Mike and Susan hope to retire a few years early, they decided to pay closer attention to the predicted amount of retirement benefits and do some analyses on the numbers.
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 Mike and Susan can be summarized as follows:
If you stop working and start receiving benefits…
-At age 62, your payment would be about $1,400 per month.
-At your full retirement age (67 years), your payment would be about $2,000 per month.
-At age 70, your payment would be about $2,480 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 Susan starts her $2,000 benefits at age 67, Mike can receive a benefit equal to 50% of hers. Then, when Mike 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 Mike taking his benefits and Susan receiving spousal benefits until age 70.
All these options let them to define four alternative plans.
A: Each takes early benefits at age 62 with a 30% reduction to $1,400 per month.
B: Each takes full benefits at full retirement age of 67 and receives $2,000 per month.
C: Each delays benefits until age 70 with a 24% increase to $2,480 per month.
D: One person takes full benefits of $2,000 per month at age 67, and the other person receives spousal benefits ($1,000 per month at age 67) and switches to delayed benefits of $2,480 at age 70.
Exercises
Mike and Susan are the same age. Mike 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. Susan and Mike 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. How much in total (without the time value of money considered) will each plan A through D pay through age 85?
2. What is the future worth of 6% per year of each plan at age 85?
3. Plot the future worth values for all four plans on one spreadsheet graph.
4. Economically, what is the best combination of plans for Mike and Susan, assuming they both live to be 85 years old?
5. Develop one additional question that you think Susan and Mike may have.