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Can anyone give me the correct equation, or point me to an online calculator to compute the following. If I have investments totalling $X, returning an average of Y% per year, how many years will it last if I draw down $Z per month? Or, alternatively, how much can I draw each month if I want it to last for N years? Thanks to all you Fools for being here.

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JoDaddy,

Go to vanguard.com. I believe they have such a model.

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You could put together a spreadsheet that has your formula ((X+(X*Y))-(12*Z))=A, then keep on repeating rows with the new total A replacing X. Granted this isn't totally accurate because it is done on yearly boundaries but it will give you a good idea. Or if you want to do it on a monthly basis which is more accurate but is a whole lot of entries, use ((X+(X*(Y/12))-Z)=A.

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JoDaddy asked: *Can anyone give me the correct equation, or point me to an online calculator to compute the following. If I have investments totalling $X, returning an average of Y% per year, how many years will it last if I draw down $Z per month? Or, alternatively, how much can I draw each month if I want it to last for N years? Thanks to all you Fools for being here. *

and uniquename answered * You could put together a spreadsheet that has your formula ((X+(X*Y))-(12*Z))=A, then keep on repeating rows with the new total A replacing X. *

But here's the "easy" way. If you have a computer, 8^), then you probably have a spreadsheet program such as Excell. All modern spreadsheet programs have financial functions built in. In Excell the one you want is called NPER. There is a function to solve for each variable given the values of the others. For example, PV gives you the necessary Present Value needed for a given payment, interest rate, and number of periods.

An example would be a 30 year mortgage valued at $100,000, an annual interest rate of 7.5%, with payments made at the end of the month. You would type in the function =PMT(7.7/12,30*12,100000) and get the answer: Monthly payments of $699.21.

I know, most people are afraid of spreadsheets and are barely able to cope with email. But spreadsheets are half the reason for the personal computer revolution and still account for most of the actual useful work that PCs do. As such, it's worthwhile to learn to use them.

Fox

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** *** JoDaddy asked: Can anyone give me the correct equation, or point me to an online calculator to compute the following. If I have investments totalling $X, returning an average of Y% per year, how many years will it last if I draw down $Z per month? Or, alternatively, how much can I draw each month if I want it to last for N years? Thanks to all you Fools for being here. ** *

Check out the Retire Early Safe Withdrawal Calculator.

http://home.earthlink.net/~intercst/reindex.html

It's an Excel spreadsheet that allows you to determine your safe withdrawal rate and optimal stock allocation for pay out periods from 10 to 50 years. For most people, the safe withdrawal rate is around 4% of assets, adjusted for inflation each year.

Good Luck, Dick

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That's Excel - the new fangled computers also have spell checkers ;). Just kidding, no flames please!

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None of the formulas or methods described in the other responses give the RIGHT answer, because you described the investment as having an AVERAGE return of Y%, not a FIXED return of Y%.

Example: If you draw 12% from an investment that earns a FIXED return of 13%, the money will last forever. Stocks since 1966 have AVERAGED a return of maybe 13%. But if you had drawn 12% of the original value each year, you would have been broke by the mid-1980s.

Too many people forget that the return from stocks is not guaranteed. So if they have a given average, that means that you have a 50/50 chance of doing worse over the coming decade or so, and 20% chance of doing MUCH worse.

If you want an example to clarify this, put the following in your Excel spreadsheet: Have your $100,000 investment lose 15% for each of the first 4 years and then earn 45% for each of the following 6 years. The average return is 21% (or somewhat less if you compute the compound return instead of the average return). But if you try to draw $10,000 a year from it, you would be broke by the end of the decade.

If you think that losing 15% a year for 4 years is not possible, note that it is the same total drop over 4 years that we had in 21 months in 1973-74. And it is a lot less of a drop than Japanese investors have had in the last 10 years.

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"Or, alternatively, how much can I draw each month if I want it to last for N years?"

Simple -- If your present investments exceed the S&P500 index returns by a little, you can take 1/2 of 1% of the total each month, and it will last FOREVER. This works out, in practice to be about 6% per annum, which is what I do, and have done for the last 4 years. And it continues to grow.

Ray

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"But spreadsheets are half the reason for the personal computer revolution and still account for most of the actual useful work that PCs do. As such, it's worthwhile to learn to use them."

Yep, I use 'em to keep my portfolio up to date daily. But what I REALLY need to learn is how to import each stock's price from MSN's Portfolio Manager into my spreadsheets (so I can sit there and watch 'em all day long.) Hah!

Ray