Monday, May 7, 2018

Give up smoking and become a millionaire

I am always on a quest to cut down expenses. Saving is as important as investing to attain Financial Independence. I was mentioning to my colleague about how we saved $600 in wireless cost by switching to Sprint. It got him wondering about how much he could have saved had he quit smoking. I ended up calculating the numbers and sharing it with him. It is important to measure the absolute and opportunity cost associated with smoking.





This post deals specifically with the financial cost of smoking. It is not my intention to take a moral stand. That being said smoking is definitely injurious to health and if possible should be given up. This article deals with the opportunity cost associated with smoking cigarettes.

According to Centers for Disease Control and Prevention the average cost of a pack of cigarette is $5.51. This is the average cost across the US. In New York the cost of a pack of cigarette can be as high as $12.85. In the state of Massachusetts average price of a pack of cigarette is $9.95 (basis for my calculations).

Assuming a pack-a-day habit it would cost $3,631.75 per year in Massachusetts. My colleague started smoking at 18. So, I am going to use that as the starting point for my calculations. On an average he smokes a pack-a-day (which I heard is normal).

To measure opportunity cost I need to take into account investment returns and tax savings. In terms of investment my immediate thought was to choose one of the tobacco stocks e.g. Altria (MO) or Philip Morris (PM). However, since I was trying to get him to quit smoking it made sense to use a socially conscious approach to investing. Additionally, in general smoking rate is going down in the US and might not bode well for tobacco stocks.

As a Vanguard aficionado I wanted to choose Vanguard FTSE Social Index Fund (VFTSX). Unfortunately it does not have an ETF version. So, I decided to choose BlackRock iShares MSCI KLD 400 Social ETF (DSI).

The iShares MSCI KLD 400 Social ETF seeks to track the investment results of an index composed of U.S. companies that have positive environmental, social and governance characteristics as identified by the index provider.

Since its inception in 2006, iShares MSCI KLD 400 Social ETF has an annualized return of 7.56% and a TTM yield of 1.31%. Now assuming he invests $3,631.75. At the age of 65 (47 years of compounding) he would have $1,539,894.22! In addition assuming a 1.3% yield his portfolio can generate 20,018.6 in dividends annually. At the age of 60 he would have become a millionaire.

Now let’s say he contributes this money to an IRA (traditional). According to IRS the average American family has a federal tax rate of 14.3%. So, that’s an addition 14.3% he would be able to contribute to his retirement account. Total yearly contribution would be $3,631.75+14.3% of $3,631.75. This comes out to $4,151.09. So, by the time he is 65 years old he would have $1,760,099 (millionaire at 58) socked away in his retirement account. This in turn would generate $22,881.29 in dividends.

An article I read has shown that e-cigarettes cost much less. The average cost of an equivalent pack of cigarettes is $1.06. So, the yearly expenses come out to be $386.9. Still the opportunity cost is very high at $187,509.34.

This article looks at the financial cost of smoking. I am not looking at healthcare and productivity cost. Additionally there is the risk of death to which I cannot assign a value. In conclusion for smokers I feel that giving up smoking provides a viable path to retirement.


5 comments:

  1. There is no doubt it is a very expensive habit. Especially with all the taxes that get piled onto a pack. Glad I never started, but I'm not adverse to investing in MO and PM. Tom

    ReplyDelete
    Replies
    1. Especially Tax. That money is gone. Definitely a worthy reason to quit smoking :-) I don't own PM or MO. But, they are a part of S&P 500 ETF (which I own).

      Delete
  2. Wow! Thant's definitely a lot of money going up in smoke literally. Numbers are always interesting.

    ReplyDelete
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