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Millennials: latte now, retire later?

By Barbara Whelehan ·
Friday, August 19, 2011
Posted: 1 pm ET

Putnam Investments introduced an application earlier this summer that helps iPhone users understand the trade-offs of everyday money decisions and how they may affect their future retirement, according to Financial Security Project at Boston College.

Only about 1,000 people have downloaded its PriceCheck&Save app so far -- but that may be because it's only available to those whose 401(k) plans are managed by Putnam. The firm is working on an unrestricted app, but surely there must be another one among the 425,000 apps approved by Apple, right?

The PriceCheck&Save app helps you calculate how much you could earn on money that you would otherwise spend. For instance, if you forgo buying an HDTV that costs $1,738, how much would that -- if invested and allowed to grow in your 401(k) account -- generate in income at retirement? The app provides an answer that depends on your age, the asset allocation in your plan (and, I presume, expected returns), and it assumes a retirement age of 65.

While it's personalized, it can't be entirely accurate since no one knows what a portfolio might achieve over the next 30 or 40 years. Still, it's intelligence that, if integrated in the psyche, can benefit users greatly.

Reaching out to millennials

I have been struggling with the issue of reaching out to younger people about the importance of retirement planning. It seems like such a distant goal when you're young, and there are so many other financial priorities. Yet the earlier you start saving for it, the more likely you'll be able to gain financial independence. I wish I had been exposed to this information in my 20s.

I asked youth expert Tina Wells, author of "Chasing Youth Culture and Getting it Right," what would be the most effective way to reach out to millennials.

"Millennials are definitely interested in saving for retirement," said Wells. "As with any demographic, though, the key is reaching them where they are. They may not be in a position to buy a house just yet, so talking to them about more 'grown-up' purchases isn't the right angle. Focus on things relevant to them, like buying one less item on Gilt Groupe or one less latte!"

I asked another youth expert, Daniel Miranda, a 22-year-old intern who works at Bankrate, what's the best way to reach young people. Would showing the long-term cost of lattes do the trick? "Real world examples are always good to include, such as showing them the annual financial result of a daily latte, and how simple it is for short, frequent contributions to add up to impressive amounts fairly quickly," he said. It would reveal "the ease and benefits of replacing an expensive habit with something more worthwhile, like a retirement plan."

This guy is smart. So, OK, let's use lattes as an example. That seems like a small luxury, right? We deserve a latte a day. But at $4 a pop, a daily dose amounts to $1,460 over the course of a year.

What if we invested it in a tax-deferred account such as a Roth IRA or traditional IRA that earns 7 percent over the course of 40 years? (Let's assume you're age 25 and you plan to retire at 65, though you may decide to retire earlier if you can.) Assuming a 3 percent inflation rate, that would amount to $134,986 at age 65. Wow. That's huge -- and that's just investing $4 a day. Over the course of 30 years, it would add up to $80,308.

So the choice becomes: Do I really want this latte now, or do I want financial independence and more control over my destiny? OK, maybe I'm overdramatizing here, but you get the point.

Bankrate's 401(k) spend it or save it calculator is another tool you can use to see the tradeoffs of spending money today versus investing it for tomorrow.


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Barbara Whelehan
August 25, 2011 at 9:56 am

Mario -- The latte serves as an example of how a relatively small amount saved up consistently over time can amount to a lot of money in three or four decades. One could substitute other goods for the example, such as cigarettes or lunches at McDonalds, and come to the same conclusion. Millennials could best benefit from this information since many are just starting their careers and making some money.

As for your suggestion about going younger, parents are in the best position to teach their adolescents and teens about saving money as well as other virtues, such as good manners. Thanks for writing.

August 24, 2011 at 12:42 pm

I wish I knew who all these 22 year old latte-a-day drinkers were. Apparently there's millions of them.
Wanna go younger? Why not use iTunes as an example.

"Don't buy 4 songs, save for retirement instead."