Don’t Smoke Away Your Retirement

A few years back I read David Bach’s book “Smart Couples Finish Rich”. The book was entertaining, but it didn’t offer anything revolutionary in the way of personal finance that hadn’t already been addressed in a variety of books before it. However, one colloquialism that was used in the book put a great perspective on the frivolous spending Americans do each and every day.

David Bach refers to the phenomenon as the “Latte Factor”, after the virtually omnipresent designer coffer shops, still popular today, that were making a killing selling $5 a cup coffee to anybody that would buy them; my particular favorite is the “Lucky Leprechaun Latte”. Of course, fancy coffee isn’t the only thing Americans waste their money on.

Let’s step out of the slightly understated, elegantly designed Starbuck’s coffee shop and look for some real indicators of wasteful consumption on the city streets. BINGO, right over there! That dudes smoking a cigarette!

Not a lot of people living below the poverty line buy $5 coffees, but according to the Centers for Disease Control and Prevention, nearly 1/3 of them are regular cigarette smokers and a great deal of these individuals smoke at least 20 cigarettes a day.

Let’s run some quick numbers and assess the economic burden of a “pack a day” smoker, not taking into account any additional medical costs, or higher insurance premiums.

My career as a merchant ship officer has taught me never to assume anything because it makes an “ass out of u and me”. Therefore, when running the following calculation, I made an effort to use the most historically conservative figures that I could.

Average Price of a Pack of Cigarettes: $4.63 (source US Dept. Agriculture)

If the rate of inflation follows its 80 year average of 3%, a smoker can expect to pay $42,292 in today’s dollars on cigarettes over his working lifetime from age 18-65.

Instead, if the individual had invested that money in a well diversified stock fund returning a conservative rate of return of 10% (the stock market has average 11.8% over the last 70 years) he would have $557,275 sitting in his account after inflation! If he lived off just the interest of this nest egg, he could get $30,000 a year and never touch the principal with a conservative 6% rate of return during his retirement years. That’s much more than most people receive from Social Security now!

The problem is that Nicotine is addictive and saving money is not. Cigarette companies spent an estimated $8.24 Billion in 1999 alone marketing their products primarily to minors. All this pressure to smoke, at a time when knowing how to balance a checkbook is not a prerequisite to graduate from most high schools.

Those same minors are now well along in their chosen occupational fields, with many having not saved a dime towards their retirement. If 1/3 of the people living below the poverty line can afford to smoke, nearly all of us can afford to fund a comfortable retirement. Instead, we just watch our chance of capitalizing on some compounding interest go up in smoke.

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