The Complete Guide to Retirement Planning

Are You Actually Making Money?

You see green numbers on your brokerage app screen. The S&P 500 is up. Your friend says they made 50% on a crypto Comparative Advantage Calculator">trade. But do you truly know how well your investments are performing?

Understanding Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">investment profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">returns is the dashboard of your financial journey. Without it, you are driving blind. You might feel like you're rent" title="Try our Prorated Rent Calculator">moving forward, but you could be lagging behind rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">inflation or taking on unnecessary percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk for little reward. In this guide, we will break down the essential Cost Per Acquisition Calculator">metrics of Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">investment rate-of-return" title="Try our Rate of Return Calculator">performance so you can track your Net Worth Calculator">wealth with confidence.

The Basics: rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return on Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment (percentage-return" title="Try our Percentage Return Calculator">ROI)

The simplest way to measure success is percentage-return" title="Try our Percentage Return Calculator">ROI. It answers the question: "For every dollar I put in, how much did I get back?"

Formula:

((Current Value - Cost of Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment) / Cost of Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment) x 100

Example:

• You buy 10 shares of stock for $1,000.
• One year later, you sell them for $1,200.
• Calculation: (($1,200 - $1,000) / $1,000) x 100 = 20%.
• Your percentage-return" title="Try our Percentage Return Calculator">ROI is 20%.

Limitation: Simple percentage-return" title="Try our Percentage Return Calculator">ROI doesn't account for time. A 20% rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return over 1 year is fantastic. A 20% rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return over 10 years is terrible (less than 2% per year). This brings us to our next metric.

Annualized profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">Returns (rate-of-return" title="Try our Annualized rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">CAGR)

The Compound Annual Time Value of Money Calculator">Present Value of Growth Opportunities)">Growth Rate (rate-of-return" title="Try our Annualized rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">CAGR) tells you what your Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">investment would have earned each year if it grew at a steady rate. It allows you to compare investments held for different time periods.

Formula:

((Ending Value / Beginning Value) ^ (1 / Number of Years)) - 1

Example:

• You invest $10,000.
• Five years later, it grows to $15,000.
• Total Time Value of Money Calculator">Present Value of Growth Opportunities)">growth is 50%. But what is the annual rate?
• Calculation: (($15,000 / $10,000) ^ (1/5)) - 1 = 0.0844 or 8.44%.

This means your money effectively grew by 8.44% every single year for 5 years.

Price rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return vs. Total rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return

Many beginners make the mistake of only looking at the stock price. This ignores a huge component of Net Worth Calculator">wealth building: yield" title="Try our Dividend Yield Calculator">dividend-discount-model" title="Try our yield" title="Try our Dividend Yield Calculator">Dividend Discount Model Calculator">dividends.

Price rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return

This measures only the change in the stock's futures-contracts" title="Try our Futures Contracts Calculator">trading price.

• Stock A goes from $100 to $105. Price rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return = 5%.

Total rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return

This includes price appreciation plus yield" title="Try our Dividend Yield Calculator">dividend-discount-model" title="Try our yield" title="Try our Dividend Yield Calculator">Dividend Discount Model Calculator">dividends and rate" title="Try our Effective rate" title="Try our Compound Interest Rate Calculator">Interest Rate Calculator">interest payments.

• Stock A goes from $100 to $105 AND pays a $3 yield" title="Try our Dividend Yield Calculator">dividend.
• Total percentage-return" title="Try our Percentage Return Calculator">gain = $5 (price) + $3 (yield" title="Try our Dividend Yield Calculator">dividend) = $8.
• Total rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return = ($8 / $100) = 8%.

Over long periods, reinvested yield" title="Try our Dividend Yield Calculator">dividend-discount-model" title="Try our yield" title="Try our Dividend Yield Calculator">Dividend Discount Model Calculator">dividends can account for 40% or more of the stock market's total rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return. Always look at Total rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return.

Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return: The rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">Inflation Factor

If your alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio gains 5%, but rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">inflation is 5%, your rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">purchasing power hasn't changed. You ran in place.

Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return Formula (Approximate): Nominal rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return - rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">Inflation Rate

Example:

• Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return: 8%
• rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">Inflation: 3%
• Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return: ~5%

Your goal is always to achieve a positive real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return. This is why keeping cash under a mattress (0% rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return) is actually losing money—it has a negative real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return equal to the rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">inflation rate.

percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk-Adjusted profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">Returns

Not all profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">returns are created equal. Earning 10% by Time Value of Money Calculator">Present Value rate" title="Try our Effective rate" title="Try our Compound Interest Rate Calculator">Interest Rate Calculator">Interest Factor of Future Value of Annuity Calculator">Annuity)">investing in a diversified index fund is very different from earning 10% by betting on a volatile penny stock.

Ideally, you want the highest rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return for the lowest percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk. Professional investors use Cost Per Acquisition Calculator">metrics like the Sharpe Ratio to measure this, but a simple rule of thumb for beginners is the "Sleep Test." If the volatility of your alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio keeps you awake at night, your "percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk-adjusted rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return" is poor, regardless of the numbers.

Benchmarking: Compared to What?

A 15% rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return sounds great, right? Not if the overall market went up 30%. To know if you (or your fund manager) are doing a good job, you must compare your rate-of-return" title="Try our Rate of Return Calculator">performance against an appropriate benchmark.

• US price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">Stocks: Compare against the S&P 500 (e.g., VOO or SPY).
• International price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">Stocks: Compare against the MSCI EAFE Index.
• percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Bonds: Compare against the Bloomberg US Aggregate Bond Index.

If you actively pick price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks but consistently underperform the S&P 500 benchmark, you might be better off switching to a passive index fund percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">debt-snowball-avalanche" title="Try our percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Debt Snowball vs Avalanche Calculator">strategy. (Spoiler: Most active professionals underperform the benchmark over the long run).

The Impact of mortgage-calculator-with-taxes-and-mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">insurance" title="Try our Mortgage Calculator with Taxes and mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">Insurance">Taxes and vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">Fees

Your "net" rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return is what you actually keep.

• Expense price-to-cash-flow-ratio" title="Try our Price to price-to-cash-flow-ratio" title="Try our Price to Cash Flow Ratio Calculator">Cash Flow Ratio Calculator">Ratios: If a Expense Ratio Calculator">mutual fund charges 1% per year, and the market profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">returns 8%, you only get 7%. Over 30 years, that 1% fee can eat up 25% of your total potential Net Worth Calculator">wealth.
• mortgage-calculator-with-taxes-and-mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">insurance" title="Try our Mortgage Calculator with Taxes and mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">Insurance">Taxes: Short-term cobb-douglas-production-function" title="Try our Cobb-Douglas Production Function">capital gains (depreciation" title="Try our Accumulated Depreciation Calculator">assets held < 1 year) are taxed as ordinary income (up to 37%). Long-term gains are taxed at lower rates (0%, 15%, or 20%).

percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">debt-snowball-avalanche" title="Try our percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Debt Snowball vs Avalanche Calculator">Strategy: Minimize vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">fees by using low-cost ETFs/index funds, and minimize mortgage-calculator-with-taxes-and-mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">insurance" title="Try our Mortgage Calculator with Taxes and mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">Insurance">taxes by holding investments for at least a year or using tax-advantaged accounts like IRAs and 401(k)s.

Key Takeaways

• percentage-return" title="Try our Percentage Return Calculator">ROI is a snapshot; rate-of-return" title="Try our Annualized rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">CAGR is a movie. Use rate-of-return" title="Try our Annualized rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">CAGR for long-term tracking.
• Total rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return matters more than price. Don't ignore yield" title="Try our Dividend Yield Calculator">dividend-discount-model" title="Try our yield" title="Try our Dividend Yield Calculator">Dividend Discount Model Calculator">dividends.
• Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return is what you can actually buy. Always subtract rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">inflation.
• Benchmarks keep you honest. Compare your profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">returns to the market average.
• vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">Fees and mortgage-calculator-with-taxes-and-mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">insurance" title="Try our Mortgage Calculator with Taxes and mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">Insurance">Taxes are silent killers. Keep them low to maximize your keep.

FAQs

What is a "good" Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">investment rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return?

Historically, the US stock market has returned about 10% annually (nominal) or 7% (real/rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">inflation-adjusted) over long periods. Anything above 7% real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return is excellent. For safer investments like percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds, 4-5% is typical.

How often should I check my profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">returns?

Less is more. Checking daily leads to emotional decisions. Checking quarterly or annually allows you to stay informed without overreacting to short-term noise.

Why is my personal rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return different from the fund's reported rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return?

This is often due to the timing of your cash flows. If you buy more shares when the price is high, your personal rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return will lag the fund's rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return. If you buy when low (dollar-cost averaging), you might outperform the fund's reported average.

Conclusion

Time Value of Money Calculator">Present Value rate" title="Try our Effective rate" title="Try our Compound Interest Rate Calculator">Interest Rate Calculator">Interest Factor of Future Value of Annuity Calculator">Annuity)">Investing is a marathon, not a sprint. By understanding these Cost Per Acquisition Calculator">metrics, you can stop obsessing over daily price swings and focus on the long-term rent" title="Try our Prorated Rent Calculator">moving-average" title="Try our rent" title="Try our Prorated Rent Calculator">Moving Average Calculator">trend of your Net Worth Calculator">wealth. Use our Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return Calculator to analyze your own alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio and see if you are on track to meet your financial goals.