The two engines: contributions and compounding
Every long-term investment plan runs on two engines. Early on, contributions do nearly all the work — in year one of the default example, your $500 a month dwarfs what an 8% return adds. But growth compounds on growth, and somewhere in the middle years the engines swap: the portfolio starts earning more per year than you put in. By year 20 of that default plan, roughly $214,000 of the $344,000 balance is growth — the market’s money, not yours. The year-by-year table makes the crossover visible, which is the single most motivating chart in personal finance.
What return should you assume?
Broad stock index funds have historically averaged around 7–10% a year over multi-decade periods before inflation — but as an average across booms and crashes, never a smooth ride and never a promise. Planning with 6–8% is a common conservative habit; bonds and savings accounts warrant far less. The inflation field matters just as much for long horizons: at 3% inflation, prices roughly double in 24 years, so the “real value” line converts your future balance into today’s purchasing power — usually a sobering but honest adjustment.
Assumptions worth knowing
The model compounds monthly at annual rate ÷ 12, adds contributions at month-end, and ignores taxes and fund fees — fine for tax-advantaged accounts and low-cost index funds, optimistic otherwise. It also assumes a constant return, whereas real markets deliver the average through violent detours. Use it to compare plans (start earlier vs contribute more vs earn more), not to predict a balance to the dollar. For a lump sum with no monthly additions, the compound interest calculator is the simpler tool; to see what an income-focused version of the same portfolio pays, try the dividend calculator.