Evaluating long-range growth assumptions
Long-range projections compound both money and assumptions. Small changes in net return, timing, and volatility can produce materially different paths.
Learning objective
Use sensitivity analysis and a real-return conversion to keep a projection honest.
Convert to a net nominal rate first
Start with a stated gross rate, then subtract or model known recurring costs using the fee’s actual basis and timing. Taxes may depend on account type, jurisdiction, and transaction. Do not subtract a flat tax estimate unless the assumptions justify it.
Convert nominal growth to real growth
For a one-period rate, real return equals (1 + net nominal return) ÷ (1 + inflation) − 1. Subtracting inflation is a useful approximation for small rates, but the ratio is more precise. Future inflation and investment returns are uncertain, so present a range rather than one exact outcome.
Separate average return from the path
Two sequences can have the same arithmetic average and different ending balances when returns compound. Contributions and withdrawals make the order of returns matter. A fixed-rate calculator does not show volatility, taxes, liquidity, or investor behavior; label those omissions explicitly.
Worked example
A fictional scenario assumes 6% nominal growth, a 0.5% annual cost, and 3% inflation. The resulting real rate is illustrative, not a forecast.
| Step | Rate |
|---|---|
| Gross nominal assumption | 6.00% |
| After 0.50% cost (simplified) | 5.50% |
| Real rate: 1.055 ÷ 1.03 − 1 | about 2.43% |
Fictional figures for practice only; they are not a forecast or recommendation.
Try the workflow
- Read the fictional scenario and identify the decision or constraint.
- Write down what information is known, estimated, and still missing.
- Choose one next step and say what could change your conclusion.
Practice prompt: Build a low, middle, and high scenario by changing only the net return. Keep the contribution schedule fixed and note which real-world factors the calculation still omits.
Your practice response stays in this page and is not saved.
Check your understanding
Choose an answer, then read the explanation before you mark the lesson complete.
Read the source
Investor.gov — Compound interest calculator ↗
This lesson is educational and uses a fictional example. Verify current details with the linked source and seek qualified advice for personal decisions.
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