Real economics of the two alternatives

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 you have gained from Chapter of the text. Based on the analysis, what should your uncle do?

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Finance Basics: Real economics of the two alternatives
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