Is it better to have a liquid (or liquidatable) stash than an income stream not derived from a stash (such as a pension) with an equivalent present value?
My gut tells me yes, because the former provides more flexibility--the stash equips you to deal with unexpected expenses and self-insure against risks in a way that the income stream does not. But I think I reach this conclusion only because it's impossible to predict our future expenses with 100% certainty (after all, strictly speaking, the answer to the question, read literally, has to be "no", because it would be a contradiction in terms to say the income stream has an "equivalent present value" if in fact it is in any way worth less than the lump sum stash).
To illustrate, let's assume your crystal ball can accurately tell you exactly (i) when you will die; (ii) what your investment returns will be until then; (iii) what the inflation rate will be until then; and (iv) what your expenses will be until then. With this information, you can determine what size stash you need to fund your retirement down to the penny (and bounce the check to the underwriter). In this scenario, I think the value to you of a stash of this size is exactly the same as that of an income stream that will cover every penny of your retirement--no better, no worse.
But now assume the crystal ball has a blind spot, and can tell you everything above except what your future expenses will be. So, like the rest of us, you now have to make an assumption about your future expenses (based on your current expense levels and your educated guesses about the future). Using that assumption, you can still calculate the exact stash size you need. In this scenario, though, I think it is better to have a stash of that size than to live "paycheck to paycheck" on an income stream that is sufficient to fund the same expected expenses (because, if your expense assumptions don't pan out, you can tap the stash). Or am I just fooling myself? Even if you have a stash to tap for unexpected expenses, once you do tap it, it is no longer sufficient to satisfy your future expected expenses, and you are going to have to make up the shortfall somehow anyway.
Anyone have thoughts on this issue?
(Not that it really matters, but the impetus behind this post is that I'm trying to figure out how the value of the income stream from my rental apartment (which is a second unit in my primary residence and which I intend to treat as a non-liquidatable asset / sunk cost for all intents and purposes of my retirement planning) compares to value of the liquid investments I otherwise could have purchased with the portion of the home's purchase price that is allocable to the rental unit.)
