Solid, consistent investment gains over the long term are key to a successful retirement when saving with a 401(k) account, along with regular, consistent contributions to the account. While it is not good to look at your account for investment performance over the short term, you should evaluate your retirement investment over longer periods to ensure that you are on track for your retirement goals. Understanding the basics in calculating rate of return is critical to this evaluation.
You can calculate your 401(k) plan's rate of return by comparing its current value to its value at a previously documented point of time. Dividing it current value by the previous value will provide a decimal-formatted representation of your current rate of return.
Calculating Total Contributions
Review your 401(k) statements or your pay statements to see what you have contributed to your 401(k) account. Each week's deduction should be shown clearly on your pay statement, but your periodic statements will show the total contributions for the reported time in a more readable format. Add up all of the contributions for the time period for which you wish to know the rate of return.
Considering the Total Gains
You will find the total gains for your 401(k) account on your periodic statements, or you can often find that information with your account's online access. If you do not have access to the gains from your account separately, you can subtract the sum of your total contributions and the beginning balance for the period you are considering from the balance of the account at the end of that period, which will yield the total gains.
For example, if you contributed $3,000 for the year to your account, with a beginning balance of $5,000, and your ending balance is $8,800, your gain for the year is $800.
Determining Your Rate of Return
The simplest way to calculate and consider a rate of return is to consider the ending balance and how it relates to the gains. In our example above, the total gain is $800, relating to the balance of $8,800. To calculate that as a ratio, divide the amount of the gain by the ending balance and multiply by 100. In this case, the total annual return is 9.09 percent.
Assessing Other Considerations
You can use different mathematical formulas to calculate the return on your 401(k) account considering the effects that your contributions have on the numbers. A $100 contribution made at the beginning of the year has had a longer time to gain in value than the same contribution made at the end of the year.
Most 401(k) statements and online accounts consider these variables when reporting return on investment. In addition, the tax-deferred compounding of a 401(k) account allows other advantages over taxable accounts, and is a consideration in evaluating 401(k) performance.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.