Beer Math

In the beginning God created beer. This has made a lot of people very happy and been widely regarded as a good move. In fact, I’m having some right now while watching football, and couldn’t agree more.  I’d bet my life savings that Future Me will hold a similar opinion. Which got me thinking (dangerous activity, I know), if beer were like money, and you could save it and grow it over time, how many beers am I costing Future Me by drinking this one right now? Let’s find out.

So, there you are with a crisp $5 bill. You have two choices: 

1. Buy a delicious beer. Be happy now. 

2. Save it. Be happy later.

As much as we’d rather not, let’s be boring and save it. Since we already have the $5 in our hands, we’ve (presumably) already been taxed on that income we can deposit it into an after-tax ROTH account (401k or IRA), which means we won’t have to pay taxes on any gains when we withdraw it later on (hooray!!).

Now, we sit in sobriety, and wait. And wait. For 40 years, until we’re 65.

What’s become of our original $5? Assuming 10% annual returns (approximate long term stock market avg.), that $5 has turned into $226.30 [ = $5*((1+10%)^40)].

So does that mean Future You can now go and buy 45 ($226.3/$5) beers right now with the money Past You saved instead of drinking that one beer 40 years ago? Hmm…not quite. In the years that your $5 was growing, things in general have gotten more expensive thanks to inflation and hopefully stable monetary policy. So, to find out how much a beer costs at the time we take our money out, let’s assume 2.5% for inflation.

Cost of beer in 40 years = $5 x (1+2.5%)^40 = $13.43.

So, the next time you’re at a bar, you can think to yourself “For every beer I’m drinking here, I’m taking away 17 ($226.3/$13.43) beers from Future Me”. Conversely, for every $5 you save today, you’re buying yourself a whole night of happily tipsy retirement.