By: Don Shaughnessy
Fundamentally, the world is a fair place. The more you smoke, the less time you are required to do it. Maybe a good thing too, because your potential retirement fund will be harmed.
Here’s an example. Suppose:
- You are a 30 year old male smoker in otherwise good health.
- You earn about $75,000 per year and have a family.
- You have determined that your financial situation would require life insurance of $1,000,000 to resolve if you died.
- You expect that problem will go away by the time the children are grown. Call it 20 years.
- You buy 20 year term life insurance.
- You think of yourself as a moderate smoker – about 100 cigarettes a week.
- You invest in a balanced portfolio and expect to earn 2.50% over the inflation rate, and you think it will be 3%.
- You would and could invest in an RRSP if you had extra money.
If you cancel the insurance after 20 years and quit smoking the same day your RRSP will be short $530,552.87 at age 65.
If you did not quit smoking when you cancelled the insurance, it would be short by $747,840.09.
It is truly unpleasant if inflation is 4% instead of 3% – $1,037,790.70 short if you smoke to 65.
The cigarettes are the big piece, but the insurance is not insignificant. $1,000,000 of 20 year term costs $140.40 per month for a smoker and $74.70 for a non-smoker. A non-smoker who is 42 would pay $141.30 for the same million. They are trying to tell you something here.
The lost capital because of the insurance price difference, even if you cancel, is about $90,000 in the 3% inflation example.
If you decide to keep the insurance longer than 20 years, at renewal it costs $1,440 per month versus $700 for a non-smoker. Many people have a fatal heart attack when they see the price of renewal so maybe that is not really an issue.
Everyone’s situation is different, so your mileage may differ. But the general direction is clear. To stop smoking is not fun, but it should be considered.
Personally, I liked smoking. I quit in Scarborough, on Tuesday, June 25, 1985 at 1:55 in the afternoon, not that I’m counting. I have not had even one cigarette since. I still miss it a little but not as often.
Sadly I didn’t put the money away.
Maybe you can be both smart enough to stop smoking and smart enough to put the money away too.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. firstname.lastname@example.org