How To Use The Calculators

We have two calculators to help you work out:

• Calculator 1 - How much will my savings/investments grow?
• Calculator 2 - How much do I need to save/invest?

However, there are a number of points to note. First of all neither calculator takes taxation into account. As everyone has a different tax situation and the tax regime alters over time, it would be hard to model this into the calculator. If you invest in an ISA then your investments have the opportunity to grow free from tax. You also get tax-protection in a pension plan but, currently, you are taxed on your pension when you start to draw from it.

What rate of return should you use?

It's important to be realistic about what rate of return you expect from your investments. Since 1918 the UK stock market has returned an average of around 11% a year. Depending on how conservative your investing strategy is, you might want to assume a return lower than this. Arguably the world's greatest investor, Warren Buffett, has achieved a long-term growth rate of a little over 20%. Although you might do better than this over short periods, it is very, very unlikely that you will match this rate of growth over the long-term.

Don't forget you need to consider the costs of investing too. In a plain-vanilla index tracker these could be as much as 1% a year. In other types of investments, charges could knock 2% or even more off your returns.

What about inflation?

The 11% stock market return quoted above is what is known as the nominal rate. Adjusting for the effects of inflation, the real rate of return since 1918 has been 7% (as inflation over this time has averaged around 4%). If you want to use the calculators to compare like with like, i.e. spending power now versus spending power in the future, you should use a real rate. Again you might need to reduce the rate to allow for the cost of investing.