Do You Have The Retirement Illusion Of Wealth or Poverty?

poverty or wealthThere’s a telling question circling round the internet that given your answer will reveal if you are living with an illusion of wealth or an illusion of poverty. The article first appeared in The Wall Street Journal (click here, but you must be a subscriber to read the article). The question is: In a twenty year retirement span, would you rather have One Million Dollars or $5,000 a month in a guaranteed income.

If you chose the One Million Dollars, you have the retirement illusion of wealth.

If you chose the $5,000 monthly income in retirement, you have the illusion of poverty.

Apparently, having a million dollars will give most retirees a false sense of security, causing them to spend more than they actually have. “One million dollars might seem like a lot—especially if you’re viewing all of those zeros on a small smartphone screen—but it isn’t nearly enough for those expecting to have, say, $8,000 a month to spend over a 20- to 30-year retirement.”

Receiving $5,000 a month will cause retirees to think of their income in monthly terms. “Instead of living the lifestyle they can afford, they worry they’re running out of money and act accordingly, skipping trips and scrimping on prescriptions.”

There’s an easy fix to this dual illusion dilemma. “Instead of highlighting only total wealth, financial websites and apps should help people focus on their projected monthly income, too. It’s this amount, after all, that puts our wealth in perspective, helping us understand the meaning of these large monetary amounts.” So, does this mean if we chose the $5,000 guaranteed monthly income we would have been right? Only if you had concerned yourself with your monthly projected income in retirement, which is exactly what I have been doing since my own early retirement. I calculate how much income I am going to safely accumulate each month and I structure my lifestyle accordingly.

For me, receiving $5,000 a month instead of a lump sum of $1 million dollars would work out better. Over the twenty year retirement span, monthly I would receive $1.2 Million vs the $1 Million lump sum the question asks. Rather than take the million and invest the lump sum at the beginning of my retirement years, and suffer from the ups and downs of a volatile investing lifetime, I would take the $5,000, use only half of it to live on and invest the remaining $2,500 monthly, thus benefitting from dollar cost averaging. This answer re-affirms to me that I suffer from both the illusion of wealth and the illusion of poverty. I have the money (or I think I have the money) but I live at, near or below the poverty level because I’m terrified I am going to run out of money. And realistically, if I’m not careful, I will! If someone would guarantee I could receive $5,000 a month throughout my whole entire retirement, I would say: yes please!

I’ve been retired for nearly 16 years (give or take) and from my experience, monthly income becomes an obsession. I need to know exactly how much money will be coming in each month so that I can comfortably align my expenses to that dollar figure. No one seems to concentrate on this phenomenon and that is what the WSJ article addresses. If more people would focus their financial decisions in retirement based on what monthly income their investments will bring in, more people would have a better retirement. Too many people are concerned with gross figures and net worth rather than their actual day-to-day living.

The correct consensus is for people to take the $1 million dollars and invest it in something that will give you a 7% return. I disagree. I don’t find the 7% to be accurate since most are recommending annuities and as per Suze Orman, annuities are for suckers. Again, I don’t invest in the stock market, so I would have put the mill in an FDIC guaranteed safe CD investment at 3% and lived off the $30,000 a year. That comes to $2,500 a month. Duh. But, I’d still have that one million dollars in the bank, which thanks to inflation (currently 2%), as the twenty years progressed, would be worth less and less: $672,971 to be exact.

Meanwhile, if I had taken the guaranteed $5,000 a month and invested half of it over the next twenty years utilizing dollar cost averaging, I would have a base of $600,000 plus whatever interest and dividends the investment I selected would have earned me. In other words, if I had invested monthly, steadily into the S&P 500 (which is my chosen investment strategy anyway), I would have doubled my money to $1,200,000, which was the original amount I had received in the first place. Over time. Duh.

I prefer living with both my illusions of wealth and poverty. I live thinking I’m richer than I really am and I live thinking I’m going to run out of money if I’m not careful enough. Somehow, these two illusions keep me in check and successfully retired.

Maybe, however, just maybe, I have NO illusions at all. Perhaps my choice of balance is a more realistic approach than I realize. I don’t overspend. And I really don’t underspend. I just try to get what I want at a reduced price! Legislation is now pending that would require retirement plan accounts to project a person’s monthly income. Researchers are recommending that thinking about how savings will impact your lifestyle in retirement to overall wealth is more suitable. Duh.

Darn it. I was right all along. And as usual, I didn’t know.

The months have it!

Live well and prosper, my friend. Live well and prosper.

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26 thoughts on “Do You Have The Retirement Illusion Of Wealth or Poverty?

  1. $5,000 a month guaranteed would be a no brainer for me. I do have my money invested, but if someone else was taking the volatility that would be awesome. Interesting post! I think monthly regarding income, but total amount on other things. I’m amazed when people will pay a car payment for years and years and are only concerned with the monthly payment. Makes the world interesting that people look at solutions through different lenses.

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    • Hi Kim. I know that looking at a car payment only monthly is not such a good idea. Unfortunately, that’s what most people do nowadays. You have to look at the whole picture. If a car payment is only $250 let’s say, as an example, it might fit into a person’s budget who only makes $50K a year. BUT….and here’s that ‘but’ if that same car costs $35K, that’s more than half of their annual income. That’s not balanced. The person would be paying and paying and paying and paying. (that’s why some car loans today are for 7 years. Gulp!)
      I look at whole costs of anything before I buy and see how it fits into my annual income. Then I look monthly if I decided to spread the cost out and decide if it’s still affordable.
      In other words, if my monthly income was $2,500 I certainly couldn’t buy a $600K home. It doesn’t balance.
      Thanks for your comment. It certainly gives us all something to think about.

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  2. FYI!:This article I read at Markerwatch which you can read without paying a subscription. We both had similar thoughts of dividing the money for growth which some of the earnings could be used to hedge inflation, too.
    Since we both have pensions that supplement Social Security we probably do both have the mindset to match the monthly bills to this monthly income. Company pensions started dramatically disappearing twenty five years ago and people were sold annuities to continue the security of monthly checks. They were not a great deal. It is a bet you will be one to get the mortality credit of those who die young. The monthly checks and high quoted returns are also part of your invested money being returned. People need to look at if you give them $100,000 and they give you $4000 back a year it will take 20 years before you have your principal returned not even taking into consideration what that money made those twenty years! Insurance companies are in the business to make money and annuities give their salespeople commissions on a graduated yearly scale and those surrender fees cover theses commissions. Why do you think those salespeople are so nice! Sincerely, Lara

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    • Hi Lara. I don’t like annuities. Period. And should a person die after purchasing a $100,000 annuity, if not purchased correctly, no one ever sees that money again! It’s gone.
      Best to stay with the sure bets.

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    • Just came back to see responses and I notice the typo I wrote: its around $5000 a year not four thousand a year thus twenty years to,get all of the principal back. 🍀 Lara

      Liked by 1 person

  3. This was a very interesting post, Cindi. I would also take the $5000/mo. Don’t care if it is a poverty mindset, you wouldn’t have the volatility of the stock market.

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    • Ditto for me too, Lucy. The report said that the results were 50/50. 50% of the people chose the million dollars. the other 50% chose the $5,000 monthly. So far, on my blog 100% of my respondents chose the sure thing, $5,000 guaranteed per month for 20 years. I guess like minds read & think alike.
      Go figure!
      Thanks for your comment.

      Liked by 1 person

  4. Figuring out a monthly income at this point (before retirement) is tough for me. We have the lingering health care phenomena that seems to be getting worse and worse. I have insurance now, which we pay over $1000/month through my husband’s employer, and we still seem to have to pay out over $6000 in co-pays and prescriptions. I need a separate $1M account just for healthcare. (a bit of an exaggeration, but not by month).
    Once all of our debt is paid (including the house), living on $3000/mos. seems doable. Not terribly fun, but we could have a roof over our heads, food on the table, clothes on our back and heat/air conditioning to make it comfortable.
    My ‘goal’ is to have enough in savings to give me at least $5000 a month, if not more. The only time I think about the ‘total’ amount is how it will pan out monthly. This is my FAVORITE retirement calculator:
    http://money.cnn.com/calculator/retirement/retirement-need/
    It uses up ALL of your money, not leaving millions when you die. More realistic for us.

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    • Sharon, when we were raising our two daughters, our monthly budget was $5,600. And that was back in the 1990’s. I can only imagine what that figure would be today! Once the kids were out of college, DH and I were able to downsize and today our monthly budget hovers around $3,000 a month, thanks in part to no mortgage or car loans. Health insurance was always a problem for us once DH no longer worked for Disney. It’s been a roller coaster ever since.
      We plan on ‘using up’ ALL of our money by the time we pass too. No millions to be passed on down either.
      I have t try your calculator. I’ll let you know what I think.

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    • I checked it out and it is too simplistic not even taking into consideration pensions and other sources of income, so it over estimates what you need to save. I used the calculators on Fidelity where so much more information can be submitted. I also like their calculator on minimum required distributions to help structure future taxes and really brought home to me the tax benefits of converting tax deferred traditional IRA to a Roth before I hit 70 1/2.🍀Lara

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      • HI Lara. Most of my investments are in ROTH IRA’s. Whoever invented those, I assume it was a Mr. Roth, was a genius. Greatest retiree investment IMHO.
        Thanks for your input. It’s great to get an all-round consensus.

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      • Hi Lara,
        It’s one of the only calculators I’ve found that actually lets you spend out your money to the end. It works for us because we don’t have any pensions. Social security will be extra. Not sure what taxes will be, but we plan on hiring a fee based financial planner to run all of the numbers for us.

        Liked by 1 person

  5. The Roth IRA was proposed by Sen Bob Packard and Sen William Roth in 1989 called IRA plus but did not become a law till 1997. We started investing in tax deferred 401K in early 1980’s which we transferred directly into tax deferred IRA when my DH company was merged. When we were investing the money we would have been taxed at 32% because our highest combined Federal and state tax bracket was 32%. As retirees,for the last 13 years of retirement we have had a combined Fed and State tax of less then 2 % and some of the IRA money came out at zero. So in the years we could have invested in a Roth1997 till 2004, we invested 6% of DH ‘s income in his 401k. The math was: 68 cents became $2.00 in his 100% match, tax deferred 401k before any investment choice was made. If we did a Roth it would take a $1.32 of his income to invest only $1.00 in a Roth. The math:
    Tax deferred and 100% matched 401k- 68 cents became $2.00 almost 300% gain before it’s investment return.
    Roth IRA- $1.32 became $1.00 – 32% loss before it was invested. 32 cents was the tax paid to Federal and State government.
    The difference was huge! Each individual needs to run the numbers and think about what income they need to live on after retirement. They need to run that income using the Social Security Worksheet to see what their taxes will be in retirement. And I also calculated my taxes after age 70 1/2 when I have to take minimum required distributions from my tax deferred IRA, starts at 8% and goes to 11% in the highest year of withdrawal, still much lower then 32%
    So no one should assume the Roth IRA even now is the best way to invest. 🍀Lara

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    • Lara, didn’t you have to pay fees on the 401K? According to some financial pundits now they are stating that because of all the hidden fees the 401K stealthfully charges (sometimes up to $150,000 after twenty years of investing) the 401K’s have turned into a sort of hoax.
      I have my ROTH IRA’s in FDIC banks, laddered with absolutely no fees. If I need money, I can withdraw without any penalty. Especially after 5 years. There are no minimum withdrawals at any age and my money can just sit there, till they become due and then I roll them over into a new CD. Rates are up to 3% at some locations (def can get 2%+ right now). For me, the ROTH’s fit into my financial planning.
      You were very fortunate to get a company match on your investments. That probably covered the fees. I don’t worry about paying taxes because we are in the low income category. Not intentionally, of course. But sometimes being poor has its benefits. But I would NOT recommend it to anyone!

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  6. Actually, since 2013 getting my Widow’s pension all of my taxes are taken from my government check not my assets so was this my Tax Freedom day? Are the taxes just merely a reduction of what the government is sending you in Social Security? And if so, then using the tax deferred method is absolutely the way to go!🍀Lara

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  7. When we were in our 401k till 2004 the Fees in 401k did not reduce your contribution and the company match you get. So first We got a 300% return and we were ultra conservative and invested in guaranteed contracts of 6%’. After five years we only invested the house money ( the earnings from these in stocks). We had a 28 year time horizon till retirement reduced later by six years, which meant for that money I calculated a 10.5% annual return.300 divided by 28 plus what it made each year. First five years16.5%.annually. 6% is what the money made, if there were fees they were taken out before they gave us the 6% or were covered by the company.
    To answer your question, The fees are hidden on what the stated investment returns are. Say I had a mutual fund and it made 10%’ the fees took 1% so my statement showed the 9%’ with no disclosure that 1% was used for fees. They are no different then what are the many hidden fees in mutual fund investing.
    If you read Charles Givens books you learned of this and the funky math of average daily returns that it creates an inflated positive return even though in reality you may have a loss. Investing in CDs give you the stated interest if you are not reinvesting that interest.
    Sadly, you probably paid much higher taxes when you both worked and established the Roths, thus if your top bracket was 25% and you paid NY state tax and New York City tax . You could have been paying over $1.32 for every $1.00 you put into the Roth. If you had done a tax deferred IRA you would have saved 32 cents in taxes and only had to add 68 cents of your take home pay to make the $1.00. Still almost a fifty percent gain! You would have had several methods to get it out and planning in the $36,000 retirement income range with some of that being Social Security now, you would be paying zero tax also on this money and no income tax on your Social Security. The government got a lot more from you when you were young then us and you could have had more in savings. I too have 3% and over Laddered CD’s, if you remember I told you about the higher paying brokerage CD’ s years ago. To this day especially after 2000 I refuse to put anything in the stock market except some of the house money.

    FYI:for Roth IRA:, The five year rule applies only to conversions and only on the earnings on your money. your contributions are accessible immediately without tax consequences.. 🍀Lara

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    • Lara, fortunately or unfortunately, we were never above the 15% tax bracket. I usually had a carryover loss, as we also did in 2014 with the RI tragedy. We never lived in NYC, so we never had to pay that tax. Just NYState.
      I dunno. My brohter and SIL invested in 401Ks and my bro just admitted that he did indeed, when they calculated over the many years, pay over $150K in fees. That money could have been theirs.
      Right now, our Roth IRAs are intact and because of our low income (I do NOT advise anyone living at this level) we pay little tax. I never mentioned that when I closed my business we owed $14K in sales tax, which DH and I were paying off for like 5 years. When NYS got wind I was going to inherit money, all of a sudden we got hit with tremendous fees and back interest. NYS made it retro and started charging us $20,000 a year in interest. Yes we had an attorney but he was no help! In the end, we wound up paying $187,000 after I inherited money (when my dad died) and our attorney got $30,000 in fees to finally settle the matter. How $14K turned into $187K remains still a mystery to us this day. So YES I would say in retrospect, we have overpaid the government in taxes. DH and I don’t talk about it much. We try to forget.

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      • Hey thanks for the link but I saw it in 2013. I am not sure if what I invested in had a 1% fee, it was a possible example. To get employees to invest in the 401k my DH company paid all the fees taking them as a tax write off. I found the first handout dispersed when it was set up after your comments.
        However, I know not all the ins and outs of the present 401k at all the corporations but seriously most financial planners say don’t walk away from the 401k free money match. So the first retirement savings should go to max 401K with a company match, then next if you have more to a Roth. Creating two income streams, taxes already paid and tax deferred for flexibility.
        I am an optimist and a math nerd as Sharon calls herself. Even if I paid 5% in fees, would you walk away from an immediate 295% gain as oppose to a 32% loss! So In my case. Let’s Look at this another way, how many years at 3 % interest would it take a Roth to get from the $1.00 invested to it’s cost of 1.32, Answer: about 10years.Then how long to get it to double to $2.00 ,Rule of 72 : 72 divided by 3 =24 years. 34 years in the Roth to get where investing in the 401k got us right away. And then we made 6% on the $2.00. If you could find guaranteed 6% every year for the Roth, it would have taken about seventeen years To get to $2.00. And as I said before, since 2013 the taxes on distributions are out of my government checks and not out of my assets and tax planning keeps my tax bill very low, now at 2%.Yes at seventy and half my tax bill goes up, but I will just roll the RMD over into a brokerage account and still take the taxes out of my government checks. So for us the 401k out shined a Roth hands Down! Individual need to do the math, in the 15% federal tax bracket you pay $1.15 for each dollar invested in a Roth .
        🍀Lara

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      • You’re right about the money match. You’d have to be a fool to give THAT up. The company match can go towards the fees. If any.
        You are def a math nerd. You lost me at ‘hello’. LOL. 🙂

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  8. Cindi, I have a dentist friend and as a self employed setting up a 401k he has access to what he pays in fees. I looked at our 401k documents and statements and found the fees were paid by the corporation, Do not know if fees were transferred to employees after 2004. . No fees are listed on any of our statements.
    It’s too bad about your huge sales tax nightmare.
    When planning for retirement there are many options, but when I started planning I did the research, math, and found out by doing my parents taxes how the social,security worksheet changes your taxes. I found out that tax deferred 401k gave us a huge return and great tax savings and more take home pay then and our taxes on the money in retirement would be extremely low if we watch where we tap the money to live on. You have to spend the time to get educated on our tax code and take advantage of ways to keep your tax bill lower. Federal Income Taxes were much higher when we were younger and you hit the 25% tax bracket with a much lower income. So I put a greater percentage in tax deferred to keep us in the 15% tax bracket and let more money grow for future needs. Different strokes and seeking to make them smarter stokes at each stage of our lives stretch our middle class income and allowed us to retire early, financially independent. 🍀Lara

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