401k Plans

[Soul_Patch]

I dont know what would be the better forum to post this in, but i figure this gets the most traffic so ill put it here.

What is an average rate of return on a 401k plan? What would be considered bad or good?

I am asking because im fairly new to this, and trying to balance myself out and make sure im doing the right thing...

You may ask...Soul_Patch, why dont you talk to a real financial advisor?? Sure i could do that, or i could throw the question out to a broad audience who seems on average, fairly smart, and see where i stick in the pot...

So right now i am contributing 8% of my income to my 401k, my employer match is pathetic, but thats another story...75% of my contribution go's to growth funds (i could list them all but that would be too much i would guess) and 25% of my contributions go to "Aggresive Growth" Is this risky? should i move a portion out to something more stable?

My average rate of return across the board is 3.5% Seems low to me, but i dont really know how that compares to others...what do you think?


Thanks ahead of time.

[Holt's Cat]

How old are you (early, mid or late; 20s, 30s, 40s...etc)?

[Soul_Patch]

just turned 30

[Holt's Cat]

In the near term having your entire 401k portfolio in growth equity funds will probably lead to relatively low returns, if not negative. The thing is, you're young, so you should be fine in the long run. If you are going to be active with managing your allocations you might consider putting between 25 and 35% in an international equity fund or at least some kind of global fund for the next year. Also you might look at an allocation of 15 to 20% in a large-cap equity fund and perhaps 15% in a mid to large cap value fund. But long-term having significant exposure to growth funds isn't a bad idea.

[Extra Stout]

just turned 30
You should have as volatile a portfolio as possible at your age. Cost averaging over time is your friend.

[Thunder Dan]

It depends what you put your money into, like what kind of fund. I'm 24, and have been using a Roth IRA in a Mutual Fund that relfects an Index fund (it actually is a little more risky than an average index fund), the ARR for the overall market is 10% a year, some years it's lower, some higher..but overall 10%. If it's in an index fund you can expect an average 10% over seveal years.

My work has our 401k in a very conservative fund that only returns about 7%-10% a year. I only put in 4% (enough for the match) and focus mostly on my Roth because I am young an can roll with the ups and downs of the market. There is no sense in me putting a ton into a 401k that is so conservative when I won't retire for another 30 something years.


I would put your money into something moderate or semi risky, but definitly diversify. You probably are like me and won't retire for awhile, so it's not important to make your money now, just focus on the number of shares you can buy while you are young

[Ed Helicopter Jones]

The S&P 500 has had an average rate of return of 11.17% over the last 20 years.

Aim to be average (diversify) and you'll probably come close to this over time. :tu

[Soul_Patch]

Thanks. Great information so far.

that 3.5% return was quarterly, so it may not reflect yearly. To be honest since i started contributing, about 11 months ago, i havent looked at this. i wanted to just leave it alone and forget about it.

Today was the first time i glanced at it, and i just had those questions.

Overall i guess it looks like i may be doing most things right, which is good to hear.

is 8% contribution pretty average? Should it be ideally more or less?

Thanks again.

[Thunder Dan]

Thanks. Great information so far.

that 3.5% return was quarterly, so it may not reflect yearly. To be honest since i started contributing, about 11 months ago, i havent looked at this. i wanted to just leave it alone and forget about it.

Today was the first time i glanced at it, and i just had those questions.

Overall i guess it looks like i may be doing most things right, which is good to hear.

is 8% contribution pretty average? Should it be ideally more or less?

Thanks again.

Sadly, I think average for your age is 0%. I forget the stat, but it's something like 1 out of 3 people ages 21-30 contribute to a retirement account. Which is really scary considering that generation spends a ton of money, most won't get pensions, and none of us will see social security. We think this A.R.M. crisis is bad, this is tiny compared to what we will get when social security runs out and people find that they have no money to live on....talk about a dark day. We will be alright though!


also, you should check out Wesabe.com. It's an awesome place where you can track your spending, but it's a great place to ask financial questions like this. There are tons of users that you can share ideas with. There are alot of smart people on there to help you with your savings goals, and it's all free.

[CubanMustGo]

If you are giving 8% this year, add 1% a year until you are maxed out (or add 2%/yr until then). You will probably not miss such a small amount and at your age it WILL add up over time.

[Shelly]

My profit sharing is set up in stocks and is very diversified. I can buy and sell what I want, but I can't contribute to it. And because my dad is my employer, he's the only on that can add to it but because I'm family, he's not allowed to add as much to it as non-family employees.

And while it's bounced back, I sure as hell couldn't retire on it.

[Aggie Hoopsfan]

Diversify like hell, especially with the market being as volatile as it is right now.

Be sure and take the expenses for the funds into account, as those will eat at your return if they are large.

International is good to get into, but taking a beating so far this year. Of course they always say when the market is going into the tank it's the perfect time to buy more on the cheap...

Don't panic about short term losses, as someone already pointed out you need to start seeing things from the 50,000 feet perspective, which is that over time the market has had a double figure return on your investment, if you're in it long enough.

[exstatic]

The S&P 500 has had an average rate of return of 11.17% over the last 20 years.

Aim to be average (diversify) and you'll probably come close to this over time. :tu
Or, you could just buy an S&P index fund. :lol

Seriously, great job starting up your 401(k). I spend time talking to my nieces and nephews about saving, because I know damn well if their parents say anything, it'll go in one ear and out the other.

Good advice so far in this thread (besides index funds :lol):
Diversify
Keep the expense ratio low. It'll be on the fund prospectus.
Roll part or all of your annual raise in each year to bump up your saving %.

A good resource on the web is Walter Updegrave's column in the personal finance section of CNN Money's website. He has a ton of advice and various tidbits about retirement, snake oil salesman financial "advisors", diversification, etc. Go through his archive, and you won't go wrong.

[spurster]

You should also look at the adminstrative costs on your fund. What percentage is it costing you to buy and manage your funds?

You want no-load funds:

http://www.fool.com/school/mutualfunds/costs/loads.htm

with a low expense ratio (< 1%):

http://www.fool.com/school/mutualfunds/costs/ratios.htm

[Bandit2981]

My best advice for you is to use broad market index funds, or basically a fund that covers the whole market (like the Wilshire 5000 for instance). These types of funds historically have provided the highest return on your money over the long haul. You should only contribute the company match to your 401(k), and put the rest in a Roth IRA. The match is good because it's basically free money from your employer, even if it's only something small like 4%, and if you are already contributing 8% total, the other 4% can go to your Roth. A 401(k) sucks in a way because it is using pre-tax money, so when it's time to withdraw your 401 savings a large chunk will be taken out based on your income level taxes at that time. A Roth on the other hand is using post-tax money (like after you deposit your paycheck) so when you withdraw from it you get to keep it all with no taxes taken out and it's a better deal. 85% in a broad market fund, 15% in a foreign fund should net you some good returns over 30 or so years. 8% return per year is about average.

[Clandestino]

For the majority of folks use either an asset allocation fund or a target retirement date fund. The farther out it says the more aggressive. Pretty hard to mess up. Set it and forget about it.

[exstatic]

My best advice for you is to use broad market index funds, or basically a fund that covers the whole market (like the Wilshire 5000 for instance). These types of funds historically have provided the highest return on your money over the long haul. You should only contribute the company match to your 401(k), and put the rest in a Roth IRA. The match is good because it's basically free money from your employer, even if it's only something small like 4%, and if you are already contributing 8% total, the other 4% can go to your Roth. A 401(k) sucks in a way because it is using pre-tax money, so when it's time to withdraw your 401 savings a large chunk will be taken out based on your income level taxes at that time. A Roth on the other hand is using post-tax money (like after you deposit your paycheck) so when you withdraw from it you get to keep it all with no taxes taken out and it's a better deal. 85% in a broad market fund, 15% in a foreign fund should net you some good returns over 30 or so years. 8% return per year is about average.
Both 401(k)s and Roths have their strengths and weaknesses. A 401(k) makes it easier to save for a youngster, though, because it's pre-tax. A hundred bucks goes into your account, but your paycheck is only $75-80 light. When you get more disposable income, then you fund the Roth. Updegrave's position is that you should fund your 401(k) up to the match limit, then fund a Roth, then go back and contribute more or MAX out your 401(k). I'm at 10% on my 401(k) and full Roth contributions right now. In 2009 my plastic debt will be history, and I'll MAX out the 401(k).

[visitor]

Just buy gold bars

[BonnerDynasty]

8% is avg. If you can at least get that you are good to go. Compound interest over 30+ years = DOMINATION.

I've got some international mutual funds in my rothIRA and they have KILLED the competition the last year or so. I'm aggressive as hell right now because I am in it for the long-term and only 21.

[ShoogarBear]

My best advice for you is to use broad market index funds, or basically a fund that covers the whole market (like the Wilshire 5000 for instance). I'm agree with this. My philosophy is that unless I'm willing to make investing a full-time job, there's no way I'm going to compete with the guys who are.

This is a good starter book to read:

http://ecx.images-amazon.com/images/I/51EBMCQS9XL._BO2,204,203,200_PIsitb-dp-500-arrow,TopRight,45,-64_OU01_AA240_SH20_.jpg

Even if you end up not agreeing with Bogle on some things, it's a good way to start thinking about what you goals should be.

[TDMVPDPOY]

ARR is about 10%

long term it should be 10% return on investment, but 10-30% growth is realistic during a peak economy....

dont have everything into one stock, diversify like many have said...
put 30-40% into share portfolio
20-30% into banks if you wanna play it safe if ur share folio is takn a pounding
20-30% unit trust or some shit...

if you have multiple 401k accounts from mmany employers, roll-over the accounts into one account, cause you dont wanna end up payin admin fees for each account.

[L.I.T]

I wouldn't worry too much about short run market volatility, nor about too much diversification. You're looking at an actual investment horizon of around thirty-five years and a more practical look at around five to ten years. Rebalancing can always occur every year or two years. Analysis of the portfolio can take place on a bi-annual or yearly basis.

At your age and likely relative income you are able to take more risks than lets say a fifty year old. At around fifty (depending on overall wealth) portfolio make-up would already be in the 50/50 or even more weighted towards bonds and money market investments (stocks to bonds or 'secure' investments); at 30 you can almost go with a 100% stock portfolio.

Tracker index funds are a solid, low-risk long-term equity play. But, you can probably target investments in some sector funds (agri-business, water, power, green technology, commodities, utilities etc.), these are long-term high-yielding riskier plays that have great upside in the five year range. Really, though, it comes down to what you feel most comfortable investing in. A good rule of thumb is, don't invest in a sector or stock that you don't understand. Also, Buffet has made his billions not in investing in short-term penny stocks, but with a thirty-year horizon. Always keep in mind what your end goal and targets are and proceed from there.

They key really is that equity plays over medium to long term are typically up. Check the Morningstar ratings on funds, go with solid, reputable fund managers and don't get too shocked by short-run volatility. Diversify in terms of country and maybe some sector risk, but don't worry too much about balancing your equities and bond investments at this juncture; ten years down the line, possibly.

Of course I say this with the understanding that your investible funds are funds that aren't needed. Your investing them with the understanding that you won't be touching them for thirty-five years.

Good luck and welcome to the tangled world of investing.