Useful math - annuities
By Murray Bourne, 16 Nov 2005
Most students have no idea why they have to study mathematics.
One of the most important topics is financial mathematics. Many adults allow themselves to be ripped off by banks because they have no idea how financial mathematics works.
I gave a workshop recently on using Excel for accountancy (internal rate of return, efficient frontier, that kind of thing). It was interesting to prepare it. I emphasised the concept of annuities - it is something that many people only think about when they are approaching retirement. But this is way too late.
Simply, you buy an annuity from a bank for a large sum of money and the bank pays the money back, plus interest, over a long period of time. So for example, currently in Australia you can buy an annuity for $100,000 and the bank will pay you $7,881 per year for 20 years. Then the money is gone.
So if you retire at 60 and live for another 25 years (this is very likely), make sure you have saved plenty...
Update: I now have a chapter in Interactive Mathematics called "Money Math". Section 6. Superannuation is about annuities.
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