A Latte a Day Isn’t Going to Ruin Your Retirement
If spending $5 a day on fancy coffee puts your retirement at risk, you’ve got bigger problems.
Bloomberg, April 3, 2019
Sorry, but no. If a daily latte is the difference between achieving your financial success or suffering devastating failure, then there must be something else you are doing entirely wrong…https://t.co/eFMlr4hMqA
— Barry Ritholtz (@ritholtz) March 29, 2019
I disagree, and have repeatedly done so over the years. If the difference between financial success and failure is the cost of a cup of coffee, you have much bigger problems. A daily $5 latte does not amount to much in the grand scheme of life.
Mind you, I am not against people saving money and we all know our society is way too materialistic.1 But we need to be honest about the actual challenges facing us; I find the Latte bull$hit to be a distraction from genuine financial issues in society.*
Here is what really gets me annoyed: Orman tells her audience that “Your Daily Coffee Habit Is Costing You $1 Million,” with this calculation:
“Let’s say you spend around $100 on coffee each month. If you were to put that $100 into a Roth IRA instead, after 40 years the money would have grown to around $1 million with a 12 percent rate of return.”
This is a nonsense calculation. Worse, it is intellectually dishonest. The actual numbers, as we see below, are anywhere from 50 percent to 75 percent less.
Let’s consider five reasons why you should occasionally treat yourself to a cup of Joe.
1. The Numbers Don’t Add Up: 12 percent annual returns for 40 years? That’s nearly 50 percent better than what markets give you (with dividends reinvested). I literally have a billion dollars for anyone who can get my clients those fat 12 percent returns annually for the next 4 decades.
More realistic are returns around ~8 percent annually. If you invested $100 per month for 40 years (total contributions of $48,000), the compounded returns would be somewhere between $300-350,000.2 And from our present highish U.S. equity valuation, even lower expected returns are not an unreasonable posture.3 But 12% annually? PUH-leeze.
2. Inflation Adjust It: Note that the $350k is in nominal, not inflation-adjusted dollars. By the year 2060, assuming a modest 2-3 percent inflation rate, $300k won’t be all that big of a number.
For some perspective, 40 years ago the median house cost about $62,000 (its over $317,400 today); median income was under $20,000 (its $61,372 today). In 2060, you should expect $300,000 to be about $80-100k today. When we inflation adjust the returns of not buying yourself a cup of coffee every day for 40 years, you might be able to buy yourself an okay car – assuming anyone is even buying cars in 2060.
3. Remove the denominator blindness: Numbers out of context are so misleading, and this one is no exception. Instead, you need to put any number into context via its relationship with other related items. In this case, that six-figure latte compounded appreciation should be put into context relative to the rest of ones’ earnings and/or portfolio appreciation.
It requires a meaningful denominator.
Over the next 40 years, a moderate sized portfolio plus contributions and appreciation can add up to millions of dollars. And a person’s lifetime earnings? If you earn only the median income of 61,372 – and never receive a raise for 40 years – that adds up to $2,454,880. If you get a mere 3 percent raise annually, that becomes closer to 5 million dollars ($4.63m); five percent annual raises lead to almost seven and a half million dollars in cumulative gross earnings.4
Comparing $90k (inflation adjusted) out of $5 million lifetime earnings shows how insignificant a daily cup of cappuccino actually is.
Here is where the coffee nonsense gets called out for the bull$hit it really is: We have had flat wages for three decades; economic mobility is near all-time lows. Health care keeps going up; college has become an economic absurdity as student debt is now over $1.56 trillion dollars. The costs of what we need keep rising, while the cost of the junk we want keeps falling.
The problem with the fixed costs, is that they are well, fixed. This means they are very difficult or impossible to cut back on. Housing, health care, and education are all expensive; Coffee, even good coffee, is not. (Same with avocado toast). Please excuse my lack of enthusiasm for discussing 4-dollar lattes while we ignore 30-plus years of zero real wage gains.
5. Mental bandwidth: Regardless of your view of the Stanford Marshmallow experiment and delayed gratification, there is validity to the claim that will power is finite. All of us have more important issues to exhaust our willpower on than this.
There are much bigger economic issues in everyone’s life, and that’s before we even bring up income inequality. Anyone of these issues are far larger and more consequential than modest spending. All of us have better things to worry about than denying ourselves the occasional cup of fresh hot java.
Cutting out coffee is a minor issue; the big things – income, debt, economic mobility, inflation – matter much, much more. The entire coffee nonsense is a huge distraction from the massive structural problems within our system.
Go enjoy a $5 Latte; and while you sip that warm, delicious brew, and enjoy the benefits, ponder the enormous challenges facing millenials, future retirees, boomers — really anyone who is not fortunate enough to find themselves in the top 20 percent of the American economic strata. Its pretty clear that these penny-wise, pound-foolish solutions really miss the big picture
2. According to the Securities and Exchange Commission’s compound interest calculator, that works out to about $350,000.
3. We really have no idea what level reinvested dividends are going to be for the next 4 decades — they have been falling for the past 4 decades. I would surmise that $350k number is on the high side.
4. I understand a straight-line percentage raise of median income does not reflect the complex reality of how most workers’ earnings curve behaves; but it is a good ballpark figure to show some context for that denominator blindness.
* Special thanks to Heleine Olen, who has written about this extensively, both in her book Pound Foolish and online. As a guest on the MIB podcast, she went off on the “gurus, pundits, self-anointed experts, crackpots, cranks, and outright frauds who populate the backwaters and slipstreams of American finance.” You definitely want to hear what she has to say about Suze Orman…