Would You Rather Have $1 Million or $5,000 Monthly

These days, investors can track at any moment how the market’s daily ups and downs are affecting their wealth.

Even investors with multiple investment accounts spread across different firms can calculate changes in their net worth in real time, thanks to websites and apps that do all of the work for them.

One might think that having all of this information would make people more financially savvy, especially when it comes to saving for retirement. New research, however, suggests that for many people, it may be the opposite.

That’s in part because many of the digital tools used to track net worth present information in a way that leads some investors to develop mistaken beliefs about how much money they actually have for retirement.

To understand why this is so, consider a phenomenon known as the illusion of wealth and the illusion of poverty, which we, along with researcher Daniel Goldstein at Microsoft Research, studied in a paper published in the Journal of Marketing Research.

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”?

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?

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.

Most tools give savers the total amount saved—the $1 million. The problem is that depending on how you answered the above question, you will view that $1 million differently.

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source: https://finance.yahoo.com/news/rather-1-million-5-000-025300479.html

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