Question 1

What is a good annual return rate to assume?

Accepted Answer

The appropriate return rate depends on your investment mix. Historically, the U.S. stock market (S&P 500) has returned an average of about 10% per year before inflation, or roughly 7% after inflation. A diversified portfolio of stocks and bonds might return 6% to 8%. More conservative investments like bonds typically return 3% to 5%, while high-yield savings accounts currently offer around 4% to 5%. For long-term retirement planning, many financial advisors recommend using 7% to 8% as a reasonable estimate for a stock-heavy portfolio, or 5% to 6% for a balanced portfolio.

Question 2

How does inflation impact my investment returns?

Accepted Answer

Inflation erodes the purchasing power of your money over time. While your investment may grow to a large nominal value, the real value (what that money can actually buy) will be lower due to rising prices. For example, at 3% annual inflation, $100 today would need to be $181 in 20 years to have the same purchasing power. This is why this calculator shows both nominal and inflation-adjusted values. The real return rate is approximately the nominal return rate minus the inflation rate. If you earn 10% but inflation is 3%, your real return is roughly 7%.

Question 3

Why is compound growth so powerful for long-term investing?

Accepted Answer

Compound growth means your returns earn their own returns. In the early years, most of your portfolio value comes from your contributions. But over time, the returns generated by your existing balance grow to far exceed your new contributions. For example, $10,000 invested at 10% annually grows to $67,275 in 20 years without any additional contributions. But with $500 monthly contributions, the same investment grows to approximately $449,562, of which $130,000 was contributed and $319,562 came from compound growth. The longer you stay invested, the more dramatic the compounding effect becomes.

Question 4

How are capital gains taxes calculated on investments?

Accepted Answer

Capital gains tax is applied only to the profit (gains) from your investment, not the original amount you invested. In the United States, long-term capital gains (on assets held for more than one year) are taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income. Short-term gains (assets held for one year or less) are taxed at your ordinary income tax rate, which can be significantly higher. This calculator applies the tax rate you specify to all gains. Note that tax-advantaged accounts like 401(k)s and IRAs are not subject to capital gains tax while the money remains in the account.

Question 5

What is the difference between nominal and real returns?

Accepted Answer

Nominal returns are the raw percentage gain on your investment without any adjustments. Real returns are nominal returns adjusted for inflation, representing the actual increase in purchasing power. For instance, if your investment grows by 10% in a year but inflation was 3%, your real return is approximately 6.8% (calculated as (1.10 / 1.03) - 1). Real returns are more meaningful for long-term planning because they show how much your wealth is actually growing in terms of what you can buy. This calculator displays both so you can see the full picture.

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