The Case for and Against Small Indulgences as Part of Saving for Retirement

Given that 30% of Americans have less than $5000 in retirement, the fact that forgoing takeout lunch everday can add up to $2160 per year is significant amount. And that fact drives home a decent point that many Americans need to forgo those small luxuries.

While most Plan Sponsors would think that creating tools that help employees see how their small indulgences add up, and usually add up to keeping them from saving, is helpful, there is a small contingent of voices arguing against that advice. It’s possible that the debate between the two could be even more useful in helping employees make informed decisions and in understanding financial behavior. Financial behavior science explains why investors make bad choices. It also studies how to encourage better choices.

Imagine the newly minted employee, enjoying her coffee on the way to work each morning, opting for the high-octane rocket fuel that costs $4 a cup. Over the course of her first year at work, she might spend as much as $1000 on coffee.  If she invested that, instead of drank it, and received a conservative 5% interest on it, she’d have $2,653.30 after 20 years, having done nothing more that set aside that’ year’s worth of coffee. In this case, forgoing the small treat would add up to a bundle.

Imagine the law student studying hard to get to the head of the class. She can opt for one more hour (and another cup of coffee at the coffee shop) or head home to brew it herself. The result? Most likely the home brewed coffee never gets drunk as the law student finds herself asleep while it’s brewing. One more hour at the coffee shop might not seem like much in isolation, but over the course of a 12 week semester might be the difference between a B+ and an A-, and the result in GPA might keep the coffee shop student employed better (higher salary) or longer (employed while the industry takes a beating in a bad economy). So while the home brewer saves $4 a day several times a week over a 12 week semester (or roughly $192) the coffee gal may end up making $20,000 a year more than the home brewer.  In this case, not forgoing the small treat would add up to losing a bundle.

For those who argue that forgoing small treats builds a better budget, they usually argue to monitor treats, not entirely forgo them.  The goal, they say is to identify leaks or unknowns in a budget so that savings can be maximized. Then the usual expense suspects can be whittled down, including gym memberships and fitness classes, overspending on holiday gifts and presents, vice-related spending like fast food, smoking and drinking, and conveniences like cabs or Ubers and delivery charges.

The idea behind cutting back on daily luxuries, like coffee, is that they add up. We’ve seen how eating out for lunch everyday instead of bringing lunch from home can add up to $2160 per year. If that was set aside, each year for 5 years at a 5% interest, the result would be $15,288.90. Given that 30% of Americans have less than $5000 in retirement, that’s a significant amount. And drives home a decent point that many Americans need to forgo those small luxuries, like buying lunch instead of bringing lunch. The argument on the other side is that savings on luxuries summing up to a fair amount of retirement it doesn’t mean that all luxuries are bad for all people for their retirement readiness.

An interesting point to this may be the financial behavioral science behind it. It’s possible that because those who need to forgo the lunch out ever day, because of the smaller salaries or higher debt levels, may be forgoing larger luxuries that they want, like vacations, more comfortable or reliable cars, or houses that would fit their multi-generational families. And the result is small daily “budget leaks” on treats like lunch or syrupy lattes. If you can’t have the ski vacation you dream of, you are less likely to be able to turn down the daily latte.

The debate on whether to forgo small luxuries shows that the same advice won’t work for a variety of people. Those with high student loans, a life time projection of modest or mid-line salaries, or who need to consider supporting children and aging parents at the same time probably need assistance in determining which comfort or luxury items they will prioritize. Those with higher salaries probably need more help monitoring overspending in general.

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