I'm trying to understand the investment math in the ERE book. Page 198, section: 7.3.2.
Could anyone help me understand this in plain English?
P1 = (P0-p) + i(P0-p) how does that equal to (P0-p)(1+i)?
I understand that:
P1 is the year 1 for the withdrawal.
i is the interest rate
P0 is the fund size
p is the withdrawal size
Thanks.
Well I'm not sure it's plain English, but I can show you the algebra.
(P0-p) + i(P0-p) = P0 -p +P0i -pi
Now lets start with the second equation and multiply out
(PO-p)(1+i) = P0 + P0i -p -pi
So they are equivalent.
What you'll have after one year (P1) is what you had at the beginning of that year (P0) minus what you took out (p), but added to that the amount of interest you received on your stash, which is roughly the interest rate (i ) times your original fund size (P0) minus what you took out (p).
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