- Compounding means growth earns growth, so after enough years most of the balance is growth rather than contributions.
- The assumed return is the input the result is most sensitive to, and the one you have least control over.
- Time beats size: on the default plan, ten extra years more than doubles the ending balance without raising the contribution.
- This is a nominal, pre-fee, pre-tax projection — net fees off the rate you enter, and inflation too for today’s dollars.
How compound growth works
Give the calculator four things: what you have now, what you add each month, the annual return you want to assume, and how many years you are leaving it alone. It compounds the balance forward month by month and returns the ending value, split into the part you contributed and the part the market added.
That split is the point of the exercise. Over a short horizon almost all of the balance is your own contributions; somewhere in the second decade growth usually overtakes them, and after that the gap widens quickly. The stacked bars in the result show where that crossover falls for the numbers you entered, and the table below gives the exact figure for every year.
The return you assume matters more than any other input and is the one thing here you cannot control. Run the projection two or three times — an optimistic rate, a plain one and a pessimistic one — and treat the spread between them as the answer rather than trusting any single line. A projection is a range wearing the costume of a number.
The math
The projection is the future value of a lump sum plus the future value of an ordinary annuity: FV = P · (1 + i)ⁿ + C · ((1 + i)ⁿ − 1) ÷ i, where P is the starting amount, C is the monthly contribution, i is the annual return divided by 12 and n is the number of months. The first term grows what you already hold; the second grows each contribution for however many months are left after it lands.
Contributions are treated as arriving at the end of each month — the ordinary-annuity convention, and the conservative one, since money paid in on the first would earn an extra period of growth. The return is applied as a constant monthly rate, so an assumed 7% year is twelve identical months rather than a real year of gains and drops. Real sequences with the same average end at different places; this is the smooth middle of them.
Three things the model leaves out, all of which push the real number down: fees, tax on anything held outside an RRSP or TFSA, and inflation. Enter a return you have already netted fees off, and subtract expected inflation from it as well if you want the answer in today’s dollars rather than future face value.
Worked example
The defaults describe an ordinary plan: $10,000 already invested, $500 added every month, 7% a year, 20 years. That grows to about $300,851. You will have put in $130,000 of it, so the other $170,851 is growth — more than half the ending balance, earned by money rather than by you.
Leave the same plan alone for ten more years and it reaches roughly $691,150. Contributions only rise to $190,000, so the extra decade added about $390,000, almost all of it growth on growth already earned. Ten years of patience did more than doubling the monthly contribution would have — which is the entire argument for starting early rather than starting bigger.
Key terms
- Compounding
- Earning a return on your returns as well as on your original money. It is what bends the curve upward instead of leaving it a straight line.
- Future value
- The projected balance at the end of the horizon, contributions and growth combined — the figure in the result card.
- Nominal return
- A return before inflation is removed. Subtract expected inflation to get the real return, which is the one that tells you about purchasing power.
- Rule of 72
- A shortcut: 72 divided by the annual return is roughly how many years money takes to double. At 7% that is a bit over ten years.