It’s a grown-up version of the teenage party game Would You Rather: Would you rather have $1 million total saved for your retirement? Or $5,000 to spend every month? Your answer, according to a recent paper in the Journal of Marketing, puts you in one of two categories — either you are (to varying degrees) under the “illusion of wealth” or the “illusion of poverty.” Learning which way you lean can help you better understand your own spending and saving habits.
Neither answer is wrong, because (sorry) it was a trick question, as two of the study authors — Shlomo Benartzi and Hal E. Hersfield, both of the UCLA Anderson School of Management — write in a recent piece in The Wall Street Journal:
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.)
Still, perception matters. Most websites and apps that people use to track their retirement savings display the amount as one lump sum — say, $1 million. (Side note: LOL.) “The problem is that depending on how you answered the above question, you will view that $1 million differently,” they write, like a kind of high-stakes rabbit-or-duck illusion.
On the illusion of wealth: A preference for the large sum may mean “a false sense of security” — you look at all the lovely commas and zeros in your various accounts and think, Hey, I’m doing okay. It’s nice way to feel, though it’s an attitude that can ultimately result in too little saved for retirement. “One million dollars might seem like a lot — especially if you’re viewing all of those zeros on a small smartphone screen — but it isn’t nearly enough for those expecting to have, say, $8,000 a month to spend over a 20- to 30-year retirement,” they write.
On the illusion of poverty: Feeling more comfortable with the $5,000 monthly option isn’t necessarily the “correct” answer, either. “Because they might be inclined to think about wealth in terms of monthly income as opposed to a large sum, they incorrectly assume that the $1 million they see on the screen equates to less than $5,000 a month,” Benartzi and Hershfield write. “Instead of living the lifestyle they can afford, they worry they’re running out of money and act accordingly, skipping trips and scrimping on prescriptions.” It’s important to save enough money, but it’s just as important to enjoy your life, and to spend money on things that matter.
The study authors suggest a big-picture solution for the problem, urging the makers of more websites and apps to display people’s projected monthly income in retirement along with the their total net worth. But for you, for now, knowing that each of these illusions exist — and getting an idea of which one might describe your beliefs and behavior — is at least a start.