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function calculate401kReturn() {
// Get input values
var startBal = parseFloat(document.getElementById("startBalance").value);
var endBal = parseFloat(document.getElementById("endBalance").value);
var contrib = parseFloat(document.getElementById("contributions").value);
var years = parseFloat(document.getElementById("timePeriod").value);
// Validation
if (isNaN(startBal) || isNaN(endBal) || isNaN(contrib) || isNaN(years)) {
alert("Please enter valid numbers in all fields.");
return;
}
if (years 100%), math breaks.
var base = 1 + periodReturn;
var annualReturn;
if (base <= 0) {
annualReturn = -1; // -100% (Total Loss)
} else {
annualReturn = Math.pow(base, (1 / years)) – 1;
}
// Display Results
document.getElementById("resultsArea").style.display = "block";
// Format Percentages
document.getElementById("annualReturnResult").innerText = (annualReturn * 100).toFixed(2) + "%";
document.getElementById("totalReturnResult").innerText = (periodReturn * 100).toFixed(2) + "%";
// Format Currency
document.getElementById("totalGainResult").innerText = "$" + totalGain.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("avgCapitalResult").innerText = "$" + averageCapital.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
}
How to Calculate Annual Rate of Return on Your 401(k)
Understanding the performance of your 401(k) is essential for long-term retirement planning. While your account balance tells you how much money you have, it doesn't necessarily tell you how well your investments are performing. To accurately gauge performance, you need to calculate the Annualized Rate of Return.
Unlike a simple savings account where interest is calculated on a static balance, a 401(k) involves fluctuating market values and continuous contributions (from your paycheck and employer matching). This makes calculating the exact return slightly more complex.
The Challenge: Accounting for Contributions
If you simply subtract your starting balance from your ending balance, you are including the money you deposited from your paycheck as "profit," which skews the results. To get an accurate picture, you must separate your contributions from your investment returns.
This calculator uses a logic similar to the Modified Dietz Method, which is an industry standard for estimating the performance of a portfolio with cash inflows (contributions) and outflows.
The Formula Used
The calculation involves two main steps:
Step 1: Calculate Total Gain
Total Gain = Ending Balance – Beginning Balance – Net Contributions
Step 2: Calculate Annualized Return
Average Invested Capital ≈ Beginning Balance + (Contributions / 2)
Period Return = Total Gain / Average Invested Capital
Annualized Rate = (1 + Period Return)(1 / Years) – 1
Why "Average Invested Capital"?
We divide contributions by 2 to estimate the "average" capital because you likely contributed money gradually throughout the year (e.g., every paycheck), rather than a lump sum at the very beginning. This assumption provides a much more accurate rate of return than standard growth formulas.
Example Calculation
Let's say you want to see how you did over the last 3 years:
- Beginning Balance: $50,000
- Ending Balance: $75,000
- You Contributed: $12,000 (total over 3 years)
1. The "Paper" Gain:
$75,000 – $50,000 = $25,000 increase in balance.
2. The Real Investment Gain:
$25,000 (increase) – $12,000 (your cash) = $13,000 actual investment profit.
3. Annualized Return:
Using the calculator above, this scenario results in an annualized return of roughly 7.20%. This indicates healthy growth compounding year over year.
What is a Good 401(k) Return?
While the stock market has historically returned about 10% annually on average (before inflation), a "good" return depends on your asset allocation. A portfolio heavy in bonds might aim for 4-6%, while an aggressive stock portfolio might target 8-12% but with higher volatility. Comparing your annualized return against a benchmark (like the S&P 500 or a Target Date Fund index) is the best way to evaluate if your 401(k) is working hard enough for you.