An individual wants to receive end-of-month payments of $1,200 for 20 years after she retires 15 years from now. What lump amount must she invest today to provide the retirement income? Assume the investment earns 7% compounded monthly for the entire 35 years.

Question

Quizplus · Accepted Answer

To solve this, we use the concept of the time value of money, specifically the present value of an annuity (for the retirement payments) and the present value of a single sum (for the lump sum investment needed today). First, calculate the present value of the annuity that starts 15 years from now and pays $1,200 monthly for 20 years at a 7% annual interest rate compounded monthly. Then, calculate the present value of that amount as of today, accounting for the 15 years until retirement at the same interest rate. The correct answer, after performing these calculations, is $54,328.50.

An Individual Wants to Receive End-Of-Month Payments of $1,200 for 20