Calculation Methodology

WealthCalculator provides completely transparent, pure mathematical models. Here are the compounding formulas and inflation adjustments powering our tools.

1. Future Value & Inflation Discounting

First, we calculate the nominal future value (FV) of a lump sum using standard compound interest:

FV_nominal = PV × (1 + r)ⁿ

Then, to find the real purchasing power today, we discount this future sum back by the annual inflation rate:

FV_real = FV_nominal / (1 + i)ⁿ = PV × [(1 + r) / (1 + i)]ⁿ

Where: PV = Present Value (initial amount), r = annual return rate, i = annual inflation rate, and n = duration in years.

2. Systematic Investment Plan (SIP)

Systematic monthly contributions compound at the end of each month (with payments made at the start of the month):

FV_nominal = P × [((1 + r_m)^months - 1) / r_m] × (1 + r_m)

The inflation-adjusted value accounts for erosion over the investment duration:

FV_real = FV_nominal / (1 + i)^years

Where: P = monthly SIP payment, r_m = monthly interest rate (r/12/100), and i = annual inflation rate.

3. Financial Independence Early Retirement

FIRE targets use the 4% safe withdrawal rate (based on historical research like the Trinity Study):

FIRE Nest Egg (Real) = Annual Expenses × 25

We then project this target into a nominal future sum needed at the time of retirement:

FIRE Nest Egg (Nominal) = FIRE Nest Egg (Real) × (1 + i)^Years