Choosing between these values is all about your perspective.
Some people view having $1 million in the bank as more valuable than having an income of $5,000 per month. However, both values are roughly equivalent. This example illustrates what behavioral researchers call the illusion of wealth and the illusion of poverty.1
It seems that most of us have been conditioned to be attracted to large numbers, and in fact, having a $1 million war chest at our fingertips may be very appealing. But consider how the illusion of wealth may skew your judgment. Many financial planners use a rule of thumb not to withdraw more than 4% a year from your retirement account. Historic research has shown the risk of that withdrawal rate depleting the account as very remote. But a 4% annual withdrawal rate taken from a $1 million nest egg is just $40,000 — not chump change, but not likely to fund a lavish lifestyle, either.
On the other hand, the option to take $5,000 a month from an investment account may appear to suffer from the illusion of poverty, at least when comparing it to the $1 million lump sum. But here, again, perspective matters. It turns out that a $5,000 per month income is roughly equivalent to a $1 million nest egg that’s annuitized (that is, converting it to a contract that provides a stream of fixed monthly payments for a defined period).2
When we examine our assumptions about money, it helps to consider the filters we use to make comparisons. Sometimes, illusions of wealth and poverty play a subliminal role.
Next Step: Speak to a Financial Advisor
Footnotes:
1 Would You Rather Have $1 Million or $5,000 Monthly in Retirement?” Wall Street Journal, March 27, 2017. https://www.wsj.com/articles/would-you-rather-have-1-million-or-5-000-monthly-in-retirement-1490582208
2 Annuities are long-term, tax-deferred vehicles designed for retirement. There are costs and limitations associated with this product and guarantees are based on the claims paying ability of the underlying insurance company.
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Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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© 2017 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this newsletter are those of Kmotion. The articles and opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. Nothing in this publication shall be construed as providing investment counseling or directing employees to participate in any investment program in any way. Please consult your financial advisor or other appropriate professional for further assistance with regard to your individual situation.
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