The average rate of return refers to the mean percentage of gain or loss generated by an investment or portfolio over a specific period. It provides a single figure to represent the typical annual performance, though actual returns can vary significantly from year to year.

There are different ways to calculate return, but a simple average (arithmetic mean) for annual returns is:

Simple Average Rate of Return = (Sum of Annual Returns) ÷ Number of Years

However, for investments over multiple periods with compounding, the **Annualized Average Rate of Return (Compound Annual Growth Rate - CAGR)** provides a more accurate reflection of the actual return per year:

CAGR = [(Ending Value ÷ Beginning Value)^(1 / Number of Years)] - 1

CAGR is generally preferred for comparing investments over different timeframes.

Historically, the average annualized return for the broader U.S. stock market, often represented by the S&P 500 index, has been around **10-12% per year** over long periods (decades). This includes reinvested dividends but is before taxes and inflation. It's crucial to remember this is an average over many years, and actual returns in any given year can be significantly higher or lower, even negative.

The average rate of return for a 401(k) plan is not a fixed number, as it depends entirely on the specific investment options chosen by the individual participant and their asset allocation (mix of stocks, bonds, etc.).

However, if a 401(k) is primarily invested in a diversified portfolio tracking the stock market (like an S&P 500 index fund), its long-term average return might be similar to the market average, historically in the **8-10% range** depending on the exact allocation, fees, and timeframe considered.

Like a 401(k), the return on a Roth IRA depends on the investments selected by the account holder. A Roth IRA is simply a tax-advantaged *type* of account, not an investment itself.

If the funds within a Roth IRA are invested in a diversified stock market portfolio, the historical long-term average return would likely mirror that of the overall market, historically around **8-10% per year**, similar to a stock-focused 401(k).

What's considered a "good" average rate of return depends heavily on several factors:

• **Investment Type:** Stocks typically offer higher potential returns but come with higher volatility than bonds or savings accounts.
• **Risk Tolerance:** Higher potential returns usually come with higher risk. A "good" return is one that aligns with your comfort level with risk.
• **Time Horizon:** Longer time horizons allow investors to potentially ride out market downturns and aim for higher growth investments.
• **Inflation:** A "good" return should ideally outpace inflation to maintain purchasing power. Historically, outpacing inflation by a few percentage points is a common goal.
• **Investment Goals:** Returns needed to meet goals like retirement or a down payment by a certain date define what is "good" for you.

Comparing your returns to relevant market benchmarks (like the S&P 500 for large-cap stocks) and considering your personal financial plan is more useful than chasing a single "good" number.