Employee Benefits
Introduction
This paper will calculate the future projected social security benefits and look at the effect inflation has on such a future benefit. The paper will also highlight my learning outcomes on this activity. Additionally, the paper will discuss the difference between the projected annual benefit and the real buying power of this projected benefit. In conclusion, the paper will look at the actions I can take to meet my future lifestyle objectives.
PART ONE (Estimating Social Security Benefits)
My projected Social Security Benefits are as follows:
| RESULTS SUMMARY | |
| Current Age | 45 |
| Annual Income | $55,000 |
| Expected salary increase | 2.5% per year |
| Inflation Rate | 3% |
| Include Spousal Benefits | No |
| Age to Begin Benefits | 65 |
| Annual income at age 65 | $87,926 |
| Estimated Benefits | $26,110 per year
$2,176 per month |
| Estimated Percent of income | 29.70% |
At the age of 65 years, currently, estimated benefits per year are projected to be $26,110 and per month, they are projected to be $2,176.
PART TWO (Estimating the Impact of Inflation on a Future Benefit)
This calculator shows the projected decrease in the value of a dollar due to the effects of inflation. Based on an inflation rate of 3.0% the value of $26,110.00 is going to be reduced to $14,456.47 in 20 years. Based on the elements in the input, the chart below displays the year-by-year decline in value. Inflation, even at moderate rates, can have a significant impact on the value of a dollar. Assuming a 4% annual inflation rate, the value of a dollar will be cut in half in 18 years.
PART THREE
From this activity, it is clear that purchasing power of money decreases with time when there is expected inflation. For example, from the above calculations, the projected future social security benefits are $26,110 per year and $2,176 when calculated monthly. This is the current purchasing power of the benefit but when we discount this future benefit to establish how much it will have in the present times, we find that this future benefit has a current purchasing power of $14,456.47. This explains that with time, money loses value when inflation sets in.
When looking at the difference between the projected annual benefit and the real buying power of the projected benefits based on the impact and projection of inflation, the projected annual benefit is higher than the real buying power of this benefit. Inflation has an impact on eroding the purchasing power of money (Bernanke et al., 2018). The inflation rate is expected to remain the same that is at 3% but if the benefits do not also increase by the same rate, the buying power of the same amount of benefit will reduce. Currently, the future benefits annually will be at $26,110 while the buying power of this same amount in the future will be equivalent to the present buying power of $14,456.47. The two values have a difference of $11653.53 which represents the amount by which inflation will erode the benefit. In 20 years, the benefits purchasing power will reduce by $11653.53 and the remaining buying power will be $14,456.47.
Based on the above calculation of social security benefits, I will not be able to survive on the benefits alone. The first step is to reduce my living expenses (Bateman et al., 2017). For example, if I have some adult children, the first step is to stop supporting them. This action would leave me with more money at my disposal than before. Adult children can be able to look for jobs and support themselves rather than depending on me. Secondly, I could opt to have some fixed income (Bateman et al., 2017). This would guarantee me of having some sure income in the future. For example, I can buy government bonds with longer maturity dates. Having a government bond would guarantee me coupon payments at specified dates and repayment of the principal amount at the maturity date.
Thirdly, I would face my fear and invest my current income so that by the time am retiring, I would have a steady income flow and my businesses would have stabilized (Bateman et al., 2017). Investing smartly would guarantee me some investment returns in the future and the fear of taking care of my bills when I retire would not be in question. Investment is not an easy task because I will assume the risks associated with the business. To avoid losing my money in an investment, I would seek the services of a financial and investment consultant who can help me to know the sector to invest my money in. Through seeking such services, it would be easier to know the sector that guarantees me more return.
Fourthly, I would start buying my home early to avoid instances of paying rent during my retirement (Bateman et al., 2017). When I buy my home early, I would not have to keep up with the problems of paying my rent and this move will leave me with more of my social security benefit at my disposal in the future. Last but not the least, after retirement, I would invest my retirement social benefit instead of just consuming it (Bateman et al., 2017). This action would assure me of increased income at old age because of such investments.
Conclusion
In conclusion, the paper has calculated the future projected social security benefits and looked at the effect inflation has on such a future benefit. The paper has also highlighted my learning outcomes on the activity of calculating future benefits and the impact inflation has on such a benefit. Lastly, the paper has discussed the difference between the projected annual benefit and the real buying power of this projected benefit and looked at the actions I can take to meet my future lifestyle objectives.
References
Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen, A. S. (2018).Inflation targeting: lessons from the international experience. Princeton University Press.
Bateman, H., Chomik, R., & Piggott, J. (2017). Retirement income. InAgeing in Australia(pp. 149-172). Springer, New York, NY.
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