Annuities are attractive investment vehicles for retirement savings as many people prefer an income stream in retirement to a lump sum in the bank. It’s easy to trade one for the another by purchasing an annuity for its discounted value from a bank or an insurance company.
Lisa Montgomery just retired at age 65 with retirement savings of $750,000. She thinks she’ll live to about 85 and would like a guaranteed monthly income until then. Her bank is offering annuity investments discounted at 6% compounded monthly. How much monthly income will Lisa have if she invests the entire sum in an annuity?