Car Buying Tips You’ll Thank Yourself for in Retirement

April 9, 2021

April

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Is your new car keeping you from reaching your retirement goals?

It’s easy to emphasize the here-and-now over something that may not affect you for decades to come. But when that “something” is as significant as your retirement, this lifestyle shift calls for some level of planning early on. This phenomenon is a huge reason why Americans are currently facing a retirement crisis.

In January 2020, FinanceBuzz released survey results revealing that 35% of Americans do not have any money saved for retirement. Millions of people are at risk of relying solely on Social Security Income once they retire. [1] When the average retiree only receives $18,000 in Social Security Income annually, most people will not be able to maintain their standard of living in retirement. [2, 3]

Interestingly, the average American planning to retire at age 65 estimates that they will need $1.9 million saved up to retire comfortably, according to a 2020 Charles Schwab study. [4] Yet, data shows that people in the 60-64 age group only have an average of $221,451.67 saved for retirement. [5]

How much you need to save to reach your retirement goals depends on many factors, which should be assessed through an individualized retirement plan, however, most experts say that you will need an average of $1 million saved to retire at age 65. [6] rebel Financial’s Lead Advisor Tony Jones says that, for a 25-year old to achieve this, they will need to start by saving around $300 per month, or $3600 per year. Comparing this amount to the $8849 an average American spends annually on car buying and driving expenses ($9282 for new car ownership), it’s clear where our priorities lie. [7, 8] If we’re spending so much money on cars, why do we think we can’t afford retirement?

To some, there’s a stigma around used car buying, which has become more taboo in recent years. Since it’s 2021 now, most pre-owned vehicles are a lot more reliable than previous models of the past. Simply put, today’s cars are better than they were decades ago, justifying why car prices are higher today than ever before (both new and used). Edmunds found that the average used car will cost $20,000, while new cars are priced at $37,000, based on 2019 data. [9] Obviously used cars aren’t perfectly equivalent to new cars, with the main difference being cost and, more importantly, depreciation. 

New cars lose the most value in depreciation within the first year of ownership. Even by the time you drive off the lot with your brand new car, you’ve already lost 9-11% of what you paid for it. [10] The reason it’s cheaper to buy a used car, even if it’s in near perfect condition, is because the bulk of the depreciation costs have already been incurred by its previous owner(s). But we get it. New cars are just better, right? 

That belief explains why the average new vehicle ownership length is only 71.4 months, or about six years. Taking this into account, the average person will own 13 cars over their lifetime. [11] Depending on how much you drive, the life of your vehicle may differ, but the average lifespan of new car models is between 11 and 12 years, according to Autotrader, which is almost double that six-year ownership average. [12] 

To give ourselves credit, this average has increased compared to fifteen years ago, where the average new vehicle ownership length was only 54 months. While this does factor in inflation and the fact that our cars last longer now, it doesn’t necessarily mean that we’re maintaining our interest in our new cars for longer. Instead, the most probable reason this length has increased is because we’re buying more expensive cars, that we may not be able to afford, and financing them for longer.

Since 2009, seven-year car loans have become significantly more popular. In 2019, seven-year car loans accounted for 31.5% of all car loans, compared to the less than 10% that they made up of the total in 2009. At the same time, five-year car loans have decreased about 15%. Six-year loans remain the most popular, bringing some parity to the situation, considering this matches the six-year ownership average. Still though, 33% of new car purchases, even with a trade in, rollover $5,000 in debt from the previous loan. If one-third of car financing is already underwater when it starts, the rising popularity of longer car loans is a recipe for disaster. [13]

Car Buying Tips for a Better Retirement

To avoid falling into the car buying trap (or if you’re already stuck, to set yourself onto the path of recovery), you need to set your priorities straight. Maybe you do care more about the bragging rights and savoring that new car smell in your younger years than you do about your retirement, and that’s fine. But for most of us, it’s safe to say we’d rather retire with the peace of mind that the financial decisions we made in our 20s and 30s won’t come back to haunt us, at least not eternally. 

Get a used car and pay for it outright, if you can

Don’t buy a new car if you can’t afford it. Even if you can, there are much better ways to allocate that money than by blowing it all on the most expensive new car on the lot. There are many methods that experts recommend for determining how much you should spend on the purchase of a car. For example, some financial experts recommend setting your car buying budget at half of your annual salary. According to this rule, if you make $60,000 annually, you can spend up to $30,000 on your upcoming car purchase. Assess the different strategies and see which one is best for your budget.

Paying for a car outright, or even financing it for a shorter period, will save you more money than you think. Longer term loans typically have higher interest rates, meaning that even if you extend your loan for a year or two, that could cost you thousands of extra dollars in interest alone — thousands you could be putting towards your retirement. 

As mentioned previously, today’s used cars are much more reliable than in previous years, making them a much wiser purchase if you’re willing to sacrifice a few new car features and little bit of mileage. Set a budget when car shopping, and if you don’t end up spending as much as you expected, perhaps you can put the difference towards your retirement savings. That’s simply a win-win for you.

Buy a car to fit your long-term needs

Family Car

If you do choose to buy a new car, plan on having it for a long time. Put into perspective how your life may be changing in the years to come, at least for the foreseeable future, and how your car will be able to accommodate your needs rather than your wants. If you’re planning to grow your family in the next few years, a new sports car probably won’t be the best purchase to make right now, considering that safety features and vehicle size will be a much bigger priority for you once it comes to the needs of your family. 

Other factors to consider include the cost to insure the car; other additional expenses related to the vehicle purchase, such as add-on and subscription services; changes to your family’s future spending; and whether you live in a multi-car household, or are planning to. 

Hold on to your car longer

Chances are, your current car still has some years left on it. Hold on to it for longer, especially if you have yet to pay it off. Rather than trading in your car as soon as you pay it off, or worse yet, trading it in before that, get in the habit of finishing your payments and holding on to your car for a certain number of years after that. 

Planning will only benefit you in the future, but we get that it’s difficult to see the light at the end of the tunnel at times. Our financial professionals are here to help you set your financial priorities straight and figure out the numbers. If you’re considering the purchase of a new car and would like to weigh your options or determine how this aligns with your retirement goals, reach out to us and let us know how we can help. 

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Got questions about your financial situation?

1. [Survey] 1 in 3 Americans Putting Off a Financial Decision Until After the Election — https://financebuzz.com/2020-election-survey 

2. You’ll Be Shocked by How Many Americans Have No Retirement Savings at All — https://www.fool.com/retirement/2020/02/19/youll-be-shocked-by-how-many-americans-have-no-ret.aspx

3. The Reality of the Retirement Crisis — https://www.americanprogress.org/issues/economy/reports/2015/01/26/105394/the-reality-of-the-retirement-crisis/

4. Show me the finish line: 401(k) savers say they want help understanding how much they’ll need for retirement — https://www.aboutschwab.com/schwab-401k-participant-survey-2020-income

5. What’s the Median Retirement Savings by Age? — https://www.synchronybank.com/blog/median-retirement-savings-by-age/

6. The Average Retirement Savings by Age Group — https://www.thestreet.com/retirement/average-retirement-savings-14881067

7. The True Cost of Owning a Car — https://www.investopedia.com/articles/pf/08/cost-car-ownership.asp

8. Average Annual Cost of New Vehicle Ownership — https://www.aaa.com/autorepair/articles/average-annual-cost-of-new-vehicle-ownership

9. How Much Should You Spend on a Car?  — https://cars.usnews.com/cars-trucks/how-much-should-you-spend-on-a-car

10. Car Depreciation: How Much Is Your Car Worth? — https://www.ramseysolutions.com/saving/car-depreciation

11. Compare Costs: Buy New Car vs. Used? — https://www.nerdwallet.com/article/loans/auto-loans/compare-costs-buying-new-car-vs-used

12. Buying a Car: How Long Can You Expect a Car to Last? — https://www.autotrader.com/car-shopping/buying-car-how-long-can-you-expect-car-last-240725

13. The 7-Year Car Loan: Watch Your Wallet — https://www.npr.org/2019/10/31/773409100/the-7-year-car-loan-watch-your-wallet

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. No client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from rebel, or from any other investment professional. See our disclosures page for more information.

Post by April

April is a fourth-year Marketing student at The Ohio State University Fisher College of Business, minoring in Communication Technology. She works as a Marketing Assistant for rebel Financial. She enjoys spending time with family and friends, being active, and exploring Columbus.

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