Problem: Your uncle has approached you with a personal finance decision. He tells you that he is currently eligible for a monthly pension benefit of $5,231 beginning January 2017. Alternatively, he can start drawing early monthly benefits of $3400 in January 2007 (a 35% reduction for a 10 year early start).
You tell him you are taking a finance course and can run the numbers to help him understand the real economics of the two alternatives. He provides the following additional information.
- Life expectancy? He says 27 years starting Jan. 2007.
- Marginal income tax rate? He says assume 28%.
- Savings rate on the pension amounts? He says assume all the money is needed for living expenses.
- Inflation? The two of you agree to assume an annual inflation rate of 4%.
Prepare an analysis that compares your uncle's two alternatives, utilizing the knowledge. Based on the analysis, what should your uncle do?