Simon just turned 66 and is trying to decide whether to take his Social Security
ID: 2776962 • Letter: S
Question
Simon just turned 66 and is trying to decide whether to take his Social Security benefits today or to wait until he is 70. The risk-free rate of interest is 2%. and Simon anticipates that this rate will not change in the foreseeable future. If Simon decides to take his benefits at age 66 (his current age , 12*$2,216 = $26,592 in 12 months and the same amount at the end of each subsequent yean if he waits 4 years, he will get $3,067 per month. Simon estimates that he will die on his 85^th birthday. Should he wait until 70 or take the Social Security now? Fill in the blank: The longer Simon's life expectancy the [more/less] worthwhile it will be for him to wait to take the Social Security benefits until he is 70. Calculate the breakeven age: The age for which waiting for the benefits is just as worthwhile as taking the benefits nowExplanation / Answer
Answer for question no.1:
Interest rate=2% per annum.
In case simon decides to take his benefits at 66, he will be receiving a benefit of $2,216 per month till he reaches his 85 birthday.Amount received per year for 19 years is $26,592
Therefore present value of this amount can be found usin excel formuls PV(rate,nper,pmt)
rate=2%
nper =19 years
pmt =$26,592
Substituting the values in the formula Present value of annuity =$416,921.66
In case he decides to take benefit after he completes 70 years, then he would be receiving $3, 067*12 per year for 15 years.
therefore, nperr=15 years
interest rate =2%
pmt =$36,804.
Substituting the values in the excel function, presnt value =$472,904.29
As the present valuue of earnings is more, if he waits until 70,.Simon should wait till he is 70.
Answer for question no.2:
More worthwhile for him to wait to take the social security benefits until he is 70. Because he will be getting more amount for each extra year he lives i.e., instead of getting $26,592 per year he would be receiving $36,804 per year.
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