time period

Time Period Tool For Finance Computations

The time period calculator can be very useful in personal financial planning calculations. For example, you can use it to get a ballpark estimate as to how long it may take you to accumulate a specific amount of retirement funds.

Time Period Calculator:









Instructions:

Change the inputs in the fields above and click “Calculate” to get your result.

Present Value:

The lump sum amount with which you are starting, if applicable. So if you are starting with $85,000, for example, you would enter this amount as a negative. If none, enter zero. Present value should typically be entered as a negative if it represents an amount you will pay to invest, for example, in order to generate a future value.

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Annual Rate:

This can be an average investment return on a portfolio, or an inflation rate, for example. The rate is adjusted automatically in the calculation when you choose the compounding frequency. For example, let’s say you enter 6% as the annual rate and “quarterly” for the compounding frequency. In this case, a periodic rate of 1.5% (6% / 4) will be used in the calculation.

Future Value:

The lump sum amount which you will have at the end of a specified time period. As an example, if you’re looking to figure out how many years (time period) it will take you to accumulate $850,000 by retirement, you would enter this number as the future value.

Periodic Payment:

The amount of any payment per compounding period. Enter this number as a negative if you are paying or investing this amount. An example of this would be a contribution or payment to an investment account.

If you are receiving periodic payments, then you would enter this amount as a positive. An example of this would be a withdrawal or payment from a retirement account to you.

You can enter a present value (see above), periodic payments, or both.

Make sure you match the periodic payment with the compounding frequency chosen. For example, if you choose monthly compounding, the periodic payment will be the payment made each month. If you choose quarterly, it will be the total payments you make for each three month period, and so on.

Type of Payment:

This input only applies if there are periodic payments. The default value is “End of Period,” which implies payments are made at the end of each compounding period (“in arrears”). But you can also choose to calculate the result as if the payments are made at the beginning of each period (“in advance”).

Compounding Frequency:

The frequency with which returns and any periodic payments are added to the running balance on which the rate is applied. For example, with a bank savings account or money market account, the interest compounds monthly. A stock dividend reinvestment plan, on the other hand would compound quarterly since most common stocks pay dividends every three months.

Number of Years Result:

The result represents the time period stated in years that it will take you to accumulate the future value indicated, based on the other criteria entered.

How Long Will It Take You To Reach Your Retirement Goal?

Let’s say that you are 40 years old and currently have $60,000 accumulated for retirement purposes. You determine that you’ll need $550,000 in order to retire at your current standard of living. You’ve arranged your budget so that you can save and invest $4,500 for retirement each year.

Finally, your portfolio investment mix is relatively aggressive, and you think you can generate an average annual rate of return of about 9%. You enter these numbers into the calculator and get a result of 19.69 years. So based on this result, you should be able to retire at around 60 years of age.

The inputs are as follows:

present value: $-60,000 (this represents the beginning amount you have invested in your account(s))

annual rate: 9% (this rate is automatically adjusted for the compounding period in the calculation)

future value: $550,000 (amount you are aiming to accumulate by retirement)

periodic payment: $-4,500 (the amount you are paying into your investment account(s) each year

type of payment: “End of Period” (default) – (we’re assuming you make periodic payments at the end of each year in this case)

compounding frequency: Annual (we are assuming you invest your periodic payments and reinvest any accumulated earnings once per year in this example)

Another Retirement Goal Example

You can change around the inputs to see how a different investment rate or periodic payment amount, for example, can affect your results.

Let’s say that with the same criteria as above, you decide to make your investment mix less aggressive (more bonds and less stocks). So now you expect to make 8% on average. However, let’s say that instead of investing periodic contributions and reinvesting earnings on an annual basis, you do it quarterly. So the periodic payment will be $1,125 ($4,500 annually from the example above divided by 4).

Plug the numbers in, and you get 20.85 years. So even though you have a less aggressive asset allocation mix, the more frequent compounding somewhat makes up for the lower expected return.

The inputs are as follows:

present value: $-60,000 (this represents the beginning value of the amount you have invested into your account(s))

annual rate: 8% (this rate is automatically adjusted for the compounding period in the calculation)

future value: $550,000 (amount you are aiming to accumulate by retirement)

periodic payment: $-1,125 (the amount you are paying into your investment account(s) each period (every three months in this example))

type of payment: “End of Period” (default) – (we’re assuming you make periodic payments at the end of each quarter in this case)

compounding frequency: Quarterly (we are assuming you invest your periodic payments and reinvest any accumulated earnings four times each year in this example)

Conclusion

This calculator assumes fixed payments and rate input variables throughout the time horizon used. For something like a fixed rate mortgage, this is not an issue. But for predicting future savings goals and investment returns, it does not allow for more flexible and detailed analysis.

More detailed inputs can be helpful. For example, your asset mix can change as you get closer to retirement (may affect investment rate of return). Or your savings may change based on income or other factors.

But greater detail can also provide a false sense of accuracy. The future is impossible to predict for many variables. For example, you don’t know exactly how much you will be able to save each year, or how much your investments will earn.

Nevertheless, you can use this tool to perform basic finance calculations in an efficient manner.  Using estimated averages for the input variables can give you some useful ballpark figures.

 

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