When you put money into your 401k plan, you want to make sure it is performing well. One way to measure your 401k 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 401k plan to the performance of other available investments.
1. Divide your 401k plan ending account balance by the initial value of your 401k 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.
2. 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.
3. Raise the Step 1 answer to the power of Step 2 with a calculator. "Power" means to use exponents. On a calculator, you can compute the power by typing in the Step 1 result, pressing the exponent key, typing in the Step 2 result and pushed "Enter." In this example, raise 1.013888888888889 to the 4th power to get 1.056723717.
4. 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 401k plan, projected from your quarterly gain, equals 0.056723717, or about 5.67 percent.
- Past performance of your 401k plan does not guarantee future results, especially if you invest in stocks.
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