Average 401k Return on Investment
The term 'average' in the world of investment trading is meaningless. There is no absolute average. An average return on a 401k investment is going to depend on what exactly the 401k is invested in. I find the word 'average' in general not only vague but entirely inaccurate and devoid of any real meaning. Regardless, I will do my best to offer up a discussion regarding 401k investments.
The advantages of the 401k investment
The mere fact that 401k investments are pretax gives them a running head start on other investments such as savings accounts, even high yield savings accounts. Any money you put in your savings account has already been taxed, this is not the case with the money that goes into your 401k. If your employer is matching even part of what you are putting in as an individual, this is yet another step in the right direction. You can’t go wrong with someone else putting money in your account as long as they never want back. The money gaining interest in your 401k does not only apply to the money you put in, but the money matched by your company as well.
401k investments also offer you the opportunity of taking out a loan against them. Last time I checked, IRA’s and savings accounts don’t offer up that option. There is however a downside on the whole repaying the loan issue which is detailed in the next section.
Even 401k investments aren't a sure thing in today's economy
If you have any doubt as to the validity of that statement, ask the employees from Enron and Worldcomm who sank their entire 401k into their company’s stock what their opinion is. You might want to cover your ears.
While taking out a loan against your 401k is one thing, taking money out of your 401k is something else entirely. There are fees or penalties for withdrawing money from your 401k while still employed with the company through which you have it. It’s your money, right up until it isn’t. Keep in mind also that whereas the loan you may take out on your 401k is pretax dollars, the money with which you pay the loan back will already have been taxed. Once you cash out your 401k, you will be required to pay taxes on that money. Essentially, you have paid some taxes twice. This is a hotly disputed topic whose flawed analysis leaves it open for constant debate. The 401k limit for contributions in the year 2011 stands at $16,500. This may be a deal breaker for some but it’s nothing I’ve ever had to worry about.
401k investments on the whole
Generally speaking, given the choice of what to invest in by your employer in regards to your 401k, you may best be served by investing most of the money in secured, insured high quality bonds and play around a little with the rest in higher risk (but possibly higher gain) stocks. In addition, past practice has been to put 10% of your earnings into your 401k; this is simply not enough for most people these days. A minimum of 15% should be your goal contribution. And whenever possible, take it to the maximum limit; you do after all, have a limit of $16,500 this year. You might as well utilize that opportunity.
Several mutual funds have been labeled “toxic” by the experts lately. The top five, being in no particular order are Putnam Global Health Care (PHXTX); Vanguard Long-Term Treasury Admiral (VUSUX); Calvert Income B (CBINX); Fidelity Freedom Income (FFFAX) and Prudential Jennison Natural Resources (JNRRX). This is just a buyer beware type of heads up. Any good investor knows that you need to do your own homework and research before making any kind of investment.