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Goal 401K Rate of Return

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lauraeyes2
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Goal 401K Rate of Return  Reply with quote  

I am 25 years old and have been contributing to my 401K for approximately 3 years. With the fluctuating market over the past few years, my rate of return has not been too successful. As of recent (I work for Merck and have a decent supply of merck company stock), with Merck's stock rising up again and the market improving, my rate of return is at 11% since this time last year.

Considering my prior rates of return averaged around 2-3%, I thought this seemed excellent. I was wondering what is a good "goal" for what to have your 401K rate of return at? I currently place 6% of my salary into my account, and my company matches 75% up to 6%. Obviously you want it as high as possible, however I was just curious as to what was considered a "good" rate of return that will provide adequate funds when retirement hits.

Laura
Post Thu Jan 12, 2006 3:17 am
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auggyf
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Re: Goal 401K Rate of Return  Reply with quote  

quote:
Originally posted by lauraeyes2
I am 25 years old and have been contributing to my 401K for approximately 3 years. With the fluctuating market over the past few years, my rate of return has not been too successful. As of recent (I work for Merck and have a decent supply of merck company stock), with Merck's stock rising up again and the market improving, my rate of return is at 11% since this time last year.

Considering my prior rates of return averaged around 2-3%, I thought this seemed excellent. I was wondering what is a good "goal" for what to have your 401K rate of return at? I currently place 6% of my salary into my account, and my company matches 75% up to 6%. Obviously you want it as high as possible, however I was just curious as to what was considered a "good" rate of return that will provide adequate funds when retirement hits.

Laura


As a 25 year old, one reasonable goal would be to perform like the U.S. stock market. One tracker of this is the Vanguard Total Stock Market index: http://finance.yahoo.com/q/pm?s=VTSMX

I would caution you about investing for retirement in a single company, and additionally that single company affects other parts of your lifestyle as well. As great as Merck is, if it performs very poorly, not only are you at risk for a layoff or cutback but your retirement account is also doing poorly. I would urge you to think about diversifying your retirement account beyond the company you work for, or any single company.

And btw, looking at 3 years of performance is not a good indication of what your nest-egg will be like in 40 years. To give you a rough estimate, in the past 50 years (which may have been an unusually good time in the U.S.), stocks have roughly gained 5-7%/yr, bonds 3-6%, and cash 0-2% [after subtracting for inflation]. I am just roughly estimating here, feel free to independently verify or find outside research to come up with more accurate figures.
Post Thu Jan 12, 2006 3:27 am
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lauraeyes2
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Just to clarify...My account is quite diversified and my merck stock is by far not my greatest fund representation. I have several different funds of different types all of which have been performing well. I have been buying up a little more merck stock as of recent (10-15% contribution) since their stock has been ridiculously low, and i figure sometime before retirement it'll get back to it's normal levels, once the company gets back on its feet.

laura
Post Thu Jan 12, 2006 3:43 am
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SkyPilot
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A good rate is one that will meet your goals which are related to your projected need at retirement. By understanding what your likely need will be, you can then plan a strategy that will hopefully get where you want to be, but avoiding more risk than you need to expose yourself to. There are many calculators available on the net that can help you determine what that sum might be.

Some people use the return for the S&P 500 as a benchmark, and any return at or above that is acceptable. Hard to argue with, but I know that I will need a bit more to retire as I hope.

Good luck.
Post Sun Jan 15, 2006 6:14 pm
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auggyf
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One book I'd like to recommend is "The Intelligent Asset Allocator" by William Bernstein. He goes into great depth (but understandable) about historical rate of returns, back to medieval times, and then how to choose the right asset class for your needs.
Post Sun Jan 15, 2006 6:23 pm
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drinkoj
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My personal expectation is to average 9% each year, over a 25 year span and I believe this to be very acheivable.

I have a short term personal goal of having a 12% return each year for the next 5 years.

Thanks to the ability to change my TSP account during decline and rallies at the end of a given day, I believe that I should be able to meet these expectations.

I believe they say to plan on receiving 9% to 11% return on IRA typical Dow or S&P 500 long term accounts, for retirement planning.

Hope that's what you wanted.
Post Mon Jan 16, 2006 3:42 am
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Rolo
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quote:
Originally posted by drinkoj
My personal expectation is to average 9% each year, over a 25 year span and I believe this to be very acheivable.


Why so low? Domestic large-cap average is 10.4%.

"Expect me when you see me."
Post Sun Jan 22, 2006 1:05 am
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