The current Social Security “full” retirement age is 66 for the so-called “Baby
ID: 2491858 • Letter: T
Question
The current Social Security “full” retirement age is 66 for the so-called “Baby Boomer” (post World War 2) generation. The Social Security Administration (SSA) allows for both early and delayed retirement payouts. If one starts to collect retirement benefits before age 66, the benefits are permanently reduced 5% per year of early retirement. But it if one waits and starts to collect retirement benefits after age 66, the benefits are permanently increased by 8% per year of delayed retirement. Below is a table used by the SSA to compute the reduced and increased benefits.
The future total SSA payout for a person who retires at age 66 and lives to age X isThus, a potential retiree has a trade-off to make. If one expects to die “young”, then he will come out ahead if he retires early. But if one thinks he is going to have a longer life, then he should delay his retirement and thus collect more money than someone who retires earlier.
A = 1.00(X – 66).
(a) What is the corresponding formula for a person who retires at age 62 and lives to age X?
(b) If one takes early retirement at age 62, at what age will the total SSA payout equal that of a person who retires at age 66?
(c) What is the future total SSA payout for a person who retires at age 70 and lives to age X?
(d) If one delays retirement until age 70, at what age will the total SSA payout equal that of a person who retires at age 66?
(e) Fill in the values for all of the ages in the table.
(f) After making these calculations, what would you recommend to someone who is approaching age 62 about when to start his retirement as far as his lifetime Social Security payout is concerned? Remember, in the above table ages 62-65 is the age when the early retiree will “fall behind” the standard aged retiree. For ages 67-70, it is the age when the late retiree will “pull ahead” of the standard aged retiree.
Fraction of full benefit pay out 0.80 0.85 0.90 0.95 1.00 1.08 1.16 1.24 1.32 Age of retirement Break Even age with 66 62 63 64 65 n/a 67 68 69 70Explanation / Answer
a.
A=0.80(X-62)
b. Let at age Y, total SSA payout of aged 62 will equal that of a person who retires at age 66.
So, 0.80(Y-62) = 1.00(Y-66)
=>0.8 (Y-62)= (Y-66)
=> 0.8Y -49.6 = Y -66
=> Y = (66 - 49.6)/0.2
=> Y = 16.4/0.2 = 82
At the age of 82, total SSA payout of person taking early retirement at 62 will equal to that of person taking retirement at age 66.
c.
The future total SSA payout for a person who retires at age 70 and lives to age X
= 1.32(X-70)
d.
If one delays retirement until age 70, at what age will the total SSA payout equal that of a person who retires at age 66?
Let at age Z total SSA payout will equal; So conditionally
1.32(Z-70)=1.00(Z-66)
=> 1.32Z - 92.4 = Z-66
=> 0.32Z=26.4
=> Z= 26.4/.32 = 82.5
At age 82.5, total SSA payout will ewqual.
e.
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