Guide
How Withdrawals Affect Compound Interest
Taking money out reduces the base that can compound. Here are simple illustrations of one-time and ongoing withdrawals and how to test them.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
Try the calculator
Run a no-withdrawal case and a withdrawal case to see the impact on growth.
Open the calculatorQuick answer
Withdrawals lower future growth because less principal remains to compound. Earlier and more frequent withdrawals have a larger effect. More on early withdrawals: withdrawing early and compounding.
Disclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and rules vary by provider and country. Withdrawals may have tax or penalty implications depending on the account/provider.
The simple mechanism
Compounding builds on a growing base. Withdrawals shrink that base. Small, ongoing withdrawals can flatten or reverse the growth curve over time.
Example #1: One-time withdrawal
Starting amount: £10,000. Rate: 5%. Time: 15 years. Compare a one-time £2,000 withdrawal at year 3 versus no withdrawal.
| Scenario | Ending balance (approx.) | Difference vs no withdrawal |
|---|---|---|
| No withdrawal | ~£20,789 | — |
| Withdraw £2,000 at year 3 | ~£17,900 | ~£2,900 lower |
Try this in the calculator.
Example #2: Regular withdrawals
Starting amount: £10,000. Rate: 5%. Time: 15 years. Compare no withdrawals vs £50/month withdrawals.
| Scenario | Ending balance (approx.) | Notes |
|---|---|---|
| No withdrawals | ~£20,789 | Baseline growth |
| Withdraw £50/month | ~£7,800 | Balance shrinks as withdrawals continue |
Depending on returns and withdrawal size, the balance can decline. Try this in the calculator.
What matters most
- Timing: earlier withdrawals reduce growth more.
- Frequency: recurring withdrawals can flatten or shrink the balance.
- Size relative to balance: larger withdrawals move the curve more.
- Rate assumption: higher rates can offset small withdrawals, but not guaranteed.
- Fees/taxes/penalties: these further reduce outcomes (varies by provider/account).
How to model withdrawals in the calculator
If the tool supports withdrawals, enter a one-time amount or a recurring withdrawal. If not, approximate by running two scenarios (reduce principal at a given year, or model negative contributions) to bracket the effect.
Open the calculatorCommon mistakes
- Changing multiple variables when comparing.
- Ignoring fees, taxes, or penalties on withdrawals.
- Assuming fixed returns will always cover fixed withdrawals.
FAQ
Do withdrawals stop compounding?
They reduce the balance that can compound. Remaining funds still compound.
Why do early withdrawals matter more?
Money removed early loses more potential future growth.
What if I withdraw occasionally vs monthly?
Occasional withdrawals reduce growth; regular withdrawals can shrink the balance if they exceed growth.
Can withdrawals cause the balance to shrink?
Yes. If withdrawals exceed growth, the balance falls over time.
How do I model withdrawals in a calculator?
Enter them directly if supported, or approximate with a reduced balance/negative contributions in a second scenario.
Do taxes or penalties apply to withdrawals?
They can, depending on account/provider. This example doesn’t include them.
What if my withdrawals change over time?
You can run multiple scenarios with different withdrawal amounts to bracket the range.
How does inflation affect withdrawal planning?
Inflation reduces purchasing power; withdrawing the same nominal amount buys less over time.
Compare withdrawals in the tool
Run a no-withdrawal scenario and a withdrawal scenario to see the impact side by side.
Open the calculator