How to calculate CAGR
CAGR takes three inputs: a beginning value, an ending value and the number of years between them. Divide the ending value by the beginning value, raise the result to the power 1 ÷ years, and subtract 1. For $10,000 that became $16,105 over five years: 16,105 ÷ 10,000 = 1.6105; 1.6105^(1/5) = 1.10; subtract 1 and the CAGR is 10%.
The years can be fractional. $10,000 that grew to $12,000 in 30 months has n = 2.5, for a CAGR of about 7.57%. Count the time elapsed, not the number of data points: values at the start of 2021 and the end of 2025 span five years, not four.
CAGR describes a single lump sum. If money was added or withdrawn along the way, the ending balance mixes growth with deposits, and the formula will overstate or understate how the investment itself performed.
CAGR vs. average annual return
The simple average of yearly returns, the arithmetic mean, is not the rate your money actually compounded at. Whenever returns vary, the average is higher than the CAGR, and the gap, often called volatility drag, widens as Volatility rises. The extreme case makes the point: gain 50% one year and lose 50% the next, and the average return is 0%, yet $10,000 has shrunk to $7,500, a CAGR of about −13.4% a year. In the worked example below, returns that average 5% compound at only 3.74%.
Both numbers have uses. The average describes a typical single year; the CAGR describes how wealth actually grew over the whole stretch. Only the CAGR reproduces the real ending balance, so it is the rate to use in a projection, a compound interest formula or the Rule of 72. Even so, a CAGR hides the path. Two portfolios with the same CAGR can end very differently once withdrawals begin, which is sequence-of-returns risk.
CAGR, fund returns and your own returns
When a mutual fund reports its average annual total return for 1, 5 and 10 years, it is reporting a CAGR under rules the SEC sets in Form N-1A. The formula there, P(1 + T)^n = ERV, solves for the yearly compounded rate T that turns a hypothetical $1,000 payment into its ending redeemable value, after deducting the maximum sales load and recurring fees and assuming every distribution is reinvested. Under SEC Rule 482, an advertisement for a mutual fund other than a money market fund that quotes performance must include the same standardized 1-, 5- and 10-year figures.
Other numbers answer different questions. A CAGR computed from price changes alone leaves out dividends and understates growth, so compare an investment’s total return CAGR with a benchmark’s total-return figure, not its price index. A cumulative return is the whole-period gain without annualizing, and Form N-1A has funds report a period shorter than a full year as a plain total return marked as not annualized.
Your own account is different again, because you added and withdrew money at particular times. A money-weighted return captures that timing; a time-weighted return strips it out to judge the investment itself. Regular purchases through dollar-cost averaging are a common reason the two diverge.
Using CAGR in a financial plan
Every long-range projection runs on CAGR-style assumptions, because a steady rate is the only kind a plan can state in advance. Three habits make those assumptions more honest.
First, separate nominal from real. A 7% nominal CAGR with 3% inflation is a real CAGR of (1.07 ÷ 1.03) − 1 ≈ 3.88%, not 4%, and real growth is what pays for future groceries; see the real rate of return.
Second, work backward from goals. Growing $400,000 into $1,000,000 in 12 years without new contributions takes (1,000,000 ÷ 400,000)^(1/12) − 1 ≈ 7.9% a year. If that required CAGR looks high for your asset allocation, the realistic fixes are usually more saving, more time or a smaller target, such as a lower FI number, rather than a riskier portfolio.
Third, remember what a single rate leaves out. Real returns arrive unevenly, and while you are withdrawing, a bad early stretch can do lasting damage even if the long-run CAGR turns out fine. That is why planners pair a baseline rate with historical backtesting or Monte Carlo simulations.
Common CAGR mistakes
CAGR is easy to compute and easy to misuse, and most errors come from the inputs rather than the arithmetic. Before trusting a CAGR, whether it comes from a fund fact sheet, an advertisement or your own spreadsheet, check how the period was chosen and what the beginning and ending values include. Small differences add up: over 30 years, $100,000 compounding at 7% instead of 5% ends about $329,000 higher.
- Cherry-picked endpoints: starting at a market low or ending at a peak flatters the rate, so look at several periods, such as 1, 5 and 10 years.
- Counting deposits as growth: a balance swollen by contributions does not have a high CAGR; use a money-weighted return instead.
- Mixing price-only with total-return figures, or before-fee with after-fee figures, in one comparison.
- Annualizing a few months of results into a yearly rate.
- Comparing a nominal CAGR with a real one.
- Treating a past CAGR as a forecast for the next decade.
Illustrative numbers
Five bumpy years on $10,000: average return vs. CAGR
- Ending value
- Value at the end of the period, including reinvested income for a total-return CAGR
- Beginning value
- Value at the start of the period
- n
- Years between the two values; fractions are allowed
The SEC’s Form N-1A writes the same equation for a fund’s average annual total return as P(1 + T)^n = ERV.
Starting value$10,000
Yearly returns+25%, −20%, +15%, +10%, −5%
Value after each year$12,500, $10,000, $11,500, $12,650, $12,017.50
Arithmetic average return5.00% a year
CAGR(12,017.50 ÷ 10,000)^(1/5) − 1 ≈ 3.74% a year
$10,000 compounded at the 5% average$12,762.82
Assuming the 5% average would overstate this investor’s wealth by $745.32. The 3.74% CAGR is the only single rate that reproduces the actual $12,017.50, which is why it, not the average, belongs in a projection or a doubling estimate. It still hides that the investment was back to $10,000 after two years, which would matter to someone drawing down the account.
At a glance
CAGR and the return measures it is often confused with
| Measure | What it tells you | Main blind spot |
|---|---|---|
| CAGR | The steady yearly rate linking a start value to an end value | Hides the path and ignores cash flows |
| Arithmetic average return | The typical single year’s return | Overstates compound growth when returns vary |
| Cumulative return | The total gain over the whole period | Not annualized, so periods of different lengths don’t compare |
| Average annual total return (funds) | A CAGR with distributions reinvested and loads and recurring fees deducted | Assumes one lump sum and, in its main version, no taxes |
| Money-weighted return (IRR) | Your personal result, including when you added or withdrew money | Blends your timing with the investment’s performance |
| Time-weighted return | The investment’s own result, with cash-flow timing removed | Not what your account balance actually earned |
Put it in your plan
CAGR in MoneyWhatIf
A fixed growth rate entered on a MoneyWhatIf account behaves like a CAGR: the plan compounds it every year. Market Simulator replays an index’s real annual returns and shows the sequence’s annualized return beside its worst year and deepest drawdown, because the annualized figure alone cannot explain timing. In Plan Resilience, eligible fixed-rate accounts borrow each dealt sequence’s ups and downs but are rescaled to compound to their chosen long-run return, and the Every run table lists each run’s annualized market return over its first five retired years.
Common questions
CAGR FAQs
What is a good CAGR?
There is no official benchmark. A CAGR is only good relative to the risk taken, the period measured and a comparable alternative, so compare a fund with a relevant index over the same dates and on the same basis, total return against total return and after fees. Subtract inflation to see real growth: a 6% CAGR during a decade of 4% inflation grew purchasing power by under 2% a year.
Is CAGR the same as annualized return?
For a single lump sum with nothing added or withdrawn, yes: the annualized return and the CAGR are the same number, and a mutual fund’s average annual total return is a CAGR computed with distributions reinvested. For an account with deposits and withdrawals, annualized figures are usually money-weighted or time-weighted returns, which can differ noticeably from a simple CAGR of the starting and ending balances.
Can CAGR be negative?
Yes. If the ending value is below the beginning value, the CAGR is negative: $10,000 that falls to $8,000 over three years has a CAGR of 0.8^(1/3) − 1 ≈ −7.17% a year. CAGR cannot be calculated when the starting value is zero or negative, which is one reason it suits investment balances better than figures such as business profits that can swing below zero.
How do you calculate CAGR in Excel or Google Sheets?
Put the beginning value, ending value and number of years in three cells, then enter =(End/Start)^(1/Years)-1 using your cell references and format the result as a percentage. Both programs also have a built-in function, RRI(years, start, end), that returns the same rate. Use the elapsed years, including fractions, not the count of yearly data points.
What is the difference between CAGR and IRR?
CAGR uses only a beginning and an ending value, so it fits a lump sum left alone. The internal rate of return, or IRR, solves for the single rate at which all of an investment’s dated cash flows, including every deposit and withdrawal, net to zero. For an account you added to over time, IRR (XIRR in a spreadsheet) measures your personal result. With no cash flows in between, IRR and CAGR are equal.