How serious are you about investing?

If you are serious then, this investment calculator is for you. Sure, all investment tools published by other sites will tell you how much you'll have after "X" years assuming a "Y" rate of return. But when you use many of these other tools, they don't consider the impact of inflation, taxes or fees on your investment results.

What good is that?

#### Info...

## Getting Started

Click on "Help" for a concise explanation.

First, let's get you oriented to a few of the high-level features of this calculator. Don't be concerned with all the options. We'll discuss each one in the next few minutes.

The upper part of the calculator has two sections. We'll ignore the "Optional Settings" on the right for the time being. Leave those inputs set to zero. When the inputs are all zero, it makes no difference whether the other options are yes or no.

The section labeled "Investment Plan" is the core of the calculator with the first six inputs being the most important ones. If you understand these first six and how they relate, everything else will fall into place.

## A Dual Investment Tool

Notice the choice "Cash Flow Type."

The periodic additions to or withdrawal from the investment collectively is the cash flow. The setting "Cash Flow Type" controls whether the cash flow is an addition to the "Starting Amount" (investment (+)) or a withdrawal from the "Staring Amount" (income (-)). If you select "Income" then set "Starting Amount (PV)" greater than "Goal Amount." Set "Starting Amount" less than "Goal Amount" when you've set "Cash Flow Type" to "Investment."

Frequently one invests so as to have enough saved at some future date to generate an income stream. How much saving will you need to produce the income you desire? This calculator will tell you.

## Investing for Income

Investing for income is a two-step calculation that also happens to demonstrate the flexibility of this calculator.

Follow along, and I'll take you through the steps.

**How much should I have in my investment account when I need to depend on it for income?**

First, how much income do you want?

$3,000 a month.

How long should this income last?

25 years or 300 months.

Set "Cash Flow Type" to "Income."

Enter "Unknown" for "Starting Amount."

Enter 3,000 for "Periodic Withdrawal Amount" (or whatever future income you want).

Enter 300 for "Number of Cash Flows."

Enter an "Annual Rate of Return (ROR)" that is, the rate you think your investment will earn. For this example, we'll use 4.5%.

Set "Goal Amount (FV)" to 0.00. Why? Because we are withdrawing from the investment and we want the income to last for 300 months. When 300 months have passed, we'll have nothing left. Zip. Zero.

You can adjust the dates as needed, but for this example, I have both dates set to May 5th.

Leave the "Investment/Income Frequency" and "Compounding" set to "Monthly."

The calculator is now ready to answer the question, what starting amount do I need to have to receive the desired income for the planned number of months?

Click "Calc", and the answer is **$542,000.00** (rounded up) This is the number we need for step two.

**How much do I have to invest periodically to reach my goal?**

Change the "Cash Flow Type" to "Investment."

Set the "Starting Amount" to whatever the current balance is in your investment account(s). For this example, I'll assume that is 0, so enter 0.00.

Set the "Periodic Investment Amount" to "Unknown."

How much time is remaining before you want to start receiving the income?

Assume 30 years.

How frequently do you want to make additional investments?

Four times a year, or quarterly.

Therefore, for "Number of Cash Flows", enter 120 (4 times a year for 30 years). And set the "Investment/Income Frequency" to "Quarterly."

Set the "Annual Rate of Return" to a value with which you are comfortable. But, you might want to be a bit more aggressive than we were with the "Rate of Return" used in the first calculation. I'm going to use 6% for this example.

Set the "Goal Amount" to **$542,000**. (This is the result of the first calculation).

Set the two dates as needed. If you are following along, I'm leaving "Today's Date" set to May 5th. You can set the "First Cash Flow Date" to when you expect to start making contributions to the investment. If you want to tie the contributions to your pay period, set it to a pay day. I'm going to set it to June 1st.

Click "Calc." The result is $1,636.

Invest **$1,636** every quarter, and if you earn your anticipated rate of return, you'll end up with the required $542,00 after 30 years. Or enough money to give you the income you want.

You can verify the result by clicking on the "Schedule" button and checking the last balance amount.

Cool, right? And we didn't even have to change calculators.

## There's more to this Investment Calculator

What about the "Optional Settings"? How do they work?

Glad you asked.

No doubt if you have done even the most basic reading on investing, you have come across phrases similar to "examples shown do not reflect actual investment results."

A big part of the reason for this is because the investment tools used to create compound growth and investment income illustrations frequently do not consider the impact of taxes, inflation, and potential investment fees.

This calculator will take these important factors into account.

Here's how they work.

## Impact of Inflation on Investing

In the "Optional Settings" section, enter an average "Annual Inflation Rate." If you want to use a rate based on history, the Bureau of Labor Statistics publishes historical US Consumer Price Index data going back to 1914. If you average the CPI for those years, you'll find that in the US, Inflation has averaged 3.2% per year. (Checkout this Inflation Calculator. It will average the CPI for you for any range of years.)

If you enter an assumed inflation rate and set "Adjust Cash Flow for Inflation" to "Yes", then the income or investment cash flows will be adjusted on the first cash flow date after January 1.

The $1,636 quarterly investment from the above example, will have to be increased to a bit over $4,000 a quarter for your investment results to keep pace with inflation.

Even if you don't want to adjust the cash flow for inflation, you may still want to enter an assumed inflation rate. Notice the "Results" pane. If you set "Cash Flow Type" to "Investment", the calculator calculates two inflation-adjusted "Goal Amounts."

"Today's Value After Inflation" is what the goal value will be, expressed in today's dollars when adjusted for inflation. Having $542,000 in 30 years with a 3.2% inflation rate will be as if you had $211,000 today. The other inflation-adjusted result, "Inflation Adjust Goal Amount" is the amount you'll have to have in the future to buy what $542,000 buys today, or per our example, $1,390,000.00.

Notice, if you change the "Cash Flow Type" to "Income", the calculator calculates the inflation-adjusted value for the first "Periodic Withdrawal Amount." If you don't compensate for inflation, and assuming it averages 3% over 25 years, a $3,000 income will be equivalent to having a $1,300 income today, or you'll need to have $6,600 to have the same purchasing power that $3,000 has today.

## Income Taxes and Investing

Obviously, taxes can have a significant impact on your investing results if you pay the taxes due from your investment account. If you are paying taxes using investment funds, then enter your marginal tax rates as needed.

Generally, if an investment is not tax-free, then you would owe taxes on the realized gains. The calculator treats the investment gain (ROI) as realized, and the taxes get deducted on the first cash flow date after the first of each year.

There is an exception. Some investments allow the investor to defer the tax liability. A traditional IRA account comes to mind as such an investment. With these investment accounts, income taxes are calculated on the withdrawal, not on the investment gain.

If you want taxes calculated on the income, set "Taxes Calculated on Withdrawal" to "Yes."

## Fees

Some investments require the investor to pay a fee. Fees get calculated in many ways, and no general purpose investment calculator can accurately handle all scenarios.

This calculator uses the percentage you enter and calculates the amount due using the year's average balance. The fee is deducted at the end of the year.

## Internal Rate of Return (IRR)

How does an investor compare investments and make a decision which investment is best? One consideration is the rate of return. The IRR is the gain an investment generates expressed as an annualized percentage.

You can use this calculation to compare investments. Notice there are two IRR calculations - one before the impact of taxes and fees, and the other after taxes and fees. (If your investment has an irregular cash flow, use this Internal Rate of Return Calculator to calculate the IRR.)

## Solving for an Unknown

The user can quickly answer the following questions with this one calculator.

- What will be the future value of my investments?
- How long will my income last?
- How long will it take to reach my goal?
- What rate of return must I earn to reach my goal?
- What rate of return will create the income I need?
- What will be my income?
- How much do I have to invest to meet my goal?

The Investment Calculator is one of the newer calculators on this site, and I've not had the benefit of much user feedback. Please feel free to comment on how it or this documentation can be improved.

## Investment Calculator Help

Investments that include regular cash flows can be described by five primary values or attributes. There are other details, but they play a secondary role to these five:

- Present value or starting amount
- Inflow or outflow amount - collectively the cash flow
- Term or number of cash flows
- Rate of Return (ROR) expressed as a percentage
- Future value or ending value (goal amount)

With this calculator, anyone of the five can be "Unknown." The calculator can solve for only one unknown at a time.

Three of the five can be zero, and there are rules for when zero is not appropriate

If the "Cash Flow Type" is set to "Income," the present value can't be zero. There is no money to invest that create the income.

If the "Cash Flow Type" is set to "Investment", the future value can't be zero. Who wants to add to an investment and end up with nothing?

Only one of the five can be zero at a time.

The rate of return and number of cash flows can't be zero.

Thus at least three inputs must be set to a value other than zero. One input may or may not be zero. And one input may be an "Unknown," but is not necessary to have an input set to "Unknown." Frequently, after solving, you may wish to change one of the options and then look at the schedule. The schedule updates whenever you click on the "Schedule" button. It is not necessary to click on "Calc."

## Daryn says:

Is there a calculator I could track 3 separate investments at the same time:

example:

RRSP

TFSA

Company Pension

I like to see what each would be worth in 5 or10 years. Each one would have different amount of contributions over the years.

## Karl says:

If by that you mean 3 separate investments at the same time and keep them separate, the answer is no.

But if they have the same rate-of-return, the problem you have is the different contributions, then you could use Ultimate Financial Calculator. It will allow you to have multiple cash flows with different amounts at different frequencies. Look at the "Investment" cash flow option. If you leave the interest rate set to 0%, it will calculate the ROR based on the contribution and withdrawals.

## Daryn says:

Hi Karl

I was looking for something like this, where i could plug all the numbers in and it would show me what my 3 investment would each be worth. I assume I could do this in the Ultimate Calculator, but only one at a time to get the value. Just wanted to have all 3 show on the same calculator. So from there I could see which one I would start to drawn from first and which ones I would need to reinvest

Investment 1 = RRSP

Open Balance = 20,000

monthly contributions = 1200

average rate earn = 5%

what would the value be in 5 years or 10 years

Investment 2 = Company Penison

Open Balance = 20,000

monthly contributions = 500.00

average rate earn = 6%

what would the value be in 5 years or 10 years

Investment 3 = TFSA

Open balance = 62,500

monthly contributions = 500.00

average rate earn = 4 %

what would the value you be in 5 years or 10 years

## Karl says:

I see. No, I’m afraid the calculator allows for one investment at a time. Of course, you can print out the report and work from that for all 3 at the same time.

## David H says:

I’m a bit confused by what the “Last cash flow date” shows in the results field. I used the calculator to tell me what principal is required to meet a certain monthly income and entered 360 for the “number of cash flows” (i.e. 30 years). I would expect the “Last cash flow date” to reflect the requested 30 years. But instead it reflects various periods (all less than 30 years) depending on the details of what is chosen for inflation rate, ROR, etc.

## Karl says:

I can see how that can be confusing. I need to better document what’s happening.

First, I assume you have the calculator set for income cash flow type.

Set all the optional settings on the upper right to 0.

For the first calculation, if you set "Starting Amount (PV)" to "Unknown," the calculator will calculate the starting amount you need to have to allow for your desired withdrawal amount and the cash flow will last 30 years.

But, if you now change the ROR and do not set the "Starting Amount (PV)" back to "Unknown," and then recalculate, the calculator will adjust the term, not the starting amount. That’s why the ending date will change.

Now, you mentioned the inflation rate option. If you change only that and recalculate, the last cash flow date will not change. What changes is the "Today’s Value After Inflation" amount. What that value tells you is the purchasing power, in today’s dollars of the last cash flow.

Does this help?