Last year, I read Shlomo Bernatzi and Hal E. Hershfield's article, "Would You Rather Have $1 Million or $5,000 Monthly in Retirement?" on the Wall Street Journal website.
In the article, the authors discuss the illusion of wealth and the illusion of poverty. How you answer the question of choosing the cool mil or a measly 5 K per month helps determine which illusion you may suffer from.
"To see which illusion you might suffer from, assume you have $1 million for retirement. How adequate does this amount seem on a seven-point scale, with one being 'totally inadequate' and seven being 'totally adequate'?"
My answer: about three and a half.
Next, assume you have $5,000 to spend every month during your retirement. How adequate does this amount seem on that same seven-point scale?
My answer: about a four.
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.
This is some simple math. If you had one million sitting in an account and wanted to make it last for two hundred months, you could withdraw $5,000 every month. It should last longer than that because even someone without any financial acumen should be able to purchase CDs with maturity rates over the years that would garner an additional 2% so the million should turn into more than one million over a 200-month period.
Even in today's ultra-low interest rate environment, I just found multiple five year CDs at 2% by Google searching the term "5 year CD rate":
TOP 5-YEAR CD RATES: Nationally Available Bank Deals
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| Source: http://beattapeco-op.com |
"To see which illusion you might suffer from, assume you have $1 million for retirement. How adequate does this amount seem on a seven-point scale, with one being 'totally inadequate' and seven being 'totally adequate'?"
My answer: about three and a half.
Next, assume you have $5,000 to spend every month during your retirement. How adequate does this amount seem on that same seven-point scale?
My answer: about a four.
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.
This is some simple math. If you had one million sitting in an account and wanted to make it last for two hundred months, you could withdraw $5,000 every month. It should last longer than that because even someone without any financial acumen should be able to purchase CDs with maturity rates over the years that would garner an additional 2% so the million should turn into more than one million over a 200-month period.
Even in today's ultra-low interest rate environment, I just found multiple five year CDs at 2% by Google searching the term "5 year CD rate":
TOP 5-YEAR CD RATES: Nationally Available Bank Deals
| Bank | APY | Minimum Deposit |
|---|---|---|
| Capital One | 2.00% | No minimum |
| Bank of Baroda | 2.00% | $1,000 |
| Gulf Coast Bank & Trust | 2.00% | $2,000 |
| Federal Savings Bank | 2.00% | $10,000 |
Source: www.interest.com/cd-rates/news/5-year-cd-rates
The authors write that while one million dollars might seem like a lot—especially if you’re viewing all of those zeros on a small smartphone screen— it isn’t nearly enough for those expecting to have, say, $8,000 a month to spend over a 20- to 30-year retirement.
$8,000 per month is the type of number that I think is reasonable to shoot for in order to live what one might call "a comfortable retirement," although if you are in your late forties, like I am, or younger, we must remember that today's dollars will not go as far as they will in ten, fifteen, twenty or twenty-five years.
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To me, $8,000 per month would rate about a five.
If I am so blessed as to make it to age seventy, that would be in the year 2040, and God only knows how much inflation could occur between now and then. $8,000 might only be enough to cover medical costs and the basics by then.
Being firmly in the $5,000 per month school of thought, the authors place Yours Truly Money Mensch with those who suffer from the illusion of poverty.
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Because others who feel as I do might be inclined to think about wealth in terms of monthly income as opposed to a large sum, we incorrectly assume that the $1 million we see on our screen or statement equates to less than $5,000 a month.
Instead of living the lifestyle we can afford, our group worries, and justifiably so in my estimation, that we’re running out of money and act accordingly, skipping trips and scrimping on prescriptions.
For Yours Truly, that also means driving beater cars, using TracFones, keeping our old tube TVs and trying to cut costs in other ways.
Because a large part of my focus is on investing and saving for the future, I feel that it is more important to do that than to fritter money away.
Also, I have no choice in the matter.
Having been an employee of local government units since soon after graduation from college, I have been contributing to a defined benefits pension plan for twenty-five years as of this past May.
What this means is that, although I am still working on reaching the $50,000 mark in my Roth IRA by paying myself first now, I am working toward a monthly pension just over $6,000 per month if I can remain gainfully employed at my current position or a comparable one that would pay what I make now, plus a small annual raise, through the end of 2025.
I cannot possibly save one million dollars in any account, with my wife working only a few hours per week during the school year, paying for two children to attend college, and our family's expenses ranging from $7,000 to $12,000 per month, and me making just over a hundred grand. Besides the pension that I will some day get and then some social security if both it and I survive until that age, we might only save a hundred grand or so by our mid-fifties.
I joke a lot that late 2025 is when I will be a grown up and I am trying to figure out what it is that I really want to do at that time. I do not know if it will be consulting in my profession of economic development, teaching courses at the local community college, blogging and writing e-books all day every day, operating an eCommerce site, tearing ticket stubs at a local movie theater, scooping ice cream at a local shop or what I often tell my daughter that my next career will be, working for her at her business.
Since my daughter is very entrepreneurial in nature, I should start setting aside a little more to help launch her business, which I have promised to do so long as she'll let me work for her, which would most likely be without pay. That is where the $6,000 monthly pension would come in, so my wife and I do not end up homeless.
I actually do plan on making at least that much at another job or a combination of jobs and writing by late 2025. It sounds like a very long time from now, but if I want to actually enjoy a few Golden Years without answering to a slew of bosses, sitting in an endless schedule of meetings, spending half of my day on the phone or composing emails, and writing a profusion of reports, I must find a way to generate some additional income.
So far, this blog has not been that outlet, but I never say never.
I write about money a lot, but it is a big part of what defines a guy like me and maybe like you.
When the difference of a thousand per month may dictate whether you or I could retire some day, or if we could remain in our house and purchase the medications that we may need, or have enough money to spend a week or a month somewhere warm when a blizzard is howling in our home state, it is something worth thinking about and planning for.
Should I be able to survive at work and in life long enough to "retire," I will likely employ a similar name for a future blog and/or e-books, "The Middle Class Guide to Retirement," "How to Retire if Your Are Middle Class," "The Money Mensch's Guide to 'Retirement' " or something similar.
That is a project that I would like to do, but am in no hurry for seven more years to fly by.
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