Converting Your Investment into Income

“There are three kinds of people in this world: those who are good at math, and those who are not.”
–Unknown

Save money now, and sometime in the future investment, you’ll supposedly have a pile of money that you can use to retire on.

That’s a great thought, but thinking in those nebulous ways won’t get you to change your behavior one iota. Why save for the future when you can buy man cave toys and Jimmy Choo shoes now? That’s what Monkey Brain will tell you.

As we saw in “Will Defining Your Retirement Number Make You Happier,” when we don’t know what our target number is, then we’ll keep working and going long after we’ve reached our goal.

However, knowing our retirement number competes with another issue: Monkey Brain doesn’t care much about what happens in the future, particularly if it affects his ability to have fun right now. Known as hyperbolic discounting, we humans tend to value fun and pain in the future much less than fun and pain right now. Since saving money involves depriving ourselves of fun now, it has a double whammy – no fun now and discounted fun in the future.

But, there is a little fear in the back of Monkey Brain’s head that we can use to our advantage: the fear of becoming the bag lady, living under a bridge, and diving in Dumpsters for cat food. While Monkey Brain doesn’t care much about leisure in the future, he’s petrified of the image of a worst case outcome.

How, then, do we convince Monkey Brain that it’s worth it to save a little now so he doesn’t have to scrounge for food later?

Stanford’s Gopi Shah Goda and a team of researchers sought to answer that question. They studied 401k plan participants in Minnesota and showed them how their account balances translated into lifetime income.

Those who had the income projections were 3.6% more likely to contribute to their 401ks than those who did not see the projections, and they saved $85 more per year.

Numbers, numbers, numbers

There’s one hiccup to that idea. What if your 401k plan provider or IRA brokerage doesn’t show those numbers? How do you convert it into income?

Rest easy.

I’ve made it simple for you.

Below is a chart where, given your age, you can see how much $10,000 translates into income if you retire at age 65. I have used a 4% withdrawal rate to replicate spending, and assumed inflation-adjusted, or real returns. To compare, the historical real annual rate of return for the S&P 500 from January 1, 1871 through December 31, 2013 is 6.86%.

The numbers scale as well. If you invest $1,000, then divide your result by 10. If you invest $5,000, divide your result by 2.

Now you know, and you have no excuse for not investing!

What’s stopping you from saving and investing this year? Let’s talk about it in the comments below!