Your car could ruin your retirement. Yes, you read that correctly.
The car you choose to drive could ruin your retirement, even if you think the car you choose is a reasonable, non-luxury option. How is this possible?
To begin, I want you to think of any car commercial you’ve seen recently on TV or on the Internet. Think about what it showed and about how the car was presented.
Happy driver? Check.
Happy passengers? Check.
Panning shot of the shiny, pristine interior? Check.
Sleek shots of the vehicle as it drove in a picturesque landscape or performed challenging off-road maneuvers? Check.
Now think about the overall message of the car commercial. Really try to nail down what was being communicated.
The overall message was the following, because it’s the same ultimate message regardless of the vehicle and regardless of the consumer to whom it is being marketed: “You need a vehicle that’s better than what you’re currently driving, and if you purchase and regularly drive this vehicle, you’ll be happier than you currently are.”
That’s it.
Not, “You don’t currently drive a vehicle at all, and if you had ours, you’d now have the ability to transport yourself from point A to point B.”
Not, “A car shouldn’t be a statement to others, but simply a machine to transport you and/or your family regularly and reliably, and this one does the job at a rock-bottom price.”
Not, “You shouldn’t really care about luxury features on a car since the vast majority of your life is spent outside of one rather than inside one, so purchase our basic vehicle.”
I think you probably get the picture here. The point is that auto manufacturers are going to do everything they can to get you to desire their new vehicle and will accordingly market it to you less on the basis of its utility, and more on the basis of your supposed happiness or pleasure.
“Buying this car = more happiness/pleasure” is the basic formula of car sales.
But here’s the catch: For almost all of us, buying a car on the basis of it supposedly making you happier or bringing you more pleasure is precisely the wrong reason to buy a car. Yet it’s also precisely why most individuals purchase the car that they do, many of whom can’t actually afford the purchase.
Moving to affordability, let’s take a look at the data to gain a better understanding of where many people are.
The Financial Picture of Americans Purchasing Cars
According to a 2019 auto loan debt study conducted by Experian, 85.4% of new vehicle purchases are either financed through auto loans or auto leases. When it comes to used vehicle purchases, 55.5% are financed through auto loans.
What about the term lengths for the auto loans? The average term for a loan on a new vehicle is 68.9 months. The average term for a loan on a used vehicle is not that far behind: 64.7 months.
And finally, how much are we talking in monthly payments? The average monthly payment for a new vehicle loan is $554 per month. The average monthly payment for a used vehicle loan is $391 per month.
These stats should paint a clear picture so far regarding how Americans purchase cars. The majority of car purchases are financed through loans, the average loan takes more than 5 years to pay off, and the average monthly payment is certainly a chunk of change.
But here’s the kicker: According to a 2018 study by car search engine iSeeCars.com, the average length of ownership for a new car is 7.4 years, or almost 89 months.
Americans purchasing brand new cars don’t keep them all that long.
Applying the Data to a Hypothetical Car Purchaser
So taking all of the data together, we’re now able to make some calculations for a hypothetical purchaser of a new car.
Let’s say you’re a 25-year-old who wants to buy a brand new car and does so. As per above (we’ll do some rounding for this example), your loan is for 69 months, and your monthly payment will be $554 per month. You’ll keep your new car for 89 months.
So you pay your $554 per month for those 69 months, then go 20 months without making any payments, since you kept your car for 89 months.
But let’s say after having the car for 89 months, you didn’t want to keep the car any longer (again, as per above), so you then begin the process all over again (and we’ll simplify by assuming the monthly payment didn’t go up). Another new car, another 69 months of monthly payments, and another 20 months of no payments.
Now let’s say you did this 5 times total between ages 25 and 65. In total, you made a monthly payment of $554 per month for 345 months out of 480 months, for a total of $191,130 spent on car payments.
You might be tempted to think, “$191,130 in car payments over 40 years? That’s a lot of money, but it was spread out, so it’s not too bad of a price to pay to satisfy my desire to drive new vehicles.” But let’s talk about what happened (or didn’t happen, to be more accurate) elsewhere, namely in your retirement account(s).
You may recall from my post on the investor’s mindset that one of the key components of the investor’s mindset is framing financial decisions in terms of your long-term financial future. And that’s exactly what we’re talking about doing here.
You spent 345 months with a monthly outflow of $554 for your cars. But what would have happened to that $554 per month if it instead had been invested and had achieved a 5% compound annual growth rate for 480 months (40 years), since we can assume that the $554 per month would also have been available for investing in the 20-month intervals between the car loans? Are you ready for this?
You would have had an account balance of $843,230.74.
$843,230.74 could have been added to whatever your retirement account balance ended up being at age 65. Instead, you sunk $191,130 into your desire of always having a new car.
Now admittedly, there are some important points to note here so that the above amount doesn’t end up being misleading. First, you probably need a car, so going without one and spending $0 on auto purchases isn’t likely. The same thing goes for someone who never purchases a car, yet still spends $X per month on public transportation. We still have places to which we must travel regularly somehow.
Secondly, if you’re focused on saving for retirement with regular contributions anyway, it’s probably reasonable to assume that you don’t have an additional $554 per month to contribute on top of whatever your normal contribution was. In other words, chances are that $554 per month is being absorbed by other expenses in your budget rather than being an additional $6,648 just sitting around waiting to be contributed to your retirement account annually.
Lastly, real median household income was $68,703 in 2019, so if you’re dropping $6,648 per year on a new car, you’re probably not saving 15% of your income ($10,305.45) for retirement in the first place. Those two together would leave $51,749.55 for all other expenses for the entire household for the entire year, and for our example, we’re talking about only one car instead of two cars for the household and haven’t figured in any other non-high-interest debt like a mortgage or student loans.
A Second Hypothetical: Purchasing a Used Car and Driving It for 9+ Years
So let’s go back to our 25-year-old and make some changes. This time, your plan is to purchase a reliable used car with a minimal loan, and drive the car until the wheels fall off. Then turn right around and do it again. And again. All the way up until retirement.
So let’s say you started today, in late September 2020. Looking on CARFAX, as of this writing, I see a 2015 Honda Accord touring edition with 75,560 miles on it being offered for $16,550.
Honda Accords are well known in the car world for their reliability and how well they retain resale value (because of their reliability). The Honda Accord is an excellent sedan that frequently receives top ratings, and full disclosure: I own and drive one.
Let’s say that at age 25, you don’t have an auto loan and you drive a jalopy that’s about to give up the ghost, but you have been saving for a car. You have the ability to put $5,000 down on the used Accord above, and you must finance the rest.
Because you have a decent credit score, you secure a 5-year loan for the remaining $11,550 at 6%. Your monthly payment will be $204 (we’ll ignore sales tax in this example).
Average mileage per year right now for drivers in America is about 13,500 miles. A Honda Accord, if properly cared for, could last up to 200,000 miles, or even more. Since you began with 75,560 miles on the car, you’re hopefully looking at the possibility of 9 or more years with the car.
That means 5 years of paying off the loan at $204 per month and 4 more years of no car payments at all. But since you’re driving an Accord, the chances are high that you could have even more than 4 years of no car payments at all.
For our example, though, what would happen if you did the above for only one car between ages 25 and 65, starting right at age 25? Well, you’d be contributing that extra $350 per month ($554-$204 = $350) to your retirement account that you would otherwise have been sinking into a brand-new car for the first five years. Then for four or more years (we’ll just say four, even though you very well could get more out of the Accord), you contributed the full $554 into your retirement account.
Doing just this for that 9-year period alone with a compound annual growth rate of 5% over the 40 years results in a balance of $145,792.19 at age 65.
Did you catch that? $145,792.19 at age 65 just from savings gained from one used car purchase at age 25.
Now think about how much more that amount could compound with additional savings from ages 34-65 by doing the same thing with your next car. And the next. And so on.
I’ve framed this in terms of your future retirement security, but whether you’re focusing on that or not, the bottom line is this:
The longer you are able to set aside whatever satisfaction/happiness/pleasure you think you’ll get from owning or leasing a brand-new car, the wealthier you can become.
Conclusion
So let’s wrap this up, shall we? Could your car ruin your retirement?
Yes.
If you’re insistent upon owning or leasing a brand-new car and are funneling money toward that car that otherwise could have been going toward saving and investing for retirement, then yes, you could very easily scuttle your retirement with your car or cars.
And while I didn’t touch on it explicitly here, the same thing could easily happen for loans on unreliable used cars or expensive used cars outside of a price range that’s reasonable for your budget.
I’ll end with this. I don’t remember with which financial writer this originates, so bear in mind that this is not original to me. But someone once made an observation akin to the following: If every vehicle on the road had a sign on top that always displayed the current net worth of the owner/lessee, do you know what you’d have?
A lot fewer brand-new vehicles on the road.
Remember that much of what you see around you in the lives of others is financed by debt.
This is especially true of vehicles. That shiny, brand-new car you see next to you on the road or perhaps in your neighbor’s driveway sure looks nice, doesn’t it? But is it worth your retirement?
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