The British Columbia Teachers’ Pension Plan allows a teacher to begin collecting a retirement pension before age 60, but the pension is reduced by 3% for each year the retiring teacher’s age is under 60. For example, a teacher retiring at age 56 would receive 100% - 4(3%) = 88% of the monthly pension that she would receive at age 60 (with the same number of years of service). The reduction is permanent, extending to payments beyond age 60.
Suppose that a female teacher will live the average life expectancy of 28 additional years for a woman aged 55. Compare the economic values at age 55 of the two alternatives of collecting an 85% pension from age 55 versus collecting a 100% pension from age 60. Assume that money is worth 7.5% compounded monthly.