Start with the actual question
Many financial goals sound different:
- £20,000 for a house deposit in four years;
- £50,000 for a future expense in ten years;
- £500,000 for retirement decades from now.
But they share the same basic problem:
Given what I have today, how much do I need to add each month to reach a target by a particular date?
For a short-term goal, most of the money will usually have to come from what you save. Over longer periods, investment growth can become a much larger part of the result, but that also means the calculation depends more heavily on what you assume about future returns.
A short-term goal is mostly arithmetic
Suppose you want £20,000 in four years and are starting from zero. Ignoring interest for a moment:
You need to save roughly £417 a month.
If the money earns some interest, the required amount falls slightly. But four years is not long enough for compounding to change the calculation much, so a short-term goal is driven mainly by:
- the target;
- the time available;
- how much you can save.
Where short-term money is held
Time also affects where the money might reasonably be held. For a short-term goal, taking substantial investment risk can leave little time to recover from a market fall just before the money is needed. Cash savings and lower-risk options are therefore often considered for shorter horizons.
The trade-off is a lower expected return, and over a few years it costs relatively little. Even a steady 7% a year would only bring the £417 down to about £364 a month, and over four years an investment return can be well below that, or negative. For a goal only a few years away, the amount you contribute does most of the work either way.
For long goals, more of the target comes from growth
Money contributed earlier has longer to grow. Over long periods, that means investment growth can provide a much larger share of the final target.
Contributions made at the end of each month grow to:
- is the future target;
- is the monthly contribution;
- is the monthly return;
- is the number of monthly contributions.
Rearranged, it gives the monthly contribution needed. It depends on three things: the target, the time available and the return assumed.
At 7% a year, is the monthly rate that compounds to 7%, not 7% ÷ 12:
For a £100,000 target, starting from zero, at a hypothetical constant 7% a year:
| £100,000 at 7% | 5 years | 10 years | 20 years | 30 years |
|---|---|---|---|---|
| Monthly contribution | £1,405 | £585 | £197 | £86 |
| Total contributed | £84k | £70k | £47k | £31k |
| Growth | £16k | £30k | £53k | £69k |
Over five years, most of the target comes from your own contributions. Over 30 years, most of it comes from assumed growth: about £69,000 of the £100,000. A longer deadline helps twice: more months to save in, and longer for each contribution to grow.
Starting from zero. 7% a year, compounded monthly at the equivalent monthly rate; contributions at the end of each month. Constant returns; no fees or taxes.
| Years | Per month |
|---|---|
| 5 | £1,405 |
| 10 | £585 |
| 15 | £321 |
| 20 | £197 |
| 25 | £128 |
| 30 | £86 |
| 35 | £58 |
| 40 | £40 |
Doubling the time from 10 to 20 years does not halve the monthly amount. It cuts it by 66%, from £585 to £197.
The five-year figure is what the maths gives if the money grows smoothly at 7% a year. Whether that is a sensible assumption for money needed in five years is a separate question, and it is the short-horizon problem above: little time to recover from a fall. If the money is held somewhere lower-risk, the figure moves towards the £1,667 a month that £100,000 needs with no growth at all.
Money already invested today, , grows on its own to by the target date, so the contributions only have to close the gap between that and the target.
Same contributions, different time horizons
Consider two simplified plans at a constant 7% annual return:
- £500 a month for 30 years;
- £750 a month for 20 years.
Both involve £180,000 of total contributions. Yet the first gives its early contributions much more time to compound. Under the simplified assumption, the 30-year plan finishes at about £585,000 and the 20-year plan at about £381,000.
You cannot change when you started, so “start earlier” is not especially useful once the date has passed. What the comparison does show is that time and contribution are partly interchangeable. If the date moves closer, the contribution required rises. If the contribution cannot rise enough, then the target, the date or the assumed outcome has to change. Those are the variables you can actually work with.
How returns change the amount you need to save
In the 30-year example, about £69,000 of the £100,000 is growth, and all of it rests on the 7% assumption. Here is the same target at 7% and at 4%:
| £100,000 target | 5 years | 30 years |
|---|---|---|
| Monthly contribution at 7% | £1,405 | £86 |
| Monthly contribution at 4% | £1,511 | £146 |
| Total contributed at 7% | £84k | £31k |
| Total contributed at 4% | £91k | £53k |
Over five years, most of the £100,000 has to come from your contributions either way. Over 30 years, much more of the result is expected to come from growth, so changing the return assumption has a much larger effect.
The chart shows the same comparison at every horizon, with 0% for reference:
- 7% a year
- 4% a year
- 0% a year
The monthly contribution needed to reach £100,000 from zero, multiplied by the number of months; whatever is not paid in comes from growth. Same conventions as the chart above. Drawn as totals because, in pounds per month, the lines for different returns move closer together as the horizon lengthens, which hides the effect.
| Years | 7% a year | 4% a year | 0% a year |
|---|---|---|---|
| 5 | £84,000 (£1,405) | £91,000 (£1,511) | £100,000 (£1,667) |
| 10 | £70,000 (£585) | £82,000 (£682) | £100,000 (£833) |
| 20 | £47,000 (£197) | £66,000 (£275) | £100,000 (£417) |
| 30 | £31,000 (£86) | £53,000 (£146) | £100,000 (£278) |
| 40 | £19,000 (£40) | £41,000 (£86) | £100,000 (£208) |
At 0% you pay in the whole £100,000, whatever the date. The 4% and 7% lines move further apart the longer the horizon: the further away the goal, the more of it rests on the assumption.
Where do return assumptions come from?
If a 30-year plan depends heavily on investment growth, what return is reasonable to assume? Most assumptions start from history, and the figures you meet most often come from one market in particular.
Why 7% and 10% are so common
Returns can be quoted before inflation (nominal) or after inflation (real). The difference is explained in more detail below.
Large US companies, with dividends reinvested, have returned roughly 10% a year since the late 1920s before inflation, and roughly 7% a year after it. Those historical US returns are one reason 10% nominal and 7% real are commonly used in long-term examples. They describe the same history: one in money terms, one in purchasing power.
It is also a favourable history to borrow from. The longest widely used dataset of global returns covers 1900 to 2024. Over that period, shares across the world returned about 5.2% a year after inflation. The US returned about 6.5%, among the highest of any market. The world excluding the US returned about 4.3%.
So a 7% real return is not a neutral assumption. It is close to the long-run record of the most successful large market of the last century, and above what a global investor actually earned.
Source Elroy Dimson, Paul Marsh and Mike Staunton, UBS Global Investment Returns Yearbook 2025 (real returns in local currency, 1900–2024).
An average is not what one period delivers
A century-long average includes good decades and bad ones. A goal 20 years away gets one particular 20 years, and which one makes a large difference.
- Someone invested in the S&P 500 from the end of 1999 to the end of 2009, with dividends reinvested, earned an annualised total return of about −1%.
- Japan’s Nikkei 225 price index closed at a record 38,915.87 at the end of 1989 and did not exceed that level again until February 2024, more than 34 years later. An investor receiving dividends would have recovered earlier than the price index alone suggests.
Both periods are part of the long-run history behind the averages above. But if one of them overlaps with the years when you actually need the money, the century-long average is not much comfort.
What a historical figure depends on
Two figures quoted as “the stock market return” can also differ simply because they measure different things:
- which market, and whether it is one country or the world;
- which years, and especially where the period starts and ends;
- whether dividends are included;
- whether the figure is before or after inflation;
- whether fees and taxes have been deducted;
- the currency in which the investor measures the result.
History is more useful for testing a range than for choosing one precise number. The sensitivity chart above shows why: changing the assumption changes how much of the target has to come from your own contributions.
Inflation, nominal and real returns
Money does not keep the same purchasing power over time. If prices rise, the same £100 will buy less in the future than it buys today. That increase in prices is inflation.
For example, with inflation of 2.5% a year, something that costs £10,000 today would cost about £12,800 in ten years. So having £10,000 in ten years would not be equivalent to having £10,000 today.
This is why investment returns can be expressed in two ways:
- Nominal return: how much the amount of money grows, without adjusting for inflation.
- Real return: how much its purchasing power grows after accounting for inflation.
If £10,000 grows by 7% in one year, it becomes £10,700. That is a 7% nominal return. But if prices increased by 2.5% over the same year, purchasing power did not increase by the full 7%.
Approximately, the real return is the nominal return minus inflation:
More precisely:
If an investment returns 7% while inflation is 2.5%:
So a 7% nominal return with 2.5% inflation is equivalent to about 4.4% growth in purchasing power.
This matters when setting a future target. If £100,000 represents the purchasing power you want in today’s money, you should either use a real return, or increase the £100,000 target over time with inflation. Mixing a fixed today’s-money target with a nominal return makes the projection inconsistent.
The examples above apply 7% to a fixed £100,000. If that £100,000 is meant in today’s money, the 7% has to be a real return, after inflation. With 2.5% inflation, a 7% nominal return is the 4.39% above: close to the 4% line in the chart.
Risk also changes as the date approaches
A goal that is decades away today will eventually be a few years away, and its final years face the same problem as a short-term goal: little time to recover from a market fall just before the money is needed.
As the date becomes closer and less flexible, protecting the amount already accumulated can become more important than maximising expected return.
A goal is therefore not only a target amount. It also has a time horizon and a tolerance for arriving with less than planned.
What does this help you decide?
A useful goal calculation gives you more than one answer. If the required monthly amount is too high, you can test:
- a later date;
- a smaller target;
- a larger starting amount;
- a different return assumption;
- several scenarios rather than one optimistic forecast.
The calculation gives you the conditions under which the goal works. You can then decide whether those assumptions and the required contribution are realistic for you.