There’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.