Sally contributed $425 each month into an ordinary annuity for 20 years until sh

Question

Sally contributed $425 each month into an ordinary annuity for 20 years until she retires. She will be able to withdraw $700 each month for 20 years after she retires. Why is she able to withdraw so much more per month for 20 years than she was required to deposit each month for 20 years? Sally contributed $425 each month into an ordinary annuity for 20 years until she retires. She will be able to withdraw $700 each month for 20 years after she retires. Why is she able to withdraw so much more per month for 20 years than she was required to deposit each month for 20 years?

Explanation / Answer

An ordinary Annuity usually involves an interest rate associated with it. As she deposits $425/month for 20 years and withdraws $700/month there is an interest that gets accumulated as the time progresses on the Deposited amount available till date. Hence she is able to withdraw $700/month for the next 20 years (which is greater than the amount deposited for the first 20 years i.e. @$450/month) due to the interest amount that gets accumulated continuously until the available deposit becomes zero ( The rate of interest is fixed such that the available deposit amount becomes zero at the end of the next 20years.)

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