Would You Rather Receive $ 1 Million or $ 5,000 a Month in Retirement?
One million dollars is a hell of a lot of money, but when it comes to retirement, it might not get you as far as you think. The Wall Street Journal calls this view the “wealth illusion.” This is what it means.
As they point out, $ 1 million is much more than, say, $ 5,000 a month. If you ask most people what they would prefer in retirement – $ 1 million or $ 5,000 a month – they would probably agree with that million. However, in the context of retirement savings, both amounts are roughly the same, based on several parameters. Here’s how the Wall Street Journal puts it :
First of all, it should be noted that the two amounts are roughly equivalent based on current annuity prices. (The rule of thumb is that monthly annuity payments are roughly 1/200 of the corresponding lump sum if they start at age 65.) Yet despite this equivalence, people often feel dramatically different about the two financial descriptions … Some people believe that $ 1 million is a much more adequate amount than $ 5,000 a month. These people tend to suffer from the illusion of wealth. Because they get a false sense of security from seemingly large sums of money, such as the ones that show up when they check their accounts, they act like $ 1 million is over $ 5,000 in monthly income.
Problem? The illusion of wealth can lead some people to underestimate retirement savings. That, as the saying goes, is a false sense of security. Of course, this is still much more than it saved most people .
It’s not about making you feel bad if you’re playing catch-up. Just want to point out that 1) savings for retirement are important and 2) they help you understand math. In other words, you should be thinking about more than just a lump sum. When you start digging into your retirement planning (and the sooner you do it, the better), be sure to look at the big picture: what your monthly expenses will be, how long you expect to withdraw funds, and how much monthly income you plan to meet your current savings rate.