When you put money into your 401(k) plan, you want to make sure it is performing well. One way to measure your 401(k) plan's performance is to calculate the compound annual growth rate, which measures your average annual return. Using the average annual return as a percentage allows you to see how much you are earning each year as a percentage of the amount you started with. You can also compare the performance with your 401(k) plan to the performance of other available investments. Remember that past performance of your 401(k) plan does not guarantee future results, especially if you invest in stocks.
In order to calculate your 401(k) annual return, you can use a series of simple mathematical equations which isolate the amount of growth sustained and place it within the perspective of the given timeframe.
Divide Your Balances
Look at your account statement, or your personal records. Divide your 401(k) plan ending account balance by the initial value of your 401(k) plan. For example, if you want to calculate the annual rate of return when your account went up from $18,000 to $18,250 in one quarter, divide $18,250 by $18,000 to get 1.013888888888889.
Enter the Number of Periods
Divide 1 by the number of years, or parts of years, over which the the growth or decline occurred. In this example, since the gain occurred over 1/4 of a year, divide 1 by 1/4 to get 4.
Use Valid Exponents
Take the ratio of your ending balance divided by your opening balance. Raise this figure to the power derived in the "number of periods" calculation. "Power" means to use exponents. On a calculator, you can compute the power by typing in the original ratio result, pressing the exponent key, typing in the "number of periods" result and pushing "Enter." In this example, take 1.013888888888889, the ratio originally calculated, and raise it to the 4th power, which is the "number of periods" calculation. The result is 1.056723717.
Subtract One Always
Subtract 1 to find the average annual rate of return. In this example, subtract 1 from 1.056723717 to find your average annual return on your 401(k) plan, projected from your quarterly gain. One minus 1.056723717 equals 0.056723717. Multiplied by 100, you arrive at your annual gain, about 5.67 percent.
Get Professional Help
Real-life 401(k) calculations are made infinitely harder by the fact that contributions are typically made monthly. This makes cash flows uneven and complicates the calculation. If you take out a loan or vary your rate of contribution, this can also muddle the calculation. For this reason, most 401(k) providers will run performance calculations on your behalf.
- Past performance of your 401k plan does not guarantee future results, especially if you invest in stocks.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."