or mutual funds to ramp up your retirement savings.

A financial advisor can help you determine your risk tolerance and the best places to invest your money right now. You can also use GOBankingRates’ Retirement Calculator to see if you should ramp up your 401(k) savings or take a more aggressive approach to investing.