Annual Compounded Rate of Return for RSU Families in CA and WA

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

An annual compounded rate of return is the single, steady yearly rate that would turn your starting balance into your ending balance over the same number of years. The formula is (ending value ÷ starting value) raised to the power of 1 ÷ years, minus 1. If $200,000 of sold RSU shares grows to $393,000 over 10 years, the annual compounded rate of return is about 7.0%, even if the actual years ranged from a 20% loss to a 25% gain.

The number that matters for a family, though, is not the rate a fund reports. It is the compounded rate left after fees, taxes and the swings of a concentrated stock position. For a California household earning $900,000, that gap can easily exceed a full percentage point a year, and over the 20 years until a young child finishes college it adds up to hundreds of thousands of dollars.

How to calculate an annual compounded rate of return

This measure is also called the compound annual growth rate (CAGR). It smooths an uneven path into one comparable number.

1. Divide the ending value by the starting value. $393,000 ÷ $200,000 = 1.965.
2. Raise that to the power of 1 ÷ the number of years. 1.965 to the power of 0.1 = 1.0699.
3. Subtract 1. The result, 0.0699, is an annual compounded rate of about 7.0%.

Run it the other way to project growth: starting value × (1 + rate) to the power of years. The SEC’s compound interest calculator on Investor.gov does the same math if you prefer not to use a spreadsheet.

The formula assumes no money went in or out. If you add RSU proceeds every quarter, a single CAGR on the account balance overstates your result. For accounts with regular deposits, use a money-weighted return to judge your own outcome, and a time-weighted return to judge the manager.

What common balances grow to (illustrative, before fees and taxes)

These rates are assumptions for illustration, not forecasts. A quick check: the rule of 72 says money doubles in roughly 72 ÷ rate years, so about 10 years at 7%.

APY is the same idea for savings accounts

Banks quote APY (annual percentage yield), which is the annually compounded equivalent of interest that may be credited daily or monthly. A 4% APY means $100,000 left in the account for a year ends at $104,000. A 3.92% rate compounded monthly works out to about 4.0% APY. The more often interest compounds, the higher the APY relative to the stated rate, but the difference is small at these levels. For cash held for a home purchase or tax bill, see HYSA versus brokerage account.

Why the average return and the compounded return differ

An arithmetic average adds the yearly returns and divides. The compounded rate reflects what actually happened to your money, and it is always lower when returns swing.

• A fund that gains 20% and then loses 20% has an average return of 0%. You end with $96 for every $100, a compounded rate of about minus 2.0% a year.
• A single stock that gains 50% and then loses 40% averages plus 5%. You end with $90 for every $100, a compounded rate of about minus 5.1% a year.

This matters for employees whose RSUs and ESPP shares pile up in one company. A concentrated position can show a strong average and a weak compounded return at the same time, because large drops cost more than equal-sized gains give back. Spreading proceeds across a diversified portfolio is mainly a way to protect the compounded rate. Our investment risk management work starts with that position.

Worked example: the same portfolio in California and Washington

Assumptions (all hypothetical): a married couple filing jointly with $900,000 of W-2 income and two children under 10. They invest $500,000 from sold RSUs in a taxable brokerage account for 20 years. The portfolio earns 7% a year before costs: 5.5% price growth plus a 1.5% qualified dividend yield. Dividends are taxed each year and reinvested. Nothing is sold until the end. After both spouses defer $24,500 each to a pre-tax 401(k) (the 2026 limit) and take their deductions, their California taxable income is about $840,000 before dividends.

The tax rates on those dividends at this income level:

• Federal, 2026: qualified dividends and long-term gains are taxed at 20% once married-joint taxable income passes $613,700 (IRS Rev. Proc. 2025-32), plus the 3.8% Net Investment Income Tax above $250,000 of modified AGI. Combined: 23.8%.
• California, 2025 schedule (2026 not yet published): joint taxable income from $742,958 to $891,542 is in the 10.3% bracket, and this family stays in it even as dividends grow to up to about $25,000 a year (FTB 2025 rate schedules), and California has no lower rate for capital gains or dividends. Combined with federal: 34.1%.
• Washington, 2026: no individual income tax, so dividends carry only the 23.8% federal rate.

Three things stand out. First, a 0.9 percentage point difference in yearly cost costs this family $285,295 over 20 years, more than the state tax difference. (The fee levels are hypothetical; see how much you should pay in investment fees.) Second, the tax-free wrapper is worth $173,318 over the California taxable account at the same cost. (Annual limits rule out putting $500,000 into a Roth at once, and withdrawals are tax-free only when qualified, so read this row as what the wrapper does to the rate.) Third, living in Washington adds $50,698 here, before the sale.

Selling changes the picture again. At the end, the California family owes federal tax plus California ordinary rates on the gain. A Washington family owes federal tax plus Washington’s 7% capital gains tax on long-term gains above the annual standard deduction ($278,000 for 2025, the latest published), rising to 9.9% on taxable gains over $1 million (WA DOR). Washington has also enacted a 9.9% income tax on AGI over $1 million starting January 1, 2028, so higher-earning Washington families should not plan on today’s gap lasting.

The factors that move your compounded rate

1. Time. Twenty years at 7% nearly quadruples money. Ten years roughly doubles it. A newborn’s account has the longest runway in the family.
2. Volatility and concentration. Large swings pull the compounded rate below the average, as shown above.
3. Costs. Every dollar of fees is subtracted before compounding, every year. See how fund fees affect your return.
4. Tax location. Holding high-yield or frequently traded assets in 401(k), Roth or 529 accounts, and broad index funds in taxable accounts, keeps more of the return compounding.
5. Reinvestment. Dividends spent are dividends that stop compounding.
6. Contribution timing. Money invested at vest, rather than left in checking for months, starts compounding sooner.

The decision parents with RSUs actually have to make

Most high-earning W-2 families do not need a better fund. They need three decisions made once and written down: what share of each vest stays in company stock, which account each new dollar goes to first (for example 401(k), mega backdoor Roth if the plan allows it, each child’s 529, then taxable), and what total cost they are willing to pay. Our tax management work covers the account order and the sale timing.

What to write down for your kids about compounding

Children see the account balance years later. They rarely see why you chose a 7% assumption, why you sold the company stock, or why fees mattered to you. A one-page note with your return assumption, the account order and the reason behind each choice gives them the reasoning, not just the result. As Kevin puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” Our Age Five Wealth Education program builds that habit with the FamilyKnowledge® System.

Common questions

Is the annual compounded rate of return the same as annual compound interest?

The math is the same. Compound interest usually describes a fixed, promised rate, such as a CD or savings account. An annual compounded rate of return describes the smoothed result of an investment whose actual yearly returns varied. Use the first to project a fixed rate and the second to measure what an investment actually did.

What compounded rate should we assume for planning?

Use a conservative after-cost, after-tax figure rather than a headline index return. In the example above, a 7% gross portfolio compounded at 5.4% to 6.5% for a taxable account depending on state and fees. Planning with the lower number and being pleasantly surprised is safer than the reverse, especially for college and home-purchase goals with fixed dates.

Next step: pull your last brokerage statement, note the total yearly cost and how much sits in your employer’s stock, and run the CAGR formula on the past five years. If the after-cost figure is well below what you expected, a review of the portfolio is a good place to start.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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