But the decisions you make about how you invest have a big impact as well. Of course, this is just an average that financial planners suggest using to estimate returns. However, if you invest a higher percentage in stocks -- as is common for many investors who can afford more risk -- you'll typically earn higher average returns.
Investing conservatively by allocating more to bonds reduces your risk of losing money, but also produces lower returns. Keep in mind, though, that your returns for any given year shouldn't concern you too much. Short-term fluctuations are normal. Long-term results are what matter for any investment. There's also a surefire way to boost the returns on the money you contribute, which is to take full advantage of your employer's k match.
Your k rate of return depends on a number of factors beyond the stock market's performance. Here are five things that affect how much your retirement account earns. The beauty of a k plan is that, thanks to payroll deductions, you're automatically dollar-cost averaging, which means you're investing a fixed amount at regular intervals. This tends to produce the best average returns over time by reducing your investment costs. You'll get the best k rate of return by being consistent and not changing your contributions based on short-term stock market performance.
Your ideal asset allocation depends on your age, your target retirement date, and your overall risk tolerance, which is the amount of risk you can comfortably handle. If you have a long time horizon and high risk tolerance, you'll want to invest heavily in stocks. Investing more in bonds is recommended as your retirement date gets closer , or if you have a low risk tolerance. Investing primarily in stocks usually produces higher average k returns, but it also increases your risk of losing money, particularly in the short term.
However, if you invest too heavily in bonds, particularly at a young age, you may not achieve the returns you need to hit your retirement goals. The average k plan offers eight to 12 investment options, and mutual funds are by far the most common. Looking for funds with the lowest expense ratio can boost your returns.
Another common type of mutual fund you'll find in k plans is target-date funds. The easy answer is as much as you can. However, the IRS sets k plan contribution limits each year. It typically makes sense to contribute at least as much as your company k employer match , otherwise you are leaving money on the table.
You can use our k calculator to determine how much you should contribute to your plan in order to generate the amount you need to support the retirement you want. In addition, our Social Security calculator can help you visualize how much you can expect in benefits. But even if you contribute as much as you can into a well diversified portfolio, another factor that can take a major chunk out of even the strongest investment returns is high fees.
A recent report by the Securities and Exchange Commission SEC painted a vivid picture of how large even a seemingly small fee can be. The report indicated that throughout the course of 20 years, a 1.
The k plan is complex machine with plenty of moving parts, and fees could be hiding anywhere. For starters, you can look into your k plan summary annual report. Another crucial document is your fund prospectus. They can include expenses for recordkeeping, legal representation and services offered to employees such as educational seminars. Your fund prospectus should detail the expense ratio. Sales Loads: Also called transaction fees, these are expenses incurred when the fund manager buys or sells shares in your fund.
There are two basic types of loads. Front-end loads are fees you pay when you buy shares of a fund and they come out of the initial investment. Back-end loads are charged when you sell shares after a certain amount of time.
Those variables make it hard to land on an average k return, but Vanguard gives us a general snapshot based on the five years ending December Thanks to both strong stock market returns and plan contributions, the average annual return for those enrolled all five years was One-third believed they paid no fees at all. Your plan is required to send you a quarterly fee disclosure statement.
Then contribute any additional retirement savings to an IRA, where you have much more control over costs and investment choices. Get your voyeur on with our breakdown of the average k balance by age. The Roth k is a mashup of a k and a Roth IRA, an individual retirement account you fund with post-tax dollars in exchange for tax-free investment growth and withdrawals in retirement.
All of this k gawking is only worthwhile if it inspires you to look more closely at your own retirement savings. See how to choose between an IRA vs. Average k match: 4.
Number of investment choices: 8 to
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