Personal Finance Manager Help/FAQ

JDM Software

Savings Calculator

The "Savings Calculator" is useful for quickly and easily creating personal savings plans. It allows you to solve for any of six different unknown variables: "Savings Amount," "Savings Interest Rate," "Savings Periods," "Withdrawal Amount," "Withdrawal Interest Rate," or "Withdrawal Periods."

Topics

How to Use
Lump Sum vs. Annuity
Solving for Interest Rates and Periods
Retirement Example

How to Use

The calculator is very straightforward. It is logically divided into two halves - a "Savings" box on the left and a "Withdrawal" box on the right. You should start by determining the variable you wish to solve for. Then, select that variable from the option menu at the bottom-left part of the window. Fill in all other active values and press the "Calculate" button.

For instance, if you know you have $1000 in a savings account earning 4% interest (APR) and you wish to know how many years until you can withdraw $5000, the unknown would be "Savings Periods." You would select this option from the "Solve For" menu, then enter "1000.00" in "Starting Balance," "4.00" in savings "Annual Interest Rate," and "5000.00" in "Amount Withdraw." Then, after pressing "Calculate," the result (41 years) would be displayed in the savings "# Years" entry.

The calculator assumes that deposit and withdrawal amounts commence at the beginning of periods. So, if you select "0" years for the savings duration and solve for the "Withdrawal Amount," the amount will equal the sum of "Starting Balance" and "Amount Deposit." All annuities are considered as "annuities due." These are deposits (or withdrawals) starting right away (at the beginning of the first period) to accrue interest and/or lose value to inflation. The end of the last savings period is always the beginning of the first withdrawal period.

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Lump Sum vs. Annuity

The savings and withdrawal frames both have a selection box for using a lump sum amount or an annuity. A "Lump Sum" generally deals with a single amount of money, whereas an "Annuity" deals with periodic deposits or withdrawals. For example, if you deposit $1000 into a savings account and leave it there for an extended time before making a withdrawal, that would be a "Lump Sum" deposit. If, however, you deposit $100 every year for ten years into an account before making withdrawals, that is considered to be an annuity.

Annuities can be constant or gradient. A constant annuity involves depositing (or withdrawing) the same amount of money with each transaction. A gradient involves deposits or withdrawals with a fixed rate or amount of increase (or decrease) for each period. Depositing $100 per year with a 10% increase would result in a cash flow that looks like this (neglecting interest and inflation): a $100 deposit for the first year, $110 the second year, $121 the third year, etc.

For savings, selecting "Lump Sum" will cause calculations to be performed on the values entered in "Starting Balance" and "Amount Deposit." For all practical purposes, these entries are treated the same for a lump sum and will be added together to form a single starting balance. Selecting "Annuity" for savings will, however, cause these two entries to have distinct meaning. The "Starting Balance" represents an initial amount for a savings annuity, and the "Amount Deposit" represents the amount that will be repeatedly deposited according to the selected "Deposit Period." Selecting "Annuity" in the savings frame will also allow you to input an amount (or percent) of deposit increase per year.

For withdrawal, selecting "Lump Sum" will set the "Amount Withdraw" to equal a single withdrawal amount at the end of the last savings period (which is the same as the beginning of the first withdrawal period). An "Annuity" withdrawal will cause the equivalent lump sum withdrawal to be spread out over the number of years selected in withdrawal "# Years." Over this time, interest gained and value lost to inflation on the remaining amounts will be taken into account (if interest and inflation values are not "0").

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Solving for Interest Rates and Periods

When solving for interest rates or number of periods, a solution will not always be obtainable. Because an iterative convergence method is employed to solve for these variables, only a certain range of values is acceptable. Interest rates are limited to values between 0 and 100 percent. Similarly, the number of years is limited to a range of 0 to 100. Therefore, if you enter values in the other entries that would require a result outside of these ranges, the program will not be able to determine a value.

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Retirement Example

This example is intended to illustrate the use of most of the functions in the "Savings Calculator."

Assume you have 30 years left until retirement, and you have $5000 in a retirement account now earning 10% interest over time (compounded annually). We will also assume that you will start contributing 6% of your salary ($60,000/year = $5000/month), of which 50% will be matched by your employer. That comes to $450/month into the retirement account. Each year, you expect a %5 salary increase, so we will factor that in. At retirement (30 years from now), you wish to withdraw a fixed amount from the retirement account for 20 years on an annual basis. After retirement, you will transfer all the money earned into an account which will provide a safe 5% annual return. We will estimate inflation to be about 3% annually. How much will you be able to withdraw each year for the 20 years after your retirement?

This type of problem is very simple to compute with the savings calculator. First, select "Annuity" for both savings and withdrawal frames. Then, select "Withdrawal Amount" as the "Solve For" value in the option menu at the bottom of the window. The following is a listing of which values to enter and their respective fields.

  (Savings Window)
  Starting Balance: 5000.00
  Amount Deposit: 450.00
  Annual Deposit Increase: "%" and 5.00
  Annual Interest Rate: 10.00
  # Years: 30
  Savings Compounding: "Annually"
  Deposit Period: "Monthly"

  (Withdrawal Window)
  Annual Interest Rate: 5.00
  # Years: 20
  Withdrawal Compounding: "Annually"
  Withdrawal Period: "Annually"
  Inflation Estimate: 3.00

After selecting "Calculate," the result, "92410.03," is found in the "Amount Withdraw" entry. Thus, you will be able to withdraw $92,410.03 per year for 20 years after retirement.

If you want to find out what savings interest rate you would need to increase your withdrawal amount to $100,000 per year, change the "Amount Withdraw" to 100000.00 and select "Savings Interest Rate" in the "Solve For" menu. Selecting "Calculate" again will show the required interest rate of 10.41%. If you want to see the effects of changing other variables (such as different compounding methods), make the desired changes, select the new variable, and re-calculate. In a short amount of time, you can devise a plan to suit your projected needs.

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