Everyone has heard that compounding is powerful. Far fewer people have noticed that it works identically in reverse — and that the reverse is the version most Canadians are actually experiencing.
Compound growth is FV = PV × (1 + r/n)n×t. $10,000 at 7% for 30 years becomes $76,123. The same mathematics applies to costs: contributing $500/month for 30 years at 7% produces about $610,000, but at 5% — the same portfolio charging a 2% fee — it produces about $416,000. The 2% fee cost roughly $194,000, more than the $180,000 that was contributed.
Compounding is what happens when your returns start earning returns of their own. The whole of it lives in one expression:
Take $10,000 invested at 7% annually, compounded once a year, for 30 years:
Read the shape of that carefully, because it is the whole lesson. The money grew by $66,123, of which only about $21,000 came from the first fifteen years. The last decade alone contributed more growth than the first two combined. Compounding is not a straight line and it is not even a gentle curve — it is almost flat, and then it is not.
Which produces the most important practical consequence: the years you cannot get back are the early ones, because those are the years doing the multiplying on everything that follows. A dollar invested at 25 and left alone is not worth "a bit more" than a dollar invested at 45. At 7%, it is worth almost four times as much.
You do not need a calculator to reason about compounding. Divide 72 by the annual return, and you get the approximate number of years for money to double.
| Annual return | Doubles in | Triples in |
|---|---|---|
| 3% | 24 years | 38 years |
| 6% | 12 years | 19 years |
| 9% | 8 years | 13 years |
| 12% | 6 years | 9.5 years |
The rule is most useful backwards. If someone offers an investment that "doubles your money in three years," they are claiming a 24% annual return, sustained. Ask what produces it. The Rule of 72 turns a marketing sentence into a testable claim in about two seconds, and it is the fastest fraud detector in personal finance.
Here is the part that gets left out of the inspirational version of this lesson. The compounding formula does not know or care whether a percentage point is a return or a cost. Subtract 2% from your return and you have not lost 2% of your outcome; you have lost 2% compounded over the entire holding period.
Consider $500 a month for 30 years, a very ordinary Canadian saving pattern:
| Scenario | Total contributed | Ending value | Cost of fees |
|---|---|---|---|
| 7% gross, no fee | $180,000 | $609,985 | — |
| 7% gross, 2.0% fee (5.0% net) | $180,000 | $416,129 | −$193,856 |
| 7% gross, 0.2% fee (6.8% net) | $180,000 | $586,452 | −$23,533 |
The 2% fee consumed more than the entire amount contributed. Nothing about the underlying investment changed — same market, same discipline, same 360 monthly transfers. The only difference is which line on a fund fact sheet the investor read.
While you are contributing, the sequence of returns barely matters. A bad year early is actually helpful — your monthly contributions buy more units cheaply, and the average return over the period is what determines the outcome.
Once you are withdrawing, this reverses completely and becomes the single largest risk to a retirement. Two retirees with identical average returns can end up with wildly different outcomes purely because of what order those returns arrived in. That is sequence-of-returns risk, and it gets a full treatment in Lesson 8.2. File it away: average returns are a fine way to think about accumulating and a dangerous way to think about spending.
A nominal return is what the statement says. A real return is what is left after inflation — the only version that buys anything.
Subtracting (7 − 2.5 = 4.5%) is close enough for mental arithmetic and slightly optimistic. The gap widens as inflation rises, which is precisely when you most want the accurate number.
The practical instruction is simple and almost universally ignored: do all long-horizon planning in real terms. When you model retirement, use a real return of 4–5% for an equity-heavy portfolio and keep every dollar figure in today's money. You will get a number you can actually interpret — "$1.05 million in today's purchasing power" — instead of a nominal figure that sounds enormous and buys much less than it appears to. The alternative, projecting nominal growth against nominal spending, is where retirement calculators go to mislead people.
On $500 a month for 30 years at a 7% gross return, a 1% fee reduces the outcome from about $610,000 to roughly $502,000 — a cost of around $108,000, on $180,000 contributed. The cost is not the 1%; it is the 1% plus everything that 1% would have earned had it stayed invested. This is why the difference between a 0.2% ETF and a 2% mutual fund compounds into a life-changing sum.
It is a very good approximation for returns roughly between 4% and 12%, which covers almost every realistic case. At 8% the rule says 9 years and the true answer is 9.01 years. It drifts at extreme rates — at 25% the rule says 2.9 years versus a true 3.1 — but for mental arithmetic about investment returns it is close enough that the error never changes a decision.
Model $500 a month for 25 years at three different returns and watch how non-linear the differences are. Then run it again with each return reduced by 2% to see the fee drag in your own numbers.
Educational purposes only — not financial, investment or tax advice. RiskStock is not a registered dealer, adviser, or tax professional. Nothing in this course is a recommendation to buy or sell any security or product. Tax and benefit figures are for the 2026 tax year, were verified against official sources on 2026-07-27, and change annually — confirm your own numbers with the CRA and a qualified professional before acting.