If you save the cost of a cup of coffee each day and invest it in a long-term pension savings account, what will happen?

It’s not easy to get through a day without caffeine, but the price of a cup of coffee is actually not that cheap. Some suggest saving the cost of daily coffee and investing for retirement. What would be the result if you saved the cost of a cup of coffee each day and invested it in a long-term pension savings account? Since developing a habit of long-term investment for retirement from a young age, let’s simulate the scenario for Ms. Park who has just started her career. Considering long-term investment, we have chosen to invest in the U.S. index.

In this simulation, we will use the Monte Carlo Simulation from the Portfolio Visualization used in the previous post “Projected Pension Investment Performance in Korea (feat. Portfolio Visualization – Monte Carlo).”

The settings are as follows:

• Portfolio Type: SPY
• Initial Amount: 1 (entering 1, as it needs to be greater than 0)
• Contribution Frequency: Monthly
• Contribution Amount: 150,000 won (1.8 million won annually), written as 15
• Simulation Period in Years: 30 years
• Tax Treatment: Pre-tax
• Simulation Model: Historical Returns
• Use Full History: Yes
• Inflation Model: Historical Inflation
• Rebalancing: None

Running the simulation with these settings will show the results of investing the savings from skipping a cup of coffee each day.

Looking at the percentile results, the key results at the 50% percentile are as follows:

• Nominal Compound Annual Growth Rate (CAGR): 9.60%
• Effective Compound Annual Growth Rate (CAGR): 7.07% (adjusted for inflation)
• Nominal Portfolio Evaluation Amount: 387 million won
• Effective Portfolio Evaluation Amount: 185 million won (present value basis)
• Safe Withdrawal Rate: 7.72%
• Perpetual Withdrawal Rate: 6.48%

The total invested capital was 54 million won, and after 30 years, the evaluation amount increased by 7.26 times and 3.4 times on a present value basis (on a pre-tax basis). Additionally, the tax deduction amount for the contributions to the pension savings fund (16.5% for annual income below 55 million won, 13.2% for income above) is added, ranging from 7.1 to 8.9 million won. Applying the perpetual withdrawal rate, you can use 29.8 million won per year (2.49 million won per month) on a nominal basis or 11.9 million won per year (1 million won per month) on a present value basis for retirement. If you withdraw using the safe withdrawal rate, the pension amount will increase even more.

Investing the cost of a cup of coffee in the long term shows significant results. Excluding national pension (uncertain whether I will receive), retirement pension, personal pension, housing pension, etc., it seems that having 1 million won per month in current terms for living expenses is enough to comfortably enjoy hobbies.