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Compounding, Cigarettes And Savings: How Quitting Smoking Can Save Your Retirement's Life

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Compounding, Cigarettes And Savings: How Quitting Smoking Can Save Your Retirement's Life
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Smokers, pay attention: Your habit is not only dangerous to your health; it could put a damper on your retirement plans.

Fool.com's Selena Maranjian explored the relationship between smoking and retirement, and it is frightening.

Consider that the average retail price of a pack of cigarettes was around $1.85 20 years ago. Assuming a smoker smokes one pack a week each week, that translates to $96.20 spent on cigarettes in one year alone.

A smoker who would have made the decision to pocket the change for the full year and invest a year's worth of smoking in an exchange-traded fund could have bought nearly 2 shares of SPDR S&P 500 ETF Trust (NYSE: SPY), the ETF that tracks the performance of the S&P 500 index.

Related Link: U.S. Demand For Cigarettes The Strongest It's Been In Decades: Citi Initiates Tobacco Names

The ETF started trading at an adjusted price of around $52 on January 2, 1997. Today, those two shares would be worth nearly $450.

Granted, this figure isn't the most convincing, but the argument gains strength when considering a heavy smoker can smoke an entire pack every one to two days, not one a week.

A smoker who smoked an entire pack every two days would have spent $336 on cigarettes in 1996 alone. Assuming the savings would have been invested in the same ETF on January 2, 1997, the $336 would be worth nearly $1,300 today.

But this is just assuming that savings from smoking is put away into an ETF for just one year and wrongfully assumes the price of cigarettes remained constant.

Maranjian noted the average retail price for a pack of cigarettes is now $7.25, so new smokers today are going to experience a larger financial setback. For instance, by 2046, a one-pack-a-day smoker will spend $55,000 on their habit, but the true cost of smoking will prove to be much higher.

Due to the magic of compounding interest, that is new interest earned on older interest, $3,000 invested each year for 20 years at an average rate of 10 percent would yield $189,000 in two decades' time.

"Quitting smoking is notoriously hard but also extremely worthwhile, as it will likely have you gaining thousands (if not hundreds of thousands) of dollars and gaining years of life to enjoy, too — years that are likely to feature better health," Maranjian wrote.

Finally, Maranjian accurately pointed out that nonsmokers shouldn't "be smug." Heavy coffee drinkers could end up spending just as much money on a caffeine addiction than a smoker does on their nicotine addiction.

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