Retirement calculator

How compound interest works for retirement

Compound interest is the engine behind every successful retirement plan. It works by earning returns not only on your original savings but also on the returns those savings generate — growth on top of growth. Over decades, this snowball effect turns modest monthly contributions into substantial retirement nest eggs.

This calculator uses the standard compound interest formula: FV = PV(1+r)ⁿ + PMT × ((1+r)ⁿ−1)/r, where PV is your current savings, PMT is your annual contribution (monthly × 12), r is your expected annual return, and n is the number of years until retirement. The longer your money compounds, the more dramatic the result — roughly two-thirds of a 30-year retirement portfolio typically comes from growth, not contributions.

Tax-advantaged accounts like 401(k)s and IRAs amplify this effect because your money grows tax-deferred (or tax-free with a Roth), letting every dollar you earn stay invested and compound without being reduced by taxes each year.

The 4% rule explained

The 4% rule is a widely cited retirement withdrawal guideline developed from the Trinity Study. It suggests that if you withdraw 4% of your retirement savings in your first year of retirement, and adjust that dollar amount for inflation each year thereafter, your portfolio should last at least 30 years with a high degree of confidence.

To use the rule: multiply your target annual retirement income by 25. If you need $40,000 per year from your investments, you'd aim for $1,000,000 in savings ($40,000 × 25 = $1,000,000). At a 4% withdrawal rate, the underlying portfolio continues growing in most market conditions, though sequence-of-returns risk in early retirement can affect outcomes.

The 4% rule is a planning benchmark, not a guarantee. Many retirees adjust based on their specific portfolio allocation, spending flexibility and expected retirement length. A more conservative 3% or 3.5% withdrawal rate is sometimes recommended for those retiring early or with less flexible budgets.

Why starting early matters

The single biggest factor in retirement savings is time — not how much you earn or how aggressively you invest. Starting at 25 instead of 35 can more than double your total retirement savings, even if you invest the same amount each month. This is the power of compounding over extended periods.

For example, investing $500 a month from age 25 to 65 at 7% annual growth yields roughly $1.2 million. Starting the same contributions at 35 yields only about $570,000 — less than half — despite contributing for the same number of years. The 10-year head start gives the earlier saver an extra decade of compounding on every dollar.

If you're behind on savings, don't panic — increasing your monthly contribution and optimizing your investment allocation can still get you to a comfortable retirement. Use this calculator to model different starting ages and contribution levels to see the impact on your own plan.

Frequently asked questions

How much do I need to retire?

A common benchmark is 25 times your desired annual retirement income, based on the 4% rule. For $40,000 a year in retirement, aim for $1,000,000 saved. Your actual number depends on lifestyle, healthcare costs, expected retirement length and Social Security or pension income.

What is the 4% rule?

The 4% rule is a withdrawal guideline from the Trinity Study. It says you can withdraw 4% of your retirement portfolio in your first year, then adjust that amount for inflation each year, and expect your savings to last at least 30 years with high confidence.

How does a 401(k) grow?

A 401(k) grows through contributions (yours and your employer's match), investment returns and compounding. Most 401(k) plans offer a range of mutual funds and target-date funds. Over a 30- to 40-year career, compounding returns typically account for the majority of the final balance.

What is the difference between a 401(k) and an IRA?

A 401(k) is an employer-sponsored retirement plan with higher contribution limits ($23,000 in 2024, plus catch-up after 50) and often includes an employer match. An IRA (Individual Retirement Account) you open yourself with contribution limits of $7,000 ($8,000 if 50+). Both offer tax advantages — traditional accounts give upfront tax deductions, Roth accounts give tax-free withdrawals in retirement.

How much should I contribute to my 401(k)?

At minimum, contribute enough to get your full employer match — that's free money. Beyond that, a common goal is 10-15% of your pre-tax income including the match. Use this calculator to see how different contribution levels affect your retirement projection.

Is a 7% annual return realistic?

A 7% average annual return is a common long-term assumption for a diversified stock-heavy portfolio, reflecting historical S&P 500 returns of roughly 10% before inflation — so 7% accounts for about 3% annual inflation. Your actual returns will vary year to year, but 6-8% is a reasonable planning range for long-term projections.