Two of the biggest obstacles to a comfortable retirement are houses and cars. People tend to buy houses based on what their realtor tells them they can afford or on what they perceive as their dream home. Cars guzzle up money that could multiply many times in a good retirement account. The challenge is to buy what you can actually afford, not what you want or dream about.
The challenge is to buy what you can actually afford, not what you want or dream about.
Fifteen percent of American homeowners are living in homes that require more than 30% of their household income be spent on their home mortgage payment, plus real estate taxes, home owners insurance, and association fees. According to the 2016 How Housing Matters Survey, commissioned by the nonprofit MacArthur Foundation, Americans are making sacrifices that include getting a second job, cutting back on health care, and running up credit card debt so they can afford their dream home.
Yet, some people appear to be cooling on the prospect of owning their dream home. About 43% of respondents in the survey say owning a home is no longer “an excellent long-term investment and one of the best ways for people to build wealth and assets.” Over one-half of those surveyed say buying a home has become less appealing than renting.
“The habit of purchasing expensive new cars, especially early in life, can be detrimental to finances of any working adult,” says Ryan Kwiatkowski at Retirement Solutions in Naperville, IL. “Many working Americans easily justify their purchase of expensive new cars by saying - I work hard and deserve a nice car, or I need a nice car for work. An expensive car will have more trade-in value. Or the other falsity - an expensive car will last longer. The challenge for car owners,” he says, “is to kick the need to be seen in a late-model car and start to feel comfortable with your 10-year-old Accord.”
If you don’t need an expensive late-model car for a reason, such as a realtor who takes customers shopping for high-end homes, owning one pricey model after another can be a retirement killer. Replacing a car for style, fear of maintenance costs, or just to keep up with the Joneses is a major no-no, according to experts in retirement planning and car ownership. “The first problem with high-end car ownership is that it is a depreciating asset, while retirement money, if invested properly, is an appreciating asset,” says Kwiatkowski.
Imagine you could invest $300 more per month by reducing various car costs. How would that affect you over a 40-year driving career and retirement at 66? Saving $300 per month ($3,600 per year) in car payments can produce a nest egg large enough to provide about $23,000 in annual income at age 66, assuming a 7% average return, 2% inflation, and a 2% annual savings increase to keep up with rising costs. That also assumes that retirement income would continue until age 100.
Financial Planner David Walter with Palisades Hudson Financial Group in Portland, OR, says, “Among the three car-driving options: buying new, leasing new, and buying a good used vehicle - the smartest and cheapest is buying a good used vehicle. And the longer you own your car, the more you’ll save by buying versus leasing.” Leasing could be the best option for certain people, like elderly drivers on fixed incomes who want the lower monthly payments leasing offers, won’t drive more than the allotted amount, want to avoid repair costs, and want all maintenance covered.
According to Walters, “For the frugal shopper, buying a home and car you can afford saves a boatload of money you can save for retirement. Saving money early in your working years will allow you to afford that dream home or dream car, but just a little later in life.”
CFP®, FLMI, Annuity Product Manager