Drive a Ferrari When You Retire
Do you want to drive a new Ferrari when you retire?
What if I were to tell you that you can afford to and all you have to do is quit smoking! This week I wanted to demonstrate the power of compounding and I’ve decided to take a slightly different approach to illustrating it to you.
Deciding not to smoke cigarettes has been clearly demonstrated to provide significant health benefits and will likely add many years to your life. But what about the financial benefits of this decision? Many smokers start fairly young and for this example, let’s assume that you start smoking at age 16 which happens to be the same age that many people get their driver’s license.
Starting smoking at age 16 and burning through (literally) ½ a pack per day will cost you approximately $2,256 per year. Now let’s instead of putting that $6 per day towards cigarettes, let’s say you decide to invest the money instead.
Without adjusting for the price of cigarettes going up overtime (inflation), you would have $652,743 in your investment account at age 65 when you are ready to retire if you averaged a six per cent per year rate of return. If, once you turn 18, you invest all of this money inside of a TFSA, the full $652,743 would be tax free money as well.
I decided to take inflation out of this example for simplicity’s sake. The price of cigarettes will no doubt rise over time but so will the price of cars so if we assume that the inflation on both purchase prices are somewhat equal, we can remove this from the example and talk in today’s dollars for both the cigarettes and the car.
So now comes your reward! Depending on how many options you choose, you can currently buy yourself a brand new Ferrari for around $300,000. So if you decide not to take up smoking and put the equivalent money away from the time you get your driver’s license until the time that you retire, you have enough money on the side for not one but TWO brand new Ferraris!
You’ll even have enough money left over to take a trip around the world for two! Not a bad way to kick off your retirement and since you didn’t smoke, you will likely have a longer and healthier retirement as well.
The above example may seem a little extreme but it really isn’t. How many people can carve $6/day out of their expenses? How much do you spend each day at Starbucks on that fancy coffee? How much could you save per day if you packed a lunch for work instead of buying your lunch each day?
The power of compounding is enormous and the above example just goes to show how much you can put away if you start early.
Of course, the main benefit to not smoking is certainly still your health. For those that don’t think a healthy retirement is enough, maybe the dream of a shiny new Ferrari waiting for you can provide that little bit of extra motivation…
Parents and grandparents, copy this article (maybe attach a picture of a new Ferrari) and pass it on to any teenagers you have in your lives. Who knows, this could be the extra motivation they need to make the right decision and never pick up the habit!