Amortization based withdrawal

The time value of money formula, widely used in the field of finance, is used to calculate the future value of an asset when certain variables are known. There are several derivations of the formula, but in most situations, the following five variables are used:


 * FV = future value
 * PV = present value
 * p = payment in each period
 * r = rate of return
 * n = number of periods

While primarily used to determine the future value of an asset, any of the above variables can be determined when the others are known. This can be useful for those who wish to make withdrawals from their portfolio to determine the needed size of the current withdrawal.

For instance, if an investor had $100,000 and wanted to amortize these funds over a period of ten years, then the annual withdrawal would be $10,000 ($100,000/10=$10,000). When a rate of return is introduced, then the time value of money formula must be used. In the above example, if the funds earned a 5% rate of return and the withdrawals were made at the beginning of each year, then the annual withdrawal would be $12,333.77.

Any of the variables in the formula can be changed. Irregular withdrawals (e.g. anticipated future expenses) and multiple income streams (e.g. Social Security benefits, pension payment, annuity payout) can also be incorporated.