- Take the ending balance and subtract any contributions you made over the past year.
- Divide by the starting balance from one year ago.
- Subtract 1 and multiply the result by 100. That will tell you the percentage of the total return.
If you've used a period other than a year, there's more math involved. Take the number you got from dividing the adjusted ending balance by the starting balance, and then use an exponential calculation as follows:
- For a two-year period, you'll need to take the square root. On a calculator, use the power key to raise the number to the 1/2 power. For a three-year period, you'd raise it to the 1/3 power and so on.
- Then, take the final answer, subtract 1, and multiply the result by 100. What's left is the average annual return.
The longer the period you're measuring and the more contributions you've made, the less accurate this simple calculation will be. A more appropriate calculation is the time-weighted return, which measures actual investment portfolio performance regardless of deposits or withdrawals.
For most situations, though, both methods will produce results that are reasonably close to each other and reflect your performance well. Regardless of which measurement you choose, make sure you regularly revisit your 401(k) returns to be sure that your investment decisions are in sync with your goals.
