1.7 Personal Financial Planning Problem: Payback Method
Problem: Shlomo is 62 years old and is entitled to Social Security retirement benefits of $800 monthly until he passes on. If he waits until age 66, he would be entitled to greater benefits, in the amount of $1,200 per month. He turns to the Payback Method to decide.
Solution: If Shlomo takes the benefits now, he will receive (4) (12) ($800) = $X that he would not otherwise have had at all if he waited the four additional years. If he does wait the four years, he will receive $400 more per month. At that rate, it will take him $X / $400 = Y months, or (y / 12) = Z years, to break even.
Questions:
- Calculate out X, Y, and Z.
- Does Shlomo’s (expected) longevity matter to his choice of action?
- Would it matter if he did a Discounted Payback?
- What would YOU do? What would you tell Shlomo?
Note:
Social Security retirement benefits increase each year, so that it may pay to wait, in any event. One can wait until 70 before taking the benefits.
