Coffee or Retirement - Which Benefits You More?

July 03, 2018 1 Comments

Chances are you have never stumbled across anyone that boasts about the fact it only took them five years to plan for retirement? Or that they have so much money that they are going to retire at forty. The reality is that planning for retirement takes dedication to earn the desired results. Retirement is going to happen whether you are ready or not! So set a goal and stick to it, because no one wants to hear all the reasons why you did not save for retirement. You have a greater chance of living to 65 than you want to believe. Can you imagine yourself retired? What does that look like? Now ask yourself what you have to do to make this a reality.

An IRA is a great way to start or supplement a retirement plan. For the context of this conversation, we will explore a scenario with a forty year old who is working for a company that does not offer a 401(k) plan as an option. In this case an IRA is the next best alternative to start on a path for retirement. At forty, you are able to contribute a maximum of $5,500 a year to your IRA. That is approximately $15.00 a day or two café vanilla frappuccino blended coffees. And just think if you cut down on your frappuccinos intake you can save yourself 860 calories a day too. In all seriousness, $15.00 a day can make a big difference now as you plan for what is to come. Yes, retirement is coming whether you want to admit it or not.

Let’s take a look at what this would look like over time. If a forty year old started contributing to an IRA to supplement or help achieve their retirement goals at the maximum IRS allowable amount from age 40 to 50 ($5,500 per year) and from age 51 to 65 ($6,500 per year), while yielding a return of five percent compounding over the 25 year period, a nest egg of over $280,000 will be created. Not bad for giving up coffee. Keep in mind this example is less than a market average return. If your IRA was invested in ten percent yielding investments the end result would be over $560,000. Is that worth giving up your coffee habit?

If you are not on board yet, then maybe this will help. Every time you buy a coffee you are paying taxes, which is how your coffee tab crept up to $15.00 for two coffees. What if you did not have to pay tax on the $560,000 you accumulated in your IRA? So now do I have your attention? If you establish a Roth IRA and you wait until age 59 ½ before taking a distribution, you will receive your distribution tax free. I’m not making this up. In fact, you can thank our government officials for this gift.

Now let me put the whip cream on top of your frappuccino. The goal with retirement is not to spend the capital, but to live off the dividends or interest of the accumulation of the capital. At this phase of the conversation your investment selection and attention to detail of your retirement plan, we are going to assume that you were able to accumulate $560,000 over 25 years. This means that every year at a 10% yielding investment you would have $56,000 in tax free income.

So put down the coffee and pay attention to your retirement plan.


Figures are as of the original publication date of July 3, 2018. IRA Contribution limits may change. Please refer to the IRA website for current limits.


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