What is a Good Rate of Return on a 401(k): Understanding the Range of Outcomes

I met my fiancée, soon-to-be-wife, in a bar; however, I almost didn’t. 

We’ll get to investments and the question of, “What is a good rate of return on a 401(k)” soon, but first, a story about ranges of outcomes and why they matter. 

The story will help bring to life the role luck, chance, and good timing can make not only investing, but in life. 

Range of Outcomes – Meeting My Soon-To-Be-Wife

I frequently think about the time I met my fiancée and how life could have turned out very differently. 

I almost didn’t go out that night. I almost didn’t meet her. 

But, somehow, life aligned. 

Let me take you back to January of 2017. It was a Friday night. 

I was exhausted from working that week. I had no interest in going out. I wanted to lie down on my cheap Ikea couch and watch television. 

I texted one of my best friends, “Hmmm…I am trying my best not to bail on tonight. I woke up at 4:30 a.m.” 

You see, a few weeks before, her boyfriend invited me to a birthday party for his colleague. The plan was to crash my friend’s boyfriend’s colleague’s birthday party. Normal, right?

My friend texted back that she wanted to meet up earlier, before the party, so I would be out already and less tempted to bail. 

My friend’s boyfriend enjoyed putting me in situations with his single friends because I was also single, and there were supposed to be quite a few single people there. Who doesn’t enjoy playing matchmaker? 

The problem was the party didn’t start until 9 or 10 p.m. I’ve never been a night owl. For most of my life, I am in bed between 9 and 10 p.m.

I agreed anyway. My friend and her boyfriend were persistent, and I didn’t want to say no. 

We met for a drink, and I didn’t bail on the birthday party. 

The birthday party was at one of the loudest, “bro-ey” bars in Seattle. Now, let me tell you something about my fiancée and me. She doesn’t really drink, and we are not really the type of people who would normally hang out at these types of bars. She also generally goes to bed very early. It’s rather amazing she was even out that night. Somehow, among the shouting, sticky floors, and many intoxicated people bumping into us, we started a conversation that continued until about midnight. 

The conversation even bar-hopped into a “divey-er”, louder, and stickier floor bar when the birthday party changed venues. 

Let me pause the story for a moment.

My friend, who I met earlier for a drink, had been showing me in public how you can tell if a woman is into a man. She said, “It’s in the eyes.” 

We’d play a game at restaurants, bars, and other public venues where we would identify whether the woman was interested in her date. I was getting better at it, but apparently, it doesn’t work when you are in the moment. 

Back to the story.

After a night of non-stop talking, I couldn’t tell if she was interested. 

Older me would just ask today, but younger me was very unwise and lacked awareness. 

After some prodding from others and after a few hours, I asked if she wanted to grab dinner, which was promptly met with a “No”, confusion on my part, and then a “Raincheck?” 

You see, she needed 7.5 hours of sleep, and if she left then, she could get it. She was not going to sacrifice sleep for a date. 

I asked for her number to schedule the dinner raincheck. 

As soon as she left, about five people in our group said, “FINALLY!”

Apparently, they picked up on the cues much earlier than I did! 

So, what does the story have to do with investing and a good rate of return on a 401(k)? 

Luck, chances, and timing. 

What if I hadn’t gone out that night? What if she hadn’t gone out that night? It was a friend from college she hadn’t seen for a long time. 

What if I hadn’t bumped into her? What if I hadn’t talked about certain topics that interested her? What if the drink I spilled on her as I tried to maintain eye contact and missed setting it down on the table had scared her off? What if I hadn’t asked her to a late-night meal? 

There are many “what ifs” from that night. 

Through some combination of good luck, taking a chance, and the right timing, it worked out. 

What consists of a good rate of return on a 401(k) can also be a combination of good luck, taking a chance, and the right timing. (Fiancée’s note: And in case you were wondering, though I am somewhat amused that he is using our falling in love story to illustrate certain tenants about a 401(k), I do agree it’s a useful comparison).

An average rate of return for stocks is 9-10%, but depending on the time period measured, the returns can be higher or lower. 

Let’s look into good luck, taking a chance, and the right timing more. 

Good Rate of Return on a 401(k): Luck as a Factor

When you were born and when you begin your investing career are two, often linked, factors that can contribute to higher or lower returns. 

For example, I used this calculator to measure the growth of $100 invested in the S&P 500 over different 10-year time periods. I’m using the S&P 500 because there is data going back further than other indices. When investing, I prefer a globally diversified portfolio instead of the S&P 500, but the S&P 500 has more available data. 

Value of $100 invested in the S&P 500 over 10 years by decade - understanding a good rate of return on a 401(k)

What this shows is how much money you would have at the end of each decade if you started investing $100 at the beginning of the decade with no additional contributions. 

As you can see, if you started investing in 2000, you actually had less at the end of 2009 than you started with. Your $100 turned into $84. Unfortunately, you had the Tech Bubble in the early 2000s and the Great Financial Crisis in 2008 and 2009 where markets dropped considerably. 

Those who started investing in 1990 had a great first decade of investing experience. Their $100 turned into $445 by the end of 1999. They more than quadrupled their money! 

I am obviously cherry-picking dates here, and that’s important to recognize. We don’t get to choose our birth year or when we start investing. They are cherry-picked for us. 

Your first 10 years of investing experience are going to be largely shaped by the returns in the stock market. Unfortunately, that is not something that can be controlled. It’s the luck of the draw. 

If you start investing in a decade with lower stock market returns, that may shape your investing experience for life

For example, if you end the first 10 years with less money than you invested, you may project that into the future and think the stock market is a terrible driver of wealth. You may think 5% is a good rate of return on a 401(k) if you lost money after 10 years. 

On the other hand, if you end the first 10 years with four times the money you invested, you may project that into the future and think the stock market is always going to have phenomenal returns. You may think 10% is a bad rate of return on a 401(k) if you earned 18%. 

Historically, both are wrong. 

This is why it’s important to look outside of your own investing experience and study what other people have experienced. 

On average, the S&P 500 may return 9-10% over longer, meaningful periods of time, but the average can take time to materialize. 

You have to understand the range of outcomes. 

Much like meeting my soon-to-be-wife, sometimes luck plays a large role. I had been in bars before, but never met anyone with who I would have a long-term relationship. 

I could have assumed that was always the experience and given up on meeting someone in social places. But, in the short term, the range of possible outcomes is very wide. Some people meet their significant other on the first try. Others have to suffer through many awkward social interactions to meet theirs. 

Although 10 years can feel like a long time period, 10 years is fairly short when most people are investing for 50+ years. 

10 years is like a few dates. It may happen, but it may not. The stories you hear and the experiences you see will vary widely. 

A good rate of return on a 401(k) invested in stocks is 9-10%, but your starting time and how long you have been invested can change the results drastically – at least until you have invested for longer than 20 years. By then, and especially after 30 years, returns tend to converge on a narrower range. 

Check out the chart below by JP Morgan Chase.

Time, diversification, and the volatility of returns.

Pay attention only to the green bars for now. These are the stocks, represented by the S&P 500 Shiller Composite. 

What this shows is that in a one-year period, stocks can have a wide range of returns. Historically, they’ve returned between -39% and 47%. In a 5 year period, between -3% and 28%. In a 10 year period, between -1% and 19%. Finally, in a 20 year period, between 6% and 17%. 

There is still a range of outcomes between 6% and 17%, but it’s much narrower than the one-year returns. 

The luck of when you were born and start investing is going to be a big factor in what is considered a good rate of return on a 401(k). 

Good Rate of Return on a 401(k): Taking a Chance

Investing involves risk. People take a chance when they invest money into the stock market and experience downturns. 

There is good historical evidence for long-term returns of around 9-10%, but nothing is guaranteed. 

You have to have faith that the stock market will continue to reward investors. 

It’s normally hardest to have that faith as the market goes down, but people who take the chance and invest on a regular basis, even through downturns, have historically been rewarded.

But, it’s not easy. 

Here is a chart using similar data that I discussed above, but presented in a different way. 

Annualized rate of return of the S&P 500 by decade

Imagine going through the 2000s with a -1.9% annualized rate of return. Remember, that’s the time period where you had less than you started with after 10 years. 

Despite that, if you continued investing, look how the next decade turned out. You earned 11.10% per year over the next 10 years. 

I feel bad for the investors who gave up, saw -1.9% as normal, and abandoned one of the best drivers of wealth. 

It can be hard to continue investing when it feels like it isn’t working. 

Putting more money into the market when it goes down 30%, 40%, and even 50% can feel like an exercise in torture. 

Why put money into something that is going down in value? 

That’s the question that gets asked. Rarely is it viewed as stocks are on sale 30%. We love discounts of 30% at the store, but when it comes to investing, it feels different. 

To earn a good rate of return on your 401(k), historically, you’ve needed to stay invested through the good and bad times. Trying to time the market is futile. If you get lucky and do it once, the odds are not in your favor that you can do it again. Plus, you have to be right twice: once when selling and again when buying. The odds are not in your favor. 

Much like dating, you have to take a chance to have the possibility of a good outcome. If you don’t go on dates, put yourself in social settings, or make an effort, there are slim odds of meeting someone. 

The more you do it, the more likely you are to meet someone. 

The same is true for investing. You have to take chances, even when it feels like it isn’t working. 

Good Rate of Return on a 401(k): Right Timing

The right timing is closely related to luck. Sometimes, life has to align to get a good rate of return.

For example, imagine if you were born around 1970 and normally would start your investing around 1990 near the age of 20, but you can’t start in 1990 because you chose to put your career on hold as you help your younger brothers and sisters because your mom got sick. 

You’re working, but your career isn’t accelerating, and you are not making the income you had planned to after graduation. You are spending most of your time focused on family. 

This continues on for about ten years, at which point your family is in a more stable place, and you can focus on your career. 

Your income starts increasing and you start investing in 2000 instead of 1990 as originally planned.

You now experience a terrible decade of investing. The $100 you invested is worth $84 at the end of it. 

Value at end of decade of $100 invested in the S&P 500

This is very different than if you had started in 1990 and had $445 at the end. 

Your expectation of a good return on your 401(k) is going to be very different in those two scenarios. 

Then, there is the situation of large bonuses. 

Perhaps you get a large bonus right around the lows of March 2020 when the stock market is down 30% and you invest it. 

The market quickly recovered. Your rate of return would have been phenomenal in a very short time period. 

Instead, imagine if you got a bonus in 2008, invested it, and then watched the stock market decline more than 50% over the next year and take years to recover.

Similar to finding the right person, much of it can be chalked up to the right timing. 

Someone’s in a relationship, then single and available, but maybe not at the same time you are single. 

Someone is moving across the country for a job, but they were the right person for you. You just didn’t have the time to discover it. 

You crash your friend’s boyfriend’s colleague’s birthday party, but you don’t end up talking to the woman you someday might marry because you run into an old friend and chat the entire night. 

Timing, even changed by a few seconds, can change outcomes. 

The right timing can alter what you consider to be a good rate of return on your 401(k). 

Summary – Final Thoughts

Although I can say a good rate of return, or at least, the average rate of return of a 401(k) account invested in stocks is 9-10%, most people don’t care about averages.

They care about their personal rate of return.

Do you think the person who starts investing in 2000 cares that the average is 9-10% after they earned -1.9% over 10 years? 

They should. But, they probably don’t. 

Look outside of your own investing experience. 

Hope for some good luck. 

Take a chance. 

And, if you have the right timing, be grateful for it. 

You never know who you might meet or the rate of return on your 401(k). 

The range of outcomes is wide. 

Disclaimer: This article is for general information and educational purposes only and should not be considered investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and other professionals to determine what may be appropriate for you. Opinions expressed are as of the date of publication, and such opinions are subject to change. Click for Full Disclaimer