How to Calculate Income from an Investment

This tutorial shows how to calculate the monthly income that can be withdrawn from a single investment.

All users should begin with the more detailed first tutorial to understand the Ultimate Financial Calculator (UFC) and its basic concepts and settings.

Investment and savings cash flows generally fall into one of four categories:

• A series of deposits followed by a single withdrawal. This pattern is typical of a savings plan.
• One initial deposit followed by a series of withdrawals. An annuity—a financial product often used to provide retirement income—follows this structure. This tutorial demonstrates this type.
• Multiple deposits and multiple withdrawals. A college or retirement savings plan is a typical example.
• A completely irregular pattern of deposits and withdrawals. Stock, bond, or mutual fund investing often follows this pattern.

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

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

1. Set Schedule Type to Savings.
   • Or click the New button to clear all previous entries.
2. Set Rounding Options to Adjust last interest:
   • Click Settings, then select Rounding Options. Choose Adjust last interest.
3. Set Initial Compounding to Daily.
4. Enter 5.0 for the Initial Interest Rate.
5. Create a Deposit entry in the first row of the cash flow grid:
   1. Set the Date to September 1, 2024 (09/01/2024).
   2. Set the Amount to 750,000.00.
   3. Set # Periods to 1.
   4. Note: When # Periods is set to 1, the Frequency field is disabled and will be cleared automatically if it contains a value.

6. Click the second row of the cash flow grid. Set Series to Withdrawal:
   1. The Date will already be set to October 1, 2024 (10/01/2024).
   2. Set the Amount to Unknown by typing U. This tells the calculator to compute the monthly withdrawal amount. See Fig. 1.
   3. Set # Periods to 300.
   4. Press Tab to move to the Frequency column. Select Monthly.
   5. The End Date will be calculated automatically as 09/01/2049. (300 monthly periods = 25 years.)

• At this point, the calculator should appear as shown below:

7. Click the Calculate button.
   • The word Unknown will be replaced with the calculated monthly withdrawal. If all inputs are correct, the result will be $4,420.40. See Fig. 2.
   • Thus, an initial investment of $750,000.00 will support a monthly withdrawal of $4,420.40 for 25 years. This calculation assumes a 5.0% nominal annual interest rate, daily compounding, the Normal compute method, and a 360-day year.

8. Click the Schedule button to view the detailed cash flow schedule.
9. Click the Charts button to view three automatically generated charts that display the savings plan. No additional input is required.

Variations: You can solve for other unknowns. For example, if $4,420.40 is more than needed, change the second row’s withdrawal amount to $3,500 and set the first row’s deposit amount to Unknown. Then calculate how much must be invested to support that withdrawal.

If you know the deposit amount, the withdrawal amount, and the withdrawal date, set the Initial Interest Rate to Unknown to calculate the nominal annual interest rate required.

Note: You can apply techniques from other tutorials to this scenario. Adjust the withdrawal amount, change the interest rate, modify withdrawal dates, apply inflation adjustments, or skip withdrawals using the Cash Flow Options menu.

Back to the Ultimate Financial Calculator.