Just looking at dollar signs or amounts of money on paper can make it difficult to truly grasp what you need in your savings account. Your personalized retirement situation comes down to how much you’ll need to cover expenses such as mortgage payments, medical bills and groceries. How you view money can also affect how you start saving for your long-term goals.
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$1 Million or $5,000 a Month: Factors To Consider
You can be shown the same numbers and either have an illusion of wealth or an illusion of poverty. No matter your retirement account, if you were presented with the financial decision of choosing between getting a lump sum of $1 million or $5,000 a month you would have several factors to weigh. Here are some key takeaways:
- If you retire at age 65 and opt to get $5,000 a month, this would would roughly equal $60,000 a year.
- $60,000 would reach $1 million in total in approximately 16 to 17 years. Depending on when you retire this would put you in your 80s.
- As many people live into their 90s, running out of money in your 80s could be problematic which is why sometimes lump sums can give you a false sense of security.
Individual retirement accounts or employer-sponsored retirement plans such as 401(K) plans often pay in installments.
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What Kind of Money Illusion Do You Have?
Suffering from money illusions is common, especially when analyzing income, large sums or monthly payments. There are primarily two schools of thought on this:
- Illusion of wealth: This is when you tend to view wealth and income in nominal dollar terms, rather than see its real value, especially when adjusted for inflation or real-life expenses. An illusion of wealth mentality can stem from having less financial knowledge or education or a handle on realistic pricing of goods and services.
- Illusion of poverty: This is when you become desensitized to large sums of money or suffer from the illusion that all large sums of money are essentially the same amount in your mind. There is almost a ceiling effect of what actually is a lot of money. For instance, when it comes to considering $1 million, though this is a lot of money, even larger sums like $10 million or $20 million seem almost equivalent.
Not that there is necessarily a right way or wrong way to perceive money, but how you think about it can affect what type of savings you can create. To adjust your money illusions, it may help to break up lump sums or total wealth into more palatable pieces such as monthly income. It can put what you earn, what you have and what you need into a better monetary perspective.
Final Take To GO: Saving For Retirement
Would you choose $1 million or $5,000 a month for your retirement? Understanding what you’ll need in retirement comes down to having both a clear vision of your financial needs as well as how far your money will go. Instead of focusing on illusions of wealth or poverty, think more on how your savings will suit the lifestyle you want. There is no predicting the future, but that doesn’t mean you shouldn’t do your best to plan for it.
FAQ
Here are some answers to frequently asked questions about choosing between $1 million or $5,000 a month in retirement.
- Is $5,000 a month a good retirement income?
- $5,000 a month is about $60,000 a year which can be a good income if that covers your expenses.
- Depending on your retirement plan, whether it is a traditional IRA or a Simple IRA, you could get monthly installment payments once you stop working after the age of 65. Make sure you understand your full financial picture to determine if $5,000 monthly payments would be adequate for your situation.
- How much monthly income can $1 million generate?
- A good rule of thumb when evaluating lump sums of money is to break it down into smaller amounts to better get a sense of what you’ll have week to week or month to month. If you were to break down $1 million into monthly payments of $5,000 it would last you approximately 16 to 17 years.
- Is $1 million annual income good?
- Yes, $1 million is a good annual income. It is well above the national average and in many states, it would put you in a top percentage of earners which means you could live quite comfortably.
