Compound Interest Calculator

Plan your retirement. Visualize the power of compounding. Make informed decisions.

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1 Growth Parameters

2 Results

Wealth Growth Over Time
Contributions Compound Interest

① Withdrawal Parameters

How long will your savings last? Enter your retirement balance, monthly withdrawal, and expected return to see when your portfolio depletes.

G The Compound Interest Guide

1 What Is Compound Interest?

Compound interest is the interest you earn on both your original money and on the interest you have previously received. It makes your money grow faster than simple interest, which is calculated only on the principal amount.

For example, if you invest $10,000 at 7% annual return, after one year you have $10,700. In year two, you earn 7% on $10,700 — not just the original $10,000. Over decades, this snowball effect creates exponential growth.

The Rule of 72: Divide 72 by your annual return rate to estimate how many years it takes to double your money. At 7%, your investment doubles roughly every 10.3 years.

2 The Formula

The standard compound interest formula with regular contributions is:

A = P(1 + r/n)nt + PMT × (((1 + r/n)nt - 1) / (r/n))

Where:

  • A = Final amount
  • P = Principal (initial investment)
  • r = Annual interest rate (decimal)
  • n = Number of compounding periods per year
  • t = Number of years
  • PMT = Regular contribution per period

3 Historical Market Returns

Past performance does not guarantee future results, but long-term historical data provides useful reference points:

  • S&P 500 (1926–2023): ~10.2% annual return before inflation, ~7.0% after inflation
  • US Total Bond Market: ~5.3% annual return before inflation, ~2.5% after inflation
  • 60/40 Stock/Bond Portfolio: ~8.8% annual return before inflation, ~5.8% after inflation
  • Inflation (CPI, long-term average): ~3.2% annually

Conservative retirement planners often model 5–6% real returns to account for sequence-of-returns risk during the withdrawal phase.

4 Common Mistakes to Avoid

  • Overestimating returns: Using 10%+ consistently ignores market downturns, fees, and taxes.
  • Ignoring inflation: A million dollars in 30 years buys far less than today. Always check the "real value" figure.
  • Inconsistent contributions: Missing even a few years of contributions, especially early on, dramatically reduces the final balance due to lost compounding time.
  • Neglecting tax drag: Capital gains, dividend taxes, and withdrawal taxes can reduce net returns by 1–3% annually.
  • Forgetting the 4% rule context: The famous "4% safe withdrawal rate" assumes a 30-year horizon with a 60/40 portfolio. Adjust for longer retirements or different asset mixes.

5 The 4% Rule Explained

The 4% rule, introduced by William Bengen in 1994, suggests that retirees can safely withdraw 4% of their initial portfolio balance in the first year, then adjust for inflation each subsequent year, with a high probability of not depleting the portfolio over 30 years.

Key assumptions: 50/50 stock/bond allocation, annual rebalancing, no additional income, 30-year horizon. For longer retirements (40–50 years, as in FIRE), a 3.0–3.5% initial withdrawal rate is often recommended.

Example: With a $1,000,000 portfolio, the 4% rule gives $40,000/year ($3,333/month) in year one. If inflation is 2.5%, year two allows $41,000. The calculator's retirement withdrawal tab shows exactly how long this lasts under your chosen assumptions.

6 FIRE Movement Quick Reference

Financial Independence Retire Early (FIRE) practitioners use aggressive savings rates to reach independence decades before traditional retirement age:

  • Lean FIRE: $1M+ portfolio, $30–40K annual spending
  • Coast FIRE: Save enough early that compound growth alone reaches your target by retirement age
  • Barista FIRE: Partial financial independence — portfolio covers most expenses, part-time work covers the rest
  • Fat FIRE: $5M+ portfolio, $150K+ annual spending

The crossover point typically requires a 50–70% savings rate sustained for 10–15 years, depending on income level and market returns.

FAQ Frequently Asked Questions

What is compound interest?
Compound interest means you earn returns not only on your original investment but also on the accumulated returns from previous periods. Over time this creates exponential growth. The frequency of compounding matters: daily compounding grows slightly faster than monthly, which grows faster than annual.
What annual return rate should I assume?
Historical averages vary by asset class. The S&P 500 has returned roughly 10% annually before inflation (~7% real) over the long term. A diversified 60/40 stock/bond portfolio might use 6-7%. Conservative planners often model 5-6%. The default here is 7% — adjust based on your risk tolerance, asset allocation, and time horizon.
How do compounding and contribution frequencies work?
Compounding frequency determines how often interest is calculated and added to your balance (daily, monthly, quarterly, annually). More frequent compounding yields slightly higher returns. Contribution frequency is how often you add money (weekly, bi-weekly, monthly, etc.). Bi-weekly contributions (26 per year) can match paycheck schedules and build habit.
How does inflation affect my real returns?
Inflation erodes purchasing power. The "Real Value" figure shows what your final balance would be worth in today's dollars. A 7% nominal return with 2.5% inflation produces roughly a 4.5% real return. The calculator applies this adjustment so you can plan in terms of actual buying power, not just face value.
Why include a tax rate?
Taxes significantly impact net returns. Long-term capital gains in the US are typically 0%, 15%, or 20% depending on income. Withdrawals from traditional 401(k)s and IRAs are taxed as ordinary income. The "After-Tax Value" line estimates what you keep after applying your chosen rate to the gains portion. This is a simplification — consult a tax professional for your situation.
Is this financial advice?
No. This calculator is a mathematical planning tool for exploration and education only. Actual investment returns vary, tax rules are complex and jurisdiction-specific, and individual circumstances differ. Consult a qualified financial advisor before making investment decisions.
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