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2D & 3D Geometry Voronoi Diagrams Trig equations & identities Vectors Graph Theory

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Differentiation Integration Differential Equations

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Annuities | IB Math AIHL | Perplex

Financial Mathematics (Lesson 3/3)

Annuities

1 / 12

Discussion

Taylor is 25 years old and opens a workplace retirement plan. She decides to put away some money into it every month until she turns 65, the age she will retire. The account earns about 7% interest annually.

The retirement plan will pay her a fixed amount every month after her retirement until her 95th birthday.

(a)

Why should Taylor do this instead of just keeping her cash in a checking account?

Solution:

A regular checking account pays almost no interest (often well below 1% per year), so any money you leave there barely grows and in fact loses value due to inflation.

In contrast, Taylor’s retirement plan grows at about 7% each year, so her contributions add up and compound over 40 years to create a much larger fund.

Keeping cash in her checking account would leave her with considerably less at age 65 that she would be able to withdraw over the next few decades.

Financial Mathematics (Lesson 3/3)

Annuities

1 / 12

Discussion

Taylor is 25 years old and opens a workplace retirement plan. She decides to put away some money into it every month until she turns 65, the age she will retire. The account earns about 7% interest annually.

The retirement plan will pay her a fixed amount every month after her retirement until her 95th birthday.

(a)

Why should Taylor do this instead of just keeping her cash in a checking account?

Solution:

A regular checking account pays almost no interest (often well below 1% per year), so any money you leave there barely grows and in fact loses value due to inflation.

In contrast, Taylor’s retirement plan grows at about 7% each year, so her contributions add up and compound over 40 years to create a much larger fund.

Keeping cash in her checking account would leave her with considerably less at age 65 that she would be able to withdraw over the next few decades.