You are 60 years old, have decided to retire from the labor force (i.e. no more human capital), and have $750,000 saved-up (“nest egg”) in a retirement savings account. You are also entitled to a Defined Benefit (DB) pension of $40,000 per year, paid monthly. However, the DB pension comes with an interesting “twist”, namely that if you wait to draw your pension, you will receive a bonus of 0.5% per month (equivalent to a 6% APR) for every month you wait. But, once you pull the trigger and start the pension, it remains fixed and constant at that level. Now, separately, assume that you can invest your $750,000 “nest egg” and earn a guaranteed rate of return of 3% (APR) per year, or 25 basis points for month. Problem: At what age should you begin your pension payment? Assume you would like to have the highest smooth & flat consumption profile until age 95. Make sure to qualitatively explain your strategy. Hint: You might want to google the rules around CPP/OAS to help you “think” about this problem, but obviously that is limited to maximum age 70. In this “toy problem” you can defer beyond that age, if you want – and if it makes sense.

Answer rating: 100% (QA)

You are 60 years of age have chosen to resign from the workforce for example not any more human reso... View the full answer