By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
The 5-year CAGR formula is: CAGR = (Ending Value / Beginning Value)^(1/5) − 1. In Excel, put the starting value in A2 and the ending value in B2, then use =(B2/A2)^(1/5)-1 or the built-in =RRI(5,A2,B2). If $400,000 of company stock is worth $700,000 five years later, the CAGR is (700,000 / 400,000)^(0.2) − 1, or about 11.8% a year.
CAGR (compound annual growth rate, also called the compound annual rate of return or the 5-year annualized return) is the single steady yearly rate that would turn the starting value into the ending value. It is a clean way to compare two holdings over the same period. It is also easy to misuse, and the misuse matters more when the numbers are a vested RSU position, a seven-figure brokerage account and a 529 for a child who is still in kindergarten.
How the CAGR formula works, step by step
- Divide the ending value by the beginning value. $700,000 / $400,000 = 1.75.
- Raise that ratio to the power of 1 divided by the number of years. For 5 years, that is 1.75^(0.2) = 1.1184.
- Subtract 1. The result, 0.1184, is a CAGR of about 11.8%.
The same math runs in reverse to project growth: Future Value = Present Value × (1 + rate)^years. For example, $15,000 compounded annually at 15% for 5 years grows to $15,000 × 1.15^5, or about $30,170. A quick mental shortcut is the rule of 72: divide 72 by the annual rate to estimate how many years it takes money to double. At 7%, that is roughly 10 years.
What CAGR hides about a concentrated RSU position
CAGR describes the start and the end, not the path. Suppose a $1,000,000 position rises 50% in year one to $1,500,000, then falls 33.3% in year two back to $1,000,000. The simple average of the two yearly returns is about +8.3%. The CAGR is 0%, because the family has exactly what it started with.
This is why a single-stock position and a diversified portfolio can show the same 5-year CAGR and still be very different holdings. An employer stock that went up 80% and then down 40% feels the same on a CAGR chart as a steady index fund, but the family living through it had a much harder time sleeping, and a much higher chance of selling at the wrong moment. When comparing a concentrated RSU position with the rest of the portfolio, look at CAGR next to the worst drawdown in the period, not on its own.
Why CAGR misleads when RSU vests and bonuses keep landing
CAGR assumes nothing was added or withdrawn. High-income W-2 households add money constantly: RSU vests, ESPP purchases, bonuses swept into the brokerage account. Plugging the starting and ending balances of such an account into the CAGR formula overstates the return, often badly.
| Illustrative brokerage account (assumptions) | Value |
|---|---|
| Balance at start of year 1 | $600,000 |
| New money added at the start of years 2 to 5 (RSU sales and bonus) | $150,000 a year, $600,000 total |
| Balance at end of year 5 | $1,600,000 |
| Naive CAGR from start and end balances | about 21.7% a year |
| Actual annualized return on the money invested (money-weighted) | about 7.8% a year |
The account grew about 2.7 times, but most of that came from savings, not investment growth. For an account with deposits, use a time-weighted return to judge the portfolio manager and a money-weighted return (an internal rate of return) to judge what your own dollars earned. Our guide to time-weighted vs money-weighted return walks through both, and how to calculate time-weighted return shows the arithmetic.
Pre-tax CAGR vs after-tax CAGR in California and Washington
A brokerage statement shows growth before tax. For a family in a top bracket, the number that matters is what is left after the sale. Here is an illustration using 2026 federal rules: $500,000 of stock held more than a year grows to $900,000 over 5 years, a pre-tax CAGR of about 12.5%. The family sells, realizing a $400,000 long-term gain. Assume the household’s taxable income is high enough that every dollar of the gain is taxed at the top rates (this ignores deduction interactions and is an estimate, not a tax calculation).
| California household | Washington household | |
|---|---|---|
| Federal long-term capital gains rate (2026, MFJ taxable income above $613,700) | 20% | 20% |
| Net Investment Income Tax (MAGI above $250,000 MFJ) | 3.8% | 3.8% |
| State tax on the gain | 13.3% (California taxes capital gains as ordinary income) | 7% (assuming the family’s other gains already used the standard deduction) |
| Approximate combined rate | 37.1% | 30.8% |
| Tax on the $400,000 gain | about $148,400 | about $123,200 |
| After-tax ending value | about $751,600 | about $776,800 |
| After-tax CAGR | about 8.5% | about 9.2% |
The 13.3% California top rate (the 12.3% top bracket plus the 1% Behavioral Health Services Tax on taxable income over $1,000,000) applies to joint filers with taxable income over $1,485,906 for 2025, and to single filers over $1,000,000 (FTB 2025 rate schedules), and California has no lower rate for capital gains (FTB). Washington has no wage income tax in 2026 but taxes long-term capital gains at 7%, rising to 9.9% on taxable gains above $1,000,000 (WA DOR); the standard deduction was $278,000 for 2025, and the 2026 figure was not yet published at the time of review. Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting in 2028 (WA DOR). Federal figures come from IRS Rev. Proc. 2025-32 and the IRS NIIT page.
Two takeaways. First, when you compare a taxable account with a 401(k) or a 529, compare after-tax CAGRs, not headline ones. Second, the tax on a concentrated, low-basis position is a real cost of diversifying, but it is a one-time cost, while the volatility of a single stock is ongoing. Our tax management work starts with exactly this trade-off.
How a 1% fee changes a family portfolio’s CAGR
A fee is a negative growth rate. If a portfolio earns an assumed 7% a year before costs, $2,000,000 grows to about $7.74 million over 20 years. At 6% after a 1% annual fee, it grows to about $6.41 million. The one-point difference in CAGR costs about $1.3 million over two decades. See how fund fees affect your overall return for the full breakdown.
Using CAGR for a child’s 529: a worked projection
CAGR is most useful looking forward, as a planning assumption. For 2026, each parent can make a five-year election to put up to $95,000 into a 529 for one child, treated as spread over five years of the $19,000 annual gift exclusion, so a couple can contribute $190,000 at once (Form 709 required; IRS Form 709 instructions). If a couple funds $190,000 for a 2-year-old and assumes a 6% CAGR for 16 years, the account would be worth about $482,700 at 18. At an assumed 4%, it would be about $356,000. Running two or three rates, rather than one, is the honest way to plan. California offers no state deduction for 529 contributions, but growth is state tax-deferred and qualified withdrawals are state tax-free.
The decision the family actually faces is not which formula to use. It is which assumed rate to plan on, what it rests on (asset mix, time horizon, fees, taxes), and when to revisit it. Our guide on why time horizon matters covers how long-dated goals change the asset mix, and our investment risk management page explains how we set those assumptions.
Common mistakes with CAGR
- Computing CAGR on an account that received deposits, and believing the result.
- Comparing CAGRs over different periods. A 5-year CAGR that starts at a market low is not comparable to one that starts at a high.
- Quoting pre-tax CAGR for a taxable account and after-tax for a Roth, or the reverse.
- Using the simple average of yearly returns instead of CAGR. After a loss, the average overstates what you earned.
- Treating a past CAGR as a forecast. Past results do not predict future returns.
What to write down for your kids
Children learn the idea of compounding best from a real number in a family document: “We put $190,000 in your 529 when you were two. We assumed 6% a year. Here is what it was worth when you turned ten, and here is why we picked that number.” Recording the assumption, the result and the reasoning teaches more than the account balance alone. As Kevin Luu 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 this into the FamilyKnowledge® Library.
Frequently asked questions
What does a 5-year annualized return mean?
It is the CAGR over five years: the single yearly rate that, compounded five times, turns the starting value into the ending value. A fund that grew from $100,000 to $161,000 in five years has an annualized return of about 10%, even if individual years ranged from a loss to a 25% gain. It says nothing about how bumpy the ride was.
Is CAGR the same as average annual return?
No. The average annual return adds up each year’s return and divides by the number of years. CAGR is a geometric average that reflects compounding. After any losing year, the simple average is higher than CAGR. A +50% year followed by a −33.3% year averages +8.3%, while the CAGR is 0%, which matches what the investor actually has.
How do I calculate CAGR in Excel?
With the start value in A2, the end value in B2 and the number of years in C2, use =(B2/A2)^(1/C2)-1 or =RRI(C2,A2,B2), then format the cell as a percentage. If the account had deposits or withdrawals along the way, use =XIRR() with dated cash flows instead, since CAGR will overstate the return.
Next step
Pull the five-year statements for your largest taxable account and compute both the naive CAGR and the money-weighted return. If they differ by more than a couple of points, your savings, not your investments, are doing most of the work, and that is worth knowing before you set the assumptions for the kids’ accounts. This is general education; the right move depends on the family’s full picture.
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.
Connect on LinkedIn → · About KevinThis is part of how we approach Investment & Risk Management for high-income W-2 families at Bright Advisers.
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