My $118 Cup of Coffee
Yesterday I paid $118.37 for a "grande" cup of coffee at Starbucks! Yikes!
Surely you must think I jest. But it is absolutely true. Let me explain.
For starters, I forked over two dollars for the cup of joe. As I did, an inner voice spoke to me. I think it was Warren Buffett. He asked, "What is the true cost of that little cup of joe (even though Starbucks names the cup "grande") thirty-six years from now?"
Well if I put the two dollars into a 401K plan that returns 12% a year, in thirty-six years my cup of joe costs me $118.37. And if I buy five cups a week on my way to work for the next year, my coffee habit costs me $30,750; and. if I do this every year for thirty-six years, my coffee habit costs $282,151.32!
Wow! That is truly a grande cup of coffee!
How can I afford to drink coffee? Me thinks I should stick to water from the drinking fountain!
Oh, I almost forgot - I eat out for lunch every day at work. And what does a sandwich with chips and a drink cost? You might think just $8.75. But not really. Try $517.44 (at 12% return for thirty-six years). My weekly lunch habit for a year costs $134,533 and if I did this repeatedly for thirty-six years, eating out for lunch costs me $1,234,412!
That's over a million dollars for lunch! It better be damn tasty!
Pierre Cutler
The Sacramento Executive
Comments
Your assumption about a 12% return is a reflection of the exhuberance that got this country into the mess it is in today. Real rates of return on investment - in aggregate - cannot exceed the real rate of growth of the global economy, which in the 2nd half of the 20th century was 4%, the highest ever. And even that figure, 4%, is probably skewed upwards because of the internet bubble which didn't burst until a few months after 12-31-99.
While some individual investors and small funds will obviously earn real rates of return in excess of 4%, to suggest that just anyone can make a passive investment in a 401K and expect anything remotely close to 12% is delusional. Tragically, this collective delusion is appealing and contagious and is the reason pension fund managers with responsibility for millions of workers misled themselves as well as policymakers - and here we are.
Posted by: Ed Ring | February 19, 2009 9:54 AM