Many anti-smoking advocates make the blanket claim that smoking is bad for your finances.[1]
But are those claims justified?
This blog entry is purely an exercise in analysis. Please do not read it as advocacy. My purpose here is merely to make clear the lifetime financial implications of a pack-a-day habit.
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We need to make some assumptions. Our life expectancy assumptions are taken from a study[2] which aims to estimate the effect of cigarette smoking on life expectancy. The cost of cigarettes is estimated using the US median price of $7.93 per pack.[3] The financial cost of smoking is measured only by the money spent on cigarettes, and the assumption that if the money were not spent on cigarettes, it would have been invested in a broad “market portfolio” including stocks, bonds, real estate, cash and others,[4] which had an average annual compound return of 4.45%.
Here are out main assumptions about the average smoker:
- Smokes from age 17 to death at age 71
- Pays for 5772 cigarettes per year
- Price of each cigarette is $.3965, for a total annual cost of $2,289
- The alternative use of the cash spent on cigarettes would have been to invest it in a non-taxable account and earn a real (i.e. after adjusting for inflation) compound annual return of 4.45%.[5]
- The same person, had he or she never smoked, would live instead to 77.5 years.[6]
- The average person spends and will spend $57,066 per year on personal consumption[7]
Given these assumptions, it is easy to calculate a direct financial (we are ignoring personal and interpersonal costs, including morbidity and medical expenses) cost of smoking. Without regard to the time value of money, the average smoker (as defined by the assumptions above) spends $2289 a year for 54 years, for a total of $126,000.
One hundred twenty-six thousand dollars is a lot, but the total end-of-life cost would be much higher if the smoker instead saved the cigarette money and invested it in the market portfolio. In that case, the $2289 each year would grow to about $512,000 by the end of the smoker’s 71st year.
The smoker (by assumption) dies then.
But the same person (again, by assumption) who had not smoked, would live another 6.5 years.
How far will that extra $512,000 resulting from saving and investing the cigarette money go? At the average personal consumption of $57,066 a year, the $512,000 (without reinvestment) will last about nine years, until the person is 80.
Age 80 is, by the assumptions we’ve used, 2 ½ years longer than the person would be expected to live, even without smoking.
We can conclude, given these assumptions, that smoking reduces both life expectancy, and expected end-of-life wealth.
Sensitivity Analysis
However, a crucial assumption was that the person who didn’t smoke instead saved the entire amount that would have gone to cigarettes, and instead invested it in a tax-free account and earned a real 4.45% each year.
Now let’s look at how the results would change if we used a different savings rate or investment return, or considered the effect of taxes.
Savings Rate
We assumed that the person saved and invested 100% of the annual $2289 not spent on smoking. But if instead that person saved only 80%, he or she would end up at age 71 not with $512,000, but with $410,000. At the same spending rate of $57,066, that $410,000 would last about 7 years, just long enough to last till life expectancy.
Reality Check
If the “average person” suddenly had an extra $2289 per year of available cash, how much would that person spend and how much would be saved? Empirical economists have estimated this,[8] and arrived at 60%. In our model, keeping all the other assumptions the same, in year 71 the person who saved and invested 60% of the $2289 each year would end up with about $307,000. At the assumed spending rate of $57,066, that $307,000 would be gone by year five, while the non-smoker has another 1.5 years of life expectancy.
Investment Return
Now let’s look at the sensitivity to investment return assumptions. The Richmond Fed reports[9] that for most Americans real estate – which mostly means homes – is significantly the largest allocation of their wealth. The long run real return to home ownership (no counting taxes and maintenance) is not more than 1%.
If the average portfolio return is 1% less than we assumed, 3.45% instead of 4.45%, the year 71 value is $362,000, which is not quite enough to cover the extra 6.5 years of spending at $57,066.
Taxes
Cigarettes are purchased with after tax (i.e. after paying income tax) dollars. If the hypothetical person invested those dollars in a Roth IRA, under current law the withdrawals would be tax-exempt, and so no adjustment would have to be made.
However, if the withdrawals were taxable, at a combined Federal and State rate of 20%, the year 71 amount would be about $410,000 assuming tax on the entire amount.
Conclusion
While there are likely many good reasons not to smoke, and to quit smoking if you do smoke, the financial argument is in the real world perhaps less convincing that many of its advocates make it out to be.
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[1] E.g. https://www.theexprogram.com/resources/blog/how-does-tobacco-use-negatively-impact-personal-finances/ or https://www.bedelfinancial.com/smoking-and-financial-health
[2] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1117323/?ref=thediff.co
[3] https://worldpopulationreview.com/state-rankings/cigarette-prices-by-state
[4] This source is quite interesting: https://academic.oup.com/raps/article/10/3/521/5640504
[5] Ibid.
[6] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1117323/?ref=thediff.co
[7] https://fred.stlouisfed.org/series/A794RC0Q052SBEA
[8] Economists call this the “marginal propensity to consume.” A study from the 2017 journal Quantitative Economics, reports the number at about 40%, meaning that 60% would be saved.
[9] https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-39
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