Investment Calculator

Worked example

$10,000 plus $500 a month for twenty years at 7% comes to $300,851 — of which $130,000 is money you put in. In today’s money it is $166,574, because 3% inflation over twenty years takes nearly half the headline figure.

How to work it out yourself

1. 1.Enter what you have now and what you add each month. Contributions are assumed at the end of each month, which is what a payroll deduction does.
2. 2.Use a real long-run return rather than a good year. US equities have averaged around 10% nominal before inflation and roughly 7% after it, with decades that did far worse.
3. 3.Read the inflation-adjusted line. It is the one that says what the money will buy, and it is the reason a large nominal figure decades away is less impressive than it looks.

What the same plan reaches over time

$10,000 to start, $500 a month, 7% return, 3% inflation.

The formula

1. What the starting amount grows to10000 * pow(1 + 0.0058333, 240)
2. What the monthly contributions grow to500 * (pow(1 + 0.0058333, 240) - 1) / 0.0058333
3. Balance at the end40387.388 + 260463.33
4. Total you put in10000 + 500 * 240
5. Growth on top of that300850.72 - 130000
6. Balance in today's money300850.72 / pow(1 + 3 / 100, 20)
7. Lost to inflation300850.72 - 166573.75
8. Monthly contribution that would reach the targetmax(0, 500000 - 40387.388) * 0.0058333 / (pow(1 + 0.0058333, 240) - 1)
9. Years to reach the target at your current pacelog((500000 * 0.0058333 + 500) / (10000 * 0.0058333 + 500)) / log(1 + 0.0058333) / 12
10. Short of the target at the endmax(0, 500000 - 300850.72)
11. Return after inflation((1 + 7 / 100) / (1 + 3 / 100) - 1) * 100

Source: US SEC Investor.gov — compound interest calculator and explanation

Questions people actually ask

Why is the inflation-adjusted figure so much lower?

Because inflation compounds too. At 3% a year, prices roughly double in 24 years, so a balance twenty years out buys about 55% of what the same number would buy today. Nothing has gone wrong with the investment — the yardstick shrank, and quoting the nominal figure alone overstates what the plan achieves.

What return should I assume?

Lower than the best decade you remember. Long-run US equity returns have been around 10% nominal, but the sequence matters enormously: the same average delivered in a different order produces very different outcomes for someone contributing or withdrawing along the way. Modelling 6 to 7% real is a defensible middle, and modelling a single fixed rate at all is an approximation.

How much of the final balance is growth?

The growth line above tells you exactly. In the example, $130,000 of contributions become $301,180 — so more than half of the end balance was never deposited. That share rises sharply with time, which is the entire argument for starting early rather than contributing more later.

Does this account for tax and fees?

No. A 1% annual fee on a 7% return is not a 1% reduction in the outcome — over twenty years it costs roughly 17% of the final balance, because the fee compounds against you. Subtract fees from the return before entering it, and treat the result as pre-tax unless the account is a tax-sheltered one.

Related

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• Present Value CalculatorWhat a future sum, or a stream of payments, is worth today at a given discount rate. Names what the wait costs, as money and as a share of the nominal total.

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