## How to Calculate Income from an Investment

Tutorial 3

Calculating income just may be the quintessential financial calculation. This tutorial will teach you how to use the Ultimate Financial Calculator to calculate the income that can be expected from an investment.

This example applies to our online Ultimate Financial Calculator. The C-Value! program for Windows works in a similar way and has a few more features including the ability to save your work.

All users should work through the first tutorial to understand basic concepts about the calculator.

Broadly speaking investment and savings cash flows will fall into one of four groups with the following characteristics:

- A series of deposits followed by one withdrawal. This cash flow pattern is typical for a
**savings plan**. - The second type of cash flow assumes one initial deposit (investment) followed by a series of withdrawals. An
**annuity**, a financial product often purchased for retirement income, follows this cash flow pattern (this tutorial). - The final type is a completely random pattern. Multiple investments (deposits) with intermittent returns (withdrawals).
**Stock, bond or mutual fund investing**is representative of this cash flow pattern.

The Ultimate Financial Calculator can easily handle any of these cash flow patterns as well as variations of each pattern.

**To create an investment schedule with a single initial investment and assuming 25 years of monthly withdrawals, follow these steps:**

- Set "Schedule Type" to "
**Savings**"- Or click the [Clear] button to clear any previous entries.
- The top two rows of the grid will not be empty

- Set "Rounding" to "
**Adjust last interest**" by clicking on the {Settings} {Rounding Options}

- Set "Initial Compounding" to "Daily".
- Enter
**5.0**for the "Initial Interest Rate". - Create a "Deposit" event in row one of the cash flow input area.
- Set the "Date" to September 1st, 2016 (09/01/2016)
- Set the "Amount" to 750,000.00
- Set the "# Periods" to 1.
- Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is filled in, it will clear automatically.

- Click on the second row of the cash flow input area. Select "Withdrawal" for the "Event Type".
- The date will already be set to October, 1st 2016 (mm/dd/yyyy)
- Set the "Amount" to "Unknown" by typing "U". This tells the calculator to calculate the final withdrawal amount
- Set the "# Periods" to 300.
- Use the [Tab] key to tab to Frequency. Select "Monthly".
- The "End Date" will automatically be calculated (09/01/2041). (300 monthly periods is 25 years.)

- Your calculator should now look like this:

- Calculate the unknown. The result is $4,420.40

- Thus the initial investment of $750,000.00 will allow the user to withdrawal $4,420.40 every month for twenty-five years assuming a 5.0% nominal annual interest rate, daily compounding when using a "Normal" compute method and a 360 day year.

- Click the "[Schedule]" button to see a detailed schedule

- Finally, don't forget to click on the "[Charts]" button to view a series of charts that let you visualize your savings plan. The charts are automatically prepared. There is nothing to configure or enter.

Variations: You can solve for several other possible unknowns. Maybe $4,420.40 is a little more than the amount which is needed for the periodic withdrawal. In that case, reset the second row's withdrawal amount, for example, to **$3,500** and the first row's deposit amount to "**Unknown**". Now, calculate for the unknown value to see how much has to be deposited to allow for the withdrawal amount that is desired.

Additionally, if you know the regular deposit amount and the amount that will be available for withdrawal and what date the funds will be available, then you can set the "Initial Interest Rate" to "Unknown" to calculate the nominal annual interest rate needed.

Note: If you apply the principles illustrated in other examples to this example, you can adjust the income amount and even the assumed interest rate. Furthermore, you can change the withdrawal dates, calculate income with adjustments for inflation or skip withdrawals (see "Cash Flow Options").