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Recently Yahoo Finance posted an article asking if readers would rather have a $1 million dollar lump sum or receive $5000 monthly in their retirement. 

As the article goes on to say, investors today have all the tools at their disposal to determine their net worth at any point in time.  One would think that with this capability, investors would be more financially savvy.  However, new research suggests that for many of us, the opposite may be true. 

There is a phenomenon called the illusion of wealth and the illusion of poverty that comes into play.  Before the article discusses these two illusions, however, it must be noted that the two amounts of retirement income are roughly equal based on current annuity pricing.

Some people feel $1 million dollars is a more adequate sum of money than $5000 per month.  This illusion of wealth can lead to a false sense of security from large amounts of money and lead to undersaving for retirement.

On the other hand, some people view $5000 a month is more adequate than $1 million and this is the illusion of poverty.  Because they are inclined to view wealth in terms of monthly income as opposed to a large sum, they worry they are running out of money and act accordingly ie: skipping vacations and scrimping on prescriptions.

Ironically, the larger the amounts of money, the greater the illusion of poverty becomes because we become desensitized to large sums.  In contrast, because we are accustomed to thinking of expenses in monthly terms, the larger the monthly income, the more wealth we feel we have.

I have asked several people this very same question, (some in the financial industry and others who are not), and the results have been interesting to say the least.  While the article did not specify the percentage of people who feel each way, I found that about 50 percent responded that they would rather have the $1 million dollars and the other half wanted the monthly income. 

How about you?  Do you have the illusion of wealth or the illusion of poverty?  


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