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Q: allowance ( Answered ,   4 Comments ) Question
 Subject: allowance Category: Business and Money > Accounting Asked by: monpetit-ga List Price: \$7.50 Posted: 26 Sep 2005 12:42 PDT Expires: 26 Oct 2005 12:42 PDT Question ID: 572883
 ```my son has received a gift of \$1000 which he has invested at a fixed rate of 4 % for 30 years. he wishes to withdraw an equal amount yearly so as to deplete his entire account in 30 years. what is that yearly amount?``` Clarification of Question by monpetit-ga on 27 Sep 2005 06:15 PDT `interest at 4% will compound monthly` Subject: Re: allowance Answered By: omnivorous-ga on 27 Sep 2005 07:55 PDT Rated: ```Monpetit ? First, compounding interest monthly yields 4.074% annually. You can calculate this by simply multiplying your \$1,000 by .003333 (.04 or 4% divided by 12, which is the monthly rate) 12 times, then adding up the results for your annual percentage. Mathematically, an alternate way to calculate this is 1.003333 to the 12th power or: 1.003333^12 = 1.04074 --- The annual withdrawals are a little more difficult, so it can be a good idea to rely on a spreadsheet. This is a 30-year annuity, so you can figure PAYMENTS the same way Excel does it with a loan (where the principal is being paid off) ? PMT(rate,nper,pv,fv,type) Rate: is the interest rate for the loan ? and this has to match the term (if monthly, then 0.0033% or if yearly, then 4.074%) Nper is the total number of payments for the loan, here 30 years Pv is the present value or principal -- \$1,000. Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (zero), that is, the future value of a loan is 0. Type is the number 0 (zero) or 1 and indicates when payments are due. We?ll make sure that he has the money at the end of each year, a 0. You should be able to view this simple spreadsheet in your browser, even if you don?t have Microsoft Excel. However, if you do you have Excell you can save the spreadsheet and can change the assumptions: http://www.mooneyevents.com/annuity1.xls Myoarin-GA was close but the monthly compounding increases the annual return to \$58.35. Best regards, Omnivorous-GA```
 monpetit-ga rated this answer: `quick,precise response` Subject: Re: allowance From: research_help-ga on 26 Sep 2005 13:47 PDT
 ```sounds pretty hypothetical to me, kind of like a homework assignment... but you'll have to specify how the interest compounds on this 30 year 4% investment to get an accurate answer```
 Subject: Re: allowance From: myoarin-ga on 26 Sep 2005 13:50 PDT
 `\$ 57.83 each year according to my trusty financial calculator.`
 Subject: Re: allowance From: myoarin-ga on 26 Sep 2005 13:52 PDT
 ```Okay, that is with the interest calculating only annually, it would be slightly more if compounded semiannually or monthly.```
 Subject: Re: allowance From: myoarin-ga on 27 Sep 2005 15:24 PDT
 ```I'll buy him a 52 cent candy bar each year if the 30 year interest bearing deposit is compounded monthly. ;) If this is not a hypothetical question, I am curious as to whether he could actually withdraw funds from the account each year. That would be an annuity, a very small one, something a financial institution probably wouldn't establish. But maybe Monpetit Dad/Mom would - to teach him about finance. My Dad used to give me interest-bearing notes for the dollar earned for an "A"s on my report cards.``` 