1/4/2013 7:45 PM ET|
Your car is wrecking your retirement
If you are having trouble saving for your golden years, take a look at the wealth destroyer parked in your driveway.
Val W. emailed me because she was “finally out of ideas and energy.” The 27-year-old was cutting expenses wherever she could -- axing cable, vacations and new clothes -- but she couldn’t make progress on her debt or save for her future.
Val’s big problem is the $678 monthly car payment eating up a third of her $2,000 monthly income.
“I have three years left to pay,” she explained, “and can't refinance because of my credit and (because) the car has negative equity.”
Val’s payment certainly is outsized, but big car expenses aren’t all that unusual. American households spend more on their wheels than on anything other than housing.
The average household shelled out $8,293, or 13% of its $63,985 pretax income, on transportation costs in 2011, according to the Bureau of Labor Statistics. That average includes purchase costs and car payments of $2,669; gas and oil charges of $2,655; and $2,454 for other expenses including insurance, maintenance, repairs and registration. (The average household also spent $516 on public transportation.)
Moreover, earning less doesn’t necessarily mean spending less on your ride. In fact, the less people earn, the larger the percentage of their incomes goes to cars. Transportation costs ate up 23% of gross incomes for those who made $15,000 to $19,999, but just 10% for those making over $70,000.
At the same time, most Americans are failing to save enough for retirement:
● Half of Americans aren’t contributing to retirement plan at all, according to a survey last year by LIMRA, a trade organization for financial services.
● Most of those who are saving haven’t saved much; 60% of workers polled by the Employee Benefit Research Institute had less than $25,000.
● One researcher estimates that half of workers who are now middle class will be near or below the poverty line in retirement. Teresa Ghilarducci, a professor of economics at the New School for Social Research, said research from the school’s Schwartz Center for Economic Policy Research shows that three-quarters of adults ages 50 to 64 have so little saved that the money won’t provide a significant supplement to their Social Security checks.
Once you see the numbers, it’s easy to conclude that our cars are robbing our retirements.
Let’s say that instead of spending it on vehicle expenses, you invested $8,000 every year over the course of 40 years. You’d wind up with $1.2 million, assuming a 6% average annual return. If your returns averaged 8%, you’d have more than $2 million.
It’s unlikely that households could entirely eliminate auto expenses, of course. But there’s ample evidence to suggest that plenty of people are spending too much on their cars. For example:
- Many people aren’t paying off their current car before buying the next one. In November, nearly one out of four car sales with a trade-in involved negative equity, according to car research site Edmunds.com. That’s up from one in five in 2010.
- The vast majority of car loans are for more than 48 months, an indication that borrowers are stretching too far to buy cars. In November, 90% of new car loans and 85% of used car loans stretched for more than 48 months.
“For many, getting qualified for a new car purchase is easy even with bad credit,” said Steve Rhode, the founder of a credit counseling firm who now helps strapped borrowers at GetOutOfDebt.org. “When the dealer is hanging easy financing right in front of you for the car you want, it's easy to forget one basic rule of the financial world: Just because a lender will approve you, doesn't mean you can afford it.”
Even if you are able to resist, your monthly payment is only part of the story. Once insurance, maintenance, repairs, fuel and depreciation are factored in, the real cost of owning the car is typically doubled. (Edmunds.com has a “True Cost to Own Feature” that breaks those expenses down by car make and model.)
More from Liz Weston:
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I would say the Government is wrecking the retirement.Matter a fact wait till they raise the retirement age...Then the Government hopes you die before then...
I put $20.00 a month into my old truck and in a couple of months I'll have a full tank of gas. In other words, vehicles are a mode of transportation. I do have a newer car, one about five years old with 30,000 miles on it. Most of those miles were added taking care of aging parents.
In other words, buy the best vehicle for your needs but not more than you need and use it wisely.
My dad was wise with what money he earned, which was not a lot for many years. He always said: If you can't afford to pay cash, you can't afford it. I realize everyone cannot live without a car, but we lived on a bus line and we did a lot of walking (very good for family togetherness as well as for one's health). When I was nearly grown, he bought his first car ever---bare bones, but it took us anywhere we wanted to go. It finally died after many years and by then he had enough saved to get another one. It was a great lesson for us kids, one we've tried to follow, our kids do the same. I wish everyone could have peace of mind and not have worries about money. Sometimes it's due to things that can't be helped, but sometimes it's due to choices.
I was a car salesman for 16 years in a large family owned dealership. When I started I leased a new cars for $300 per month. The problem is I only lived 3 miles from work. I ended up only driving 10,000 miles during the 3 year lease. So I spent 11 grand to drive 10,000 miles. PLUS high insurance costs to drive new cars. After the second lease I said "screw this" and paid $3000 cash for a 1995 Buick Riviera
with 172,000 miles on it. One owner car driven by a 70 yr old crop adjuster in ND. All highway miles. Bought the car in Jan. 07 and still have it and it just went over 199,000 miles. I have put about $1200 in repairs in the car. Also because I am 48 yrs old and drive low miles plus I only pay $32 per month for liability ins.
Another tidbit- 80% of the people that sell new cars buy cars that are less than $10k. Mostly new salesman buy nice new cars right away. Veteran car salespeople drive older cars. Our dealership did NOT give domos out.
The math: Old car- $3k price+$1200 repairs+total ins for 3 yrs 2400. = $6600
New Car using my 2 leases: $300 payment times 72 months for both cars. $21,600 + $95 ins per month x 72 = $6840. --- $21600+$6840= $28440 Almost $22k diff.
I work in IT now at Mi---soft and make a good living but when this car dies I will find another used car.
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