A "Latte" Coffee or a "Latte" Retirement?
Every day people make decisions on how they should spend and/or save their money. Decisions like going out for lunch vs. eating last night’s leftovers, seeing a new movie at the movie theater vs. reading a favorite book, or ordering a pumpkin spice latte at your local coffee shop vs. drinking the generic “free” coffee at work. There is constant pressure on consumers, and it can be hard to know when to say “Yes.” and when to say “No.”
Years ago, a friend of mine, who worked at a local coffee shop, told me that she had a regular customer who ordered not one, but two lattes every day! A majority of people would probably admit that two lattes sound a bit much (I would tend to agree), but many people can probably think of someone who gets their “drink of choice” every day. Earlier this year, Reuters found that about 64% of Americans over the age of 18 drink a cup of coffee a day, and among younger crowds, close to half drink what they would consider to be gourmet coffee. On the surface, spending $5 per visit at a coffee shop may sound harmless, but we thought it would be a fun and quick exercise to unwrap what that simple daily decision could mean for investors and their financial future.
A “Latte” of Retirement Funds!
Let’s imagine there is an individual who goes to their favorite cafe for a latte and spends $5 every weekday for 50 weeks during the year (this keeps the math simple). Over the whole year they would spend $1,250. If this individual made the disciplined decision to limit their $5 latte to one per week, they would save $1,000 each year.$1,000 may not sound like a lot of money to some readers, but to young professionals (who are probably more susceptible to their daily coffee fix), $1,000 is a nice chunk of change. Making the adjustment would allow them to put that money to work in a Roth IRA, taking advantage of tax-free growth and withdrawals for years to come.
In the case of a 25-year-old, saving $1,000 per year could have enormous implications on their retirement funds. Imagine if this 25-year-old just cut back for 10 years (until age 35) and instead invested that money. That deferred latte consumption could be worth almost $500,000 at retirement! And, if they “kick the habit” until retirement age (from age 25 to 69), this could be over $750,000. That’s a “latte” of retirement funds!
The Power of Compounding
The below table illustrates how deferring your pumpkin spice latte addiction could affect your investment portfolio as you enter retirement at 70. It really comes down to the power of compounded returns and the ability to take risks:
| Annual Returns: Age 25 - 69 | Future Value: Cut Back for 10 Years | Future Value: Cut Out to Retirement |
|---|---|---|
| 6% | $107,387 | $225,508 |
| 7% | $157,838 | $305,752 |
| 8% | $231,324 | $417,426 |
| 9% | $338,061 | $573,186 |
| 10% | $492,669 | $790,795 |
While we are having fun, imagine never touching the ~$500,000 at retirement and keeping these dollars invested. Doing so has the potential to result in you leaving behind a legacy of $5.8 MILLION instead of a pile of empty coffee cups. (Values assume a geometric return of 10% through the age of 70 and 95, respectively, and investments made at the beginning of each year from 25-34. Long-term historical returns for equities have been in excess of 10%/year.) Again, it’s the power of compounding over another couple of decades.
Whether you are buying coffee, clothes, or the newest gadget, there is always an opportunity cost. Spending money today means you can’t save that money for the future. In the case of drinking a grande pumpkin spice latte, that opportunity cost also rears its head in the form of calories (drinking 250 grande pumpkin spice lattes in a year would result in consuming 100,000 calories), but that is a topic for a dietician to blog about.
Invest for the Longer Term
Everyone has their “pumpkin spice latte” - what’s yours? Perhaps it’s time to invest for the longer term instead.
At Kings Path, we want investors to enjoy what they have been blessed with, but more than that, we want to help institutions, families, and individuals lay out proper values and goals and to spend, save, and give their money accordingly.
