Congratulations, you have just been employed! You now have a choice between a flat benefit at retirement equal to $4,000 times your years of service, or a career average formula of 3.50% of your average salary times your years of service. You expect to work 40 years. At what average salary would you be indifferent between the two alternatives?

Question

Quizplus · Accepted Answer

To be indifferent, the flat benefit and the career average formula must be equal. The flat benefit is $4,000 * 40 = $160,000. The career average formula is 3.50% * average salary * 40. Setting these equal gives $160,000 = 0.035 * average salary * 40. Solving for the average salary gives $114,286.

Congratulations, You Have Just Been Employed! You Now Have a Choice