From Morningstar:

Ronald Reagan and personal finance coaches both opt for stories instead of stats. The $1 million coffee fund parable is popular, but its lessons may not be wholly accurate. A $1 million portfolio can be achieved, but inflation must be considered. The real value of $1 million by 2064 is likely to be reduced due to inflation.

The Coffee Fund formula involves investing in an equity fund at a 6% return, but the $1 million result is nominal, not real. Buying the most expensive coffee each day yields the $1 million outcome, but it may not be the most practical means to save money.

Despite the Coffee Fund’s myth, investing in equities over 40 years does not factor in inflation’s impact on portfolio value. Although the $1 million forecast may seem substantial, it will not hold the same purchasing power in 2064. A 4% annual real withdrawal rate reduces the value considerably to $5,700 to $13,800.

Expensive coffee beverages may appeal to a demographic that isn’t necessarily struggling financially. For those less fortunate, there are simpler ways to save money. However, the coffee cup parable still delivers a valuable message, suggesting underinvesting may be a choice for some while not an option for others. With frugal savings strategies, a $1 million retirement portfolio is attainable.



Read more: Finally, Proof Ditching Coffee Won’t Make You a…