Coffee and Pensions

Well, it's Saturday again. Usually, I spend my Saturdays running errands, my day to unload all my cash into this highly integrated global economy. My job is to spend. I do so with reluctance. But, it is my job anyway. My political leaders have told me it is my job, as have all the economists out there. No has told me yet that spending all my money is not my job.

A coffee or two, first thing in the morning to jump start my sluggish disposition, well ... let's just say caffeine is my drug of choice and my employer likes it when I get to work on time. Oh, I used the 'drug' word. Coffee has become so deeply entrenched into our culture and other cultures, for that matter, that we overlook the powerful stimulative effects of the black brew. If coffee were discovered today, it would not get past the Food and Drug Administration nor Health Canada, without being branded a prescribed pharmaceutical. Luckily, the health watchers are looking the other way.

My concern with this can of coffee is not so much what it does to me and others within minutes of ingestion. My concern is the financial benefit of this can of coffee. Financial benefit? For those of you that imbibe this brew, the overwhelming majority will have concocted a cup or two at home, as I've yet to find a drive-thru that serves Maxwell House. So, right off the bat, you and I have
saved money by not having it ready made by someone else. Then if we can buy this stuff on special, at a 'discount' as the economists and accountants would say, we can save even more.

As you can witness by the scanned advertisement, I was able to buy not one, but six of these 925 gram cans for $4.69 each. Damned good deal, actually! The regular price at Sobey's or Zehr's seems to hover around $7.47 a can. I reduced my living expenses by $2.78 a can or $16.68 if we multiply by the six cans purchased. Yup, bulking up on special works.

Now for the real reason of this gripping insight into Grade 3 arithmetic.

What is the Future Value of my savings, this gigantic pot of $16.68?

A loaded question, for sure. First some assumptions. Economists love assumptions. Philosophers will argue using hypotheses. I'll stick with assumptions.

First, let's assume that I will take this huge glob of cash I saved and invest it wisely for my future.

Second, let us assume that I will not lend my money to a bank or a government, but invest it in the greatest casino on earth, the stock market.

Third assumption, since I have the intelligence of the clay brick, I will invest this glob of cash into some shares of Standard and Poor's 500 ETF's or Exchange Traded Funds as they are called, since I could not pick a winning stock even with both eyes open.

Fourth assumption, over the next 18 years of my working life, assuming I will retire at age 65 (and that assumption may be sorely tested), these ETF's will net me an average annual compound rate of return of 10%. I hold out no hope that the equity markets will do any better for me. And with the lunacy of the markets since the end of 1994, even 10% looking forward, over time, may be fanciful.

Fifth assumption, all this incredibly astute investing will happen inside of TFSA, or Tax Free Savings Account. It's a new Canadian tax treatment. A TFSA means I will not pay any income tax on my gains or withdrawals.

By saving $16.68 and compounding it over 18 years at 10% per annum, I end up with an extra $92.74 when I retire. I would gain nothing by only buying one can of coffee at the full retail price of $7.47 and using it up until I run out and then buying another can at full retail. By bulking up on special, an effort that requires very little energy to pull off, I sow the seeds of having a few extra dollars when I retire.

Or, to put it another way, the Future Value of $16.68 saved today, 18 years out, is $92.74. Another way of putting it, by NOT saving $16.68 by buying on special a commodity that I use every day, I will forgo $92.74 on the day I retire.