A million dollar lump sum at age 65 or $5000 a month for life?

Me? It could go either way.

At 60? $5000. If you live to 85 $1,000,000, even invested at 4%, could leave you broke if the market goes in the shitter for an extended period anything in that time frame.

And if you choose the $5000 make sure you only live on $4000 and put $1000 aside because that $5000 is not adjusted for inflation for in 20 years it’d be worth only $2500 or so.

One million dollars sounds like a hell of a lot of money, but when it comes to retirement, it might not take you as far as you think. The Wall Street Journal refers to this perspective as “the illusion of wealth.” Here’s what it means.

As they point out, $1 million sounds like a lot more money than, say, $5,000 a month. When you ask most people which they’d rather have in retirement—$1 million or $5,000 every month—they’d probably go with the million. In the context of retirement savings, though, both amounts are roughly the same, assuming a few parameters. Here’s how the Wall Street Journal puts it:

The first thing to note is that these two amounts are roughly equivalent based on current annuity pricing. (A rule of thumb is that monthly annuity payments are about 1/200th of the corresponding lump sum, assuming they begin at age 65.) And yet, despite this equivalence, people often have sharply different feelings about the two financial descriptions….Some people feel 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 monetary amounts, such as those that appear when they check their accounts, they behave as if the $1 million is more than $5,000 in monthly income.
The problem? An illusion of wealth can cause some people to under-save for retirement. It’s, as they say, a false sense of security. Of course, that’s still a lot more than most people have saved.

The point isn’t to make you feel bad if you’re playing catch up. It’s just to point out that 1) saving for retirement is important and 2) it helps to understand the math. In other words, you have to think beyond the lump sum. When you start to dig into your retirement planning (and the sooner you do, the better), make sure to look at the whole picture: what your monthly expenses will be, how long you expect to make withdrawals, and how much your projected monthly income will be at your current savings rate.

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  1. bogsidebunny says:

    At almost 75 I’d take the moola in one lump sum and hire a $1,000 a night hooker to administer me a nightly trip around the world as we spent a year traveling geographically around the world.

    1: 1-$1,000 a night babe for 365 days = $365,000.

    2: 2-First Class “round the world tickets” at approx. $50,000 each = $100,000.

    3: Incidentals like hiring a professional Asian prostate massager in Thailand for a couple of days to give the regular “Round Eye’s” 3 orifices time for a break. A professional video camera-lady to accompany us and record the “tender trapeze moments” travelling across the vast Pacific ocean expanses at 42,000 feet and 580 knots and a few cases of Chateau Mouton-Rothschild Pauillac 1996 Red Bordeaux Wine at $750 a bottle. would probably add another $100,000 to the mix.

    So the total would be about: $600,000. A bargain.

  2. BobF says:

    I’d take the $5,000 per month. With my military retirement and other investments, I will live very well.

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