Have you ever used one of those compounding interest calculators to figure out how much your 401k will be worth in 20 or 30 years? I have, I use them often. My favorite is Money’s Chimps.

I can be pretty sure about the amount I will contribute each year. The one variable I have a hard time predicting is my annual rate of return. For years the industry used the default 10% return, but those days are long gone.

I was talking with one of my financial adviser friends recently. He told me he expects to get his clients a 7% return and he charges a 1% fee to manage their account. I think that’s a very reasonable return to expect from a financial adviser that know what he is doing.

Money chimp has another great tool you can use to estimate your 401k returns. You can check it out here – CAGR.

It’s very cool to see the numbers. Here’s quick breakdown of the last 10, 20 and 30 years.

S&P Annualized Returns:

10 Years (1999 – 2009): 3.02% – $1 turned into $1.10
20 Years (1989 – 2009): 11.02% – $1 turned into $6.42
30 Years (1979 – 2009): 13.07% – $1 turned into $27

So the last ten years have yielded about 3% a year while the last 30 years have given us a total average of 13.03%. I don’t know what to expect for the next 10 – 30 years but I’m going to take an average of the 10 and 30 year returns to make my predictions. That gives me 8%.

The returns we see in the future greatly depends on where you invest and what you invest in. Your 401k portfolio can prosper even if America does not by investing in foreign funds. I think we will be in a stock picking market for a long time, but I’m no expert.