Question

An employee with 25 years of service at a company is considering retirement at some time in the next 10 years. The employer uses a final pay benefit formula by which the employee receives an annual benefit payment of 2.0 percent of her average salary during her last five years of service times her total years employed. The employee’s average salary over the last 5 years of service is as follows:

   Average Salary during last Five Years of Service

Retire now $125,000

Retire in 5 years $135,000

Retire in 10 years $140,000

Calculate the annual benefit payment for retirement now, in 5 years, and in 10 years.

Answer 1

Calculating Annual benefit if employee retires now

Current Years of service = 25 years, Average salary in last 5 years of service = $125000,

Annual benefit payment = 2% x Current years of service x Average salary in last 5 years of service = 2% x 25 x 125000 = $62500

If employee decides to retire now, then annual benefit payment = $62500

Calculating Annual benefit if employee decides to retire in 5 years

Total Years of service = Current years of service + 5 = 25 + 5 = 30 years, Average salary in last 5 years of service = $135000,

Annual benefit payment = 2% x Total years of service x Average salary in last 5 years of service = 2% x 30 x 135000 = $81000

If employee decides to retire in 5 years, then annual benefit payment = $81000

Calculating Annual benefit if employee decides to retire in 10 years

Total Years of service = Current years of service + 10 = 25 + 10 = 35 years, Average salary in last 5 years of service = $140000,

Annual benefit payment = 2% x Total years of service x Average salary in last 5 years of service = 2% x 35 x 140000 = $98000

If employee decides to retire in 10 years, then annual benefit payment = $98000