When A $9,701 Cup Of Coffee Is A Bargain

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When A $9,701 Cup Of Coffee Is A Bargain by Chip Castille, BlackRock

Is $9,701 a great price for a cup of coffee? It may be, and understanding why can help you think about how your retirement savings translates into retirement income.

Throughout our working lives, our income and spending are paired together. We know how much we make, and therefore we know that our spending should be equal to or (preferably) less than our income. We seldom think of our spending in bulk. For example, we don’t think how much our house costs, we think about how much our monthly mortgage payment is. We also don’t think about how much a lifetime of coffee costs; we just think about the price of the next cup.

All this changes with retirement. We need to save enough money to provide for our entire retirement lifetime. That means your lump sum savings has to pay for your cup of coffee every day, for the rest of your life. When you look at your retirement balance, how do you know it is enough to feed your coffee habit?

The problem is relating the lump sum in our savings accounts to retirement spending is neither simple nor clear. Here is a scenario that can help.

How Much Dough for a Cup of Joe?

Let’s say you are 55 and one of your favorite things to do on weekends is walk to your local coffee shop, buy a large cup and chat with friends. When you think about retirement, which you plan to do at 65, you imagine doing this every day. How much will that cost? Let’s assume that today your coffee costs $1.95 per cup. And for simplicity’s sake, let’s remove inflation from the equation and assume the price of your cup will not change. That means:

  • A year of coffee will cost $711.75.
  • Ten years of coffee will cost $7,117.50.
  • If your retirement lasts 30 years, you will eventually spend $21,352.50.

Fortunately, you don’t need all $21K at once. What you need is enough savings so you can spend $711.75 per year on your daily cup of coffee. So, how much is enough?

To figure that out, I used CoRI. (Full disclosure, it’s a BlackRock tool.) If you are 55 to 64, you can check CoRI daily for the estimated cost of a dollar of annual lifetime income beginning at age 65. (Check the CoRI site if you are interested in how the tool works.) Let’s say you are 55 and today’s estimated cost per dollar of future income is $13.63.

If $13.63 gives you an estimated $1.00 in annual income throughout retirement, how much savings do you need today to get the $711.75 annual income needed to buy your daily cup each year once you turn 65? Simple—just multiply $13.63 by $711.75. The answer is $9,701. (The figures and estimates provided here are for illustrative purposes only, assume no other variables, and are subject to change over time.)

Now here’s the good news: If your retirement lasts 30 years—that is, you get to enjoy a cup of coffee each day for 30 years—that $9,701 in savings has bought you $21,352.50 worth of coffee. And that’s a bargain.

How CoRI Can Help

Estimating the cost of retirement income (by using CoRI or some other method) helps you estimate the future income your savings may produce, and that in turn lets you measure your estimated income against your projected retirement living expenses. That exercise helps you look at your retirement readiness in much the same way you measure your current spending against your annual income.

The second way it helps is that you start to think about retirement income (from whatever source) as a “cost”, something you “buy”. And that may change how you think about retirement saving. Rather than putting money aside and hoping it is enough, you can now think of saving as buying something today that you will use tomorrow. And that subtle shift can help you set savings goals based on the income you think you’ll need in retirement.

Chip Castille, Managing Director, is head of the BlackRock US Retirement Group. 

The CoRI tool does not guarantee future income or protect against loss of principal. Although the CoRI tool provides an estimate of the amount of money you need today for every dollar of annual income you want in retirement, this estimate is not a guarantee. A number of factors may contribute to variations in retirement income.

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