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:
- Your year-end financial cheat sheet
- Money moves that can come back to haunt you
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So, how much is too much to spend on a car? Some credit counselors suggest car costs shouldn’t exceed 20% of your after-tax pay, but that figure could still be way too much if your living costs are high.
My rule: If you have a car payment and you aren’t saving for retirement, you probably spent too much on the car.
Here are some ways to reduce car costs to free up more money for the future:
- Consider alternatives. In many urban areas, it’s quite possible to forgo owning a car altogether, thanks to public transportation and rental agencies or services such as Zipcar. Even in some suburban areas, it may be possible to get by without a car or with one fewer car.
- Buy used. New cars are a luxury, and luxuries should be paid for with cash. If you can’t pay cash for a vehicle, let the other guy take the new-car depreciation hit. If you’re nervous about buying a car you didn’t break in, go for a certified preowned version.
- Hang on to your cars longer. With proper maintenance, today’s better-built cars can last more than 200,000 miles. Make sure your current car is paid off and that you have saved a substantial down payment on a new one before you start thinking of replacing it.
- Keep loans short -- and cheap. If you can’t pay cash, line up financing before you ever set foot on a car lot, recommends Phil Reed of Edmunds.com. Credit unions often have the best rates and terms. If you can’t pay off the car in four years, you probably can’t afford the car.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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What kind of car is Val driving with $678 per month payment? If Val makes $2000 per month, she has no business driving a $678 per month vehicle. What Val needs is a brain, not saving plan
What's sad is the only people who read this article are the ones who already know this is stupid.
I feel like my wife and I are going to be lonely in retirement because friends my age are not saving for retirement.
I made that vow and kept it years ago and I've never regretted it.
Now, my house is paid for, my two cars are paid for and I live quite comfortably on my $1300 per mo. Social Security.
One does not have to be rich to enjoy retirement.
Money in a CD makes your percentages. You might try corporate bonds at 5.25 to 7.25%. You might try annuities for the long haul at 4%. You might try I shares at 5.25 to 6.75%. You might want to invest in Kinder Morgan for a 5.75% return. Investment strategy is making money in a bad economic market. Making it in a good economic market is easy when saving rates are 6 or more percent. It has nothing to do with the government, economy, job market, politics and so forth. Almost $700.00 a month for a car payment? There are really good autos available for under twenty thousand dollars with five year payments under $400.00 a month. Don't know what this gal drives however it seems a bad purchase based on her income.
"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.”
AMEN!!!!!!!!! This is the MAJOR Problem in America right now. 90% of the people who credit carded their way into what they think is the "Middle Class" are in fact one or two paydays from the poor house, because they think they can afford stuff they can't!
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