Question

Background

When Sheryl graduated from Northeastern University in 2000 and went to work for BAE Systems, she did not pay much attention to the monthly payroll deduction for social security. It was a “necessary evil” that may be helpful in retirement years. However, this was so far in the future that she fully expected this government retirement benefit system to be broke and gone by the time she could reap any benefits from her years of contributions. This year, Sheryl and Brad, another engineer at BAE, got married. Recently, they both received notices from the Social Security Administration of their potential retirement amounts, were they to retire and start social security benefits at preset ages. Since both of them hope to retire a few years early, they decided to pay closer attention to the predicted amount of retirement benefits and to do some analysis on the numbers.

Information

They found that their projected benefits are substantially the same, which makes sense since their salaries are very close to each other. Although the numbers were slightly different in their two mailings, the similar messages to Brad and Sheryl can be summarized as follows: If you stop working and start receiving benefits . . .

At age 62, your payment would be about $1400 per month

At you full retirement age (67 years), your payment would be about $2000 per month

At age 70, your payment would be about $2480 per month

These numbers represent a reduction of 30% for early retirement (age 62) and an increase of 24% for delayed retirement (age 70). This couple also learned that it is possible for a spouse to take spousal benefits at the time that one of them is at full retirement age. In other words, if Sheryl starts her $2000 benefit at age 67, Brad can receive a benefit equal to 50% of hers. Then, when Brad reaches 70 years of age, he can discontinue spousal benefits and start his own. In the meantime, his benefits will have increased by 24%. Of course, this strategy could be switched with Brad taking his benefits and Sheryl receiving spousal benefits until age 70.

All these options led them to define four alternative plans.

A: Each takes early benefits at age 62 with a 30% reduction to $1400 per month.

B: Each takes full benefits at full retirement age of 67 and receives $2000 per month.

C: Each delays benefits until age 70 with a 24% increase to $2480 per month.

D: One person takes full benefits of $2000 per month at age 67, and the other person receives spousal benefits ($1000 per month at age 67) and switches to delayed benefits of $2480 at age 70.

They realize, of course, that the numbers will change over time, based on their respective salaries and number of years of contribution to the social security system by them and by their employers. Case Study Exercises Brad and Sheryl are the same age. Brad determined that most of their investments make an average of 6% per year. With this as the interest rate, the analysis for the four alternatives is possible. Sheryl and Brad plan to answer the following questions, but don’t have time this week. Can you please help them? (Do the analysis for one person at a time, not the couple, and stop at the age of 85.)

1) What is the future worth at 6% per year of each plan at age 85?

Answer 1