Trucking <majimbo88[at]yahoo.com> wrote:

- quote -

Yes.

--
Ron

- quote -

What I'm trying to do is to use the interest I get and at the same
time, maintain the value of my initial investment.

If the annual interest rate of my $100,000 CD is at 6%, inflation is
at 4%. If I just spend 2% of my interest and reinvest the remaining
4%, wouldn't I retain the value of that $100k 10 years from now?

Trucking <majimbo88[at]yahoo.com> wrote:
- quote -

The current inflation rate is about 2.2%, YMMV, so a 6% CD will actually
give you 3.8% after inflation. I wouldn't bother to calculate out 10
years because the inflation rate can vary.

--
Ron

majimbo88[at]yahoo.com (Trucking) writes:

- quote -

If you're letting the interest accumulate in the CD, you'll
actually end up with more than $60,000 of interest due to compounding.

The amount in the CD at the end will be
$100,000 * (1 + 0.06)^10 = $179,085
meaning $79,085 in interest.

- quote -

You have to make some assumption about the inflation rate.
If you assume an inflation rate of, say, 4%, then $1 ten
years from now is worth
$1/(1 + 0.04)^10 = $0.676
in today's dollars.

So you multiply a final CD value of $179,085 in future
dollars by the $0.676 that an inflation-adjusted future
dollar is worth today, and you find out that ten years
from now your CD is worth what
$179,085 * 0.676 = $121,061
is today.

So adjusting for inflation, your "real" interest was
$21,061 even though your nominal interest was $79,085.

The equation for the real interest rate in terms
of the nominal rate and the assumed inflation rate is:
1 + Rn
Rr = -------------- - 1
1 + i
where
Rr = real interest rate
Rn = nominal interest rate
i = inflation rate

In the current example,
Rr = (1 + 0.06)/(1 + 0.04) - 1 = 0.0192 = 1.92%

And not surprisingly
$100,000 * (1 + 0.0192)^10 = $120,947
[the reason it didn't come to $121,061 is because
0.0192 is a rounded-off number. Use a more exact
number and you'll recover $121,061 exactly.]

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

I'm a bit new at this. How do you determine the purchasing power of
US dollar 10 years from now? Here's the scenario. What if I buy
$100,000 in CD, with interest rate of 6%, term is 10 years.

For simplicity, let's leave out taxes. Annual interest should be
$6,000. In 10 years, you've accumulated $60,000 interest from your
$100,000 investment. 10 years from now, purchasing power of that
$100k is weaker than when you left it. I figure, if you calculate all
these factor it would give me a clear indication at how much I'm
actually getting.