401k

[shanecurran]

In my company's 401k program it outlines estimated accumulations based on different contribution amounts. They assume an 8% rate of return. Is this a reasonable assumption? What would you use as a reasonable rate of return on a moderate, conservative and aggressive approach?

The company is matching 4% of my salary and I am fully vested after 2 years. Given the current economy, is this a rich plan that the company is providing for me?

[kork13]

In my company's 401k program it outlines estimated accumulations based on different contribution amounts. They assume an 8% rate of return. Is this a reasonable assumption? What would you use as a reasonable rate of return on a moderate, conservative and aggressive approach?

The company is matching 4% of my salary and I am fully vested after 2 years. Given the current economy, is this a rich plan that the company is providing for me?

8% is probably a fair "aggressive" estimate. 6% for "moderate", 4% for "conservative". By no means are those hard and fast rules of thumb (if such a thing is possible), but that's what I use. Others might change all of those numbers by 1-2% though.

A 4% match with a 2-year vesting period are pretty comparable (if not better) terms to an average 401k plan. It's not like you can pick and choose your 401k (except by picking your employer), so in short, I'll say this: You have a decent sounding 401k plan--use it!

[Petunia 100]

Yes, 8% is a reasonable assumption, but is by no means guaranteed.

So they are just giving you 4% of your salary, whether you contribute or not? That's a pretty sweet deal.

[jpg7n16]

4% - too conservative
6% - conservative
8% - reasonable
10% - aggressive
12% - too aggressive

The stock market is usually expected to gain 7-11%/year. 8% is on the lower end of that spectrum and is a perfectly reasonable assumption.

Not guaranteed, but a reasonable estimate. It's pretty much the figure I would use.

[shanecurran]

Yes, 8% is a reasonable assumption, but is by no means guaranteed.

So they are just giving you 4% of your salary, whether you contribute or not? That's a pretty sweet deal.

No it is a 4% match.

[shanecurran]

At 28 years old we are talking about 37 years it will be invested at least. In the short run there is obviously more fluctuation and nothing is guaranteed, but over such a long period of time the law of averages should figure in. I thought 8% sounded reasonable but my girlfriend disagreed. I tried arguing my case by showing her the worst 30 year period for indexes such as the S & P. She argued that the S & P would not be a good indicator, and she thought 8% seemed too high. I am currently in the aggressive plan, so I think that 8% seems reasonable. Thanks for the input.

[shanecurran]

8% is probably a fair "aggressive" estimate. 6% for "moderate", 4% for "conservative". By no means are those hard and fast rules of thumb (if such a thing is possible), but that's what I use. Others might change all of those numbers by 1-2% though.

A 4% match with a 2-year vesting period are pretty comparable (if not better) terms to an average 401k plan. It's not like you can pick and choose your 401k (except by picking your employer), so in short, I'll say this: You have a decent sounding 401k plan--use it!

So you think 8% is only reasonable if you take an aggressive approach?

[Mr Nice Guy]

At 28 years old we are talking about 37 years it will be invested at least. In the short run there is obviously more fluctuation and nothing is guaranteed, but over such a long period of time the law of averages should figure in. I thought 8% sounded reasonable but my girlfriend disagreed. I tried arguing my case by showing her the worst 30 year period for indexes such as the S & P. She argued that the S & P would not be a good indicator, and she thought 8% seemed too high. I am currently in the aggressive plan, so I think that 8% seems reasonable. Thanks for the input.

Stick with your gut.

The S&P 500 is a GREAT indicator

[BuckyBadger]

That's a nice plan. Better than mine. I get 2% match (50% of my first 4%) and it's on a 5 year gradual vesting plan. (0% for less than a year, then 20%, 40%, 60%, 80%, 100%). After I've been there for about a million years it goes up to 75% of 6% for a total match of 4.5%. Grrr.

My husband has a great one! 3% match, fully vested in 2 years, and an additional 4% deposit by his company every January.

[kork13]

So you think 8% is only reasonable if you take an aggressive approach?

When I say "aggressive", I'm talking a portfolio almost entirely composed of American company stocks (such as from the S&P 500--and yes, that is an excellent indicator). If you take an even more aggressive approach, including internationals, emerging markets, and commodities, you could probably average higher.

My biggest point is that those are the planning figures that I use. Actual performance may vary (could be better, could be worse), but that's what I use for planning purposes. I see 8% as a practical figure to estimate total performance 20-30 years from now, obviously not knowing anything of what the future holds. And as I said, those were just the figures I use (4%/6%/8%), based on my own definitions of what I consider to be conservative or aggressive. Others may (or perhaps likely) use different planning figures. The numbers JPG pointed out above (between 4%-12%) are also reasonable.

[puck36]

I been at my company for over 7 years and when I first started you had to be with the company 7 years before you were full vested. Then they changed it to 5 years, then to 3 years. 0% 1st year, 0% 2nd year, then 100% 3rd year with no match. We have an ESOP. Dave Ramsey goes with 12% when he gives his answers but 8% is a better return. When I look at my retirement accounts I use the range of 8% to 12% because most of what I have almost always does better then that.

[dfeucht]

In reality the actual return doesn't matter. It's the real return that matters. I assume the numbers here factor in an inflation rate around 2-3%? Given the fears those out there give about rampant inflation (not that I buy into that, but some talk about it) it really pays to try and make an assumption above inflation rather than trying to project a total return.

8% in this case seems to be 5-6% above the long-term inflation numbers that I generally see. That seems reasonable. The 9-10% above inflation that Dave Ramsey uses seems extremeley aggressive.

[shanecurran]

In reality the actual return doesn't matter. It's the real return that matters. I assume the numbers here factor in an inflation rate around 2-3%? Given the fears those out there give about rampant inflation (not that I buy into that, but some talk about it) it really pays to try and make an assumption above inflation rather than trying to project a total return.

8% in this case seems to be 5-6% above the long-term inflation numbers that I generally see. That seems reasonable. The 9-10% above inflation that Dave Ramsey uses seems extremeley aggressive.

Good point. I actually used this in my argument that 8% was not unreasonable, explaining that it was a nominal, not real rate of return.