{"id":329,"date":"2017-04-27T16:57:46","date_gmt":"2017-04-27T15:57:46","guid":{"rendered":"https:\/\/evolvemyretirement.com\/blog\/?p=329"},"modified":"2017-07-06T16:37:08","modified_gmt":"2017-07-06T15:37:08","slug":"illusion-wealth-poverty","status":"publish","type":"post","link":"https:\/\/evolvemyretirement.com\/blog\/illusion-wealth-poverty\/","title":{"rendered":"Illusion: Would You Choose \u00a31 Million Or \u00a350,000 Per Year?"},"content":{"rendered":"

Let me clarify the choice a bit. The choice is between receiving a cash lump sum of \u00a31 million, or a fixed yearly payment of \u00a350,000 for life. The answer may<\/em> indicate whether you have an illusion of wealth or of poverty!<\/p>\n

Many people will consider this choice to be a no-brainer. But it might surprise them to learn that some other people would give the opposite answer, and that those other people too would consider it a no-brainer!<\/p>\n

Recently the Wall Street Journal posed a similar question to its readers in an article<\/a>,\u00a0which was geared towards its US readership. It was based on research in which they participated, which found that some people have an \u2018illusion of wealth\u2019, whereas others have an \u2018illusion of poverty\u2019.<\/p>\n

Guaranteed Fixed Income<\/h2>\n

\"guaranteed-income\"<\/p>\n

As it happens if a man of average health aged 65 spent \u00a31 million on an annuity that paid a fixed income, it would generate around \u00a350,000 per year for life. The researchers assumed that this means that the two choices are roughly equivalent for a 65 year old man. I\u2019d question this assumption, as I’ll explain later.<\/p>\n

It\u2019s worth noting that the younger one is, the greater the relative value is of the \u00a350,000 per year. The older one is, the more the \u00a31m becomes more valuable, since it\u2019s less likely to have to last so long.<\/p>\n

Based on the Wall Street Journal research, we’re supposed to consider people who choose \u00a31 million as having the \u2018illusion of wealth\u2019; those who choose \u00a350,000 per year we should consider as having the \u2018illusion of poverty\u2019. Let\u2019s check this out.<\/p>\n

How Much Should We Actually Spend?<\/h2>\n

\"spending\"<\/p>\n

You might imagine that having a fixed income of \u00a350,000 a year means that we could safely spend it all. That really would be an illusion! Actually, you could only spend it all if you had no expenses, and your only spending was on luxuries. In other words, if you only had discretionary spending. Unfortunately, that\u2019s never the case. Everyone has certain necessary expenditure, and this tends to increase with inflation. But a fixed income, by definition, never increases. So if you live long enough on a fixed income, and you spend all of it, eventually your expenses will be more than your income. That\u2019s not what we want at all. At just 3% average inflation, our expenses would double in about 23 years!<\/p>\n

Analysing Spending<\/h2>\n

\"analyse-spending\"<\/p>\n

Let\u2019s assume a 65 year-old single man has necessary expenses of \u00a320,000 per year. Then he needs to set a level of discretionary spending that allows him to build up savings. Then, if he\u2019s lucky enough to live for a long time, he can supplement his fixed income by drawing down on savings. How much discretionary spending is safe? That depends on a number of factors, the most important of which are:<\/p>\n