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Q: allowance ( Answered 5 out of 5 stars,   4 Comments )
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:5 out of 5 stars
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) ?


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:

Myoarin-GA was close but the monthly compounding increases the annual
return to $58.35.

Best regards,

monpetit-ga rated this answer:5 out of 5 stars
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.

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