Last Week’s Question of the Week: Name one of the top four states where retirees are currently moving to?
ANSWER: Top four states where retirees are moving to are Florida, Arizona, North Carolina and South Carolina.
HOST: Before we get to discussing the topic of the day, can you please remind our listeners as to whom Klaas Financial is, and exactly what it is that you do?
KLAAS FINANCIAL: Klaas Financial is celebrating over 43 years in business and operates as a mid-size Registered Investment Advisory firm with offices in both Fitchburg and northern Illinois. We help clients every day sort out what their future retirement is going to look like.
On our weekly show here, we are always trying to focus on the “how to retire better” and that brings us to a quick description on what true financial planning really is.
We believe that your financial planner should act like the quarterback of a football team. DISCLOSURE, we are not accountants or lawyers. You should always check with your own accountant and estate planning attorney to make sure your plans are right for you.
Financial planning covers all areas of a person’s financial life including but not limited to:
- Estate Planning – Wills and Trusts
- Insurance – Life/LTC/Health/P&C
We believe you should expect from your financial advisor……Regular reviews of your financial or estate plans through monitoring life changes which can help keep your goals and portfolio working together.
At Klaas Financial we offer a complementary first call or sit-down meeting to see if we can possibly help you or offer a second opinion.
HOST: So, aside from strictly planning for retirement you also help direct your clients towards making better financial decisions overall… correct? Like today’s topic about financing your next vehicle purchase.
KLAAS FINANCIAL: Yes, exactly. Before our clients decide to take on a new debt or pull a significant amount of money from their savings or retirement portfolio, we like to clearly spell out the financial implications of their decisions. So today, in the area of paying for your next vehicle purchase we want to discuss some considerations and perhaps some smarter ways to cash flow a large purchase like this.
NEED FOR A CAR: Most Americans, unless they live in a very large city, will likely need the use of a car almost their entire life. So, when we hear people tell us they are buying their last car as they begin retirement, we do chuckle, because if you are 62 years old, you are likely to be still driving another 20+ years, so this will very likely not be your last car. In 2016, in the U.S., 42 million adults 65 and older were licensed to drive, which is an increase of 15 million from 20 years ago. Of course, driving remains as a major symbol of independence but also a needed activity for older people to be able to shop, go to the doctor and maintain social connections.
MONEY FROM WHERE? It is important that prior to retirement and into retirement people make very calculated decisions on how much to spend, and where that money should originate from.
DEPRECIATION: When it comes to Car Purchases, keep in mind DEPRECIATION: A car is a depreciating asset, meaning its value goes down every year that you own it. Ever hear the familiar expression that the minute you drive a new car off the lot, it drops in value? A car can lose 20% or more of its original value within the first year. After the first year, the depreciation rate typically “levels out,” but if you fast-forward five years down the line and you’re still looking at an average loss in value of about 60% from the original sticker price. We say “average” because the exact rate of your car’s depreciation depends on the make, model and other factors.
CAR LOANS: Every quarter, Experian Automotive releases data on the latest car financing trends. Back in 2017 their 4th Quarter report shows how much car loans are crippling people:
- Nearly 9 in 10 new cars are purchased with borrowed money.
- The average new car loan totals $31,099 with monthly payments of $515 at 5.11% interest.
- The average new car loan term was 69 months—that’s more than five and a half years!
- What that means: If you’re the average car buyer, you’ll spend the five years to pay more than $34,000 for a car will be worth maybe $12,000 at the end of that time. Not a great deal.
There are of course choices between buying versus leasing which we have previously discussed on this show and should be carefully vetted for your own situation.
HOST: So, does it make sense to pay for a new car from savings if you have enough, or take the lump sum from a retirement account like an IRA or 401k?
KLAAS FINANCIAL: Yes, the money must come from somewhere if you really do need a car. You can perhaps look towards cash sitting in savings or after-tax investments, or from retirement funds, or from a combination of trading in an older car plus savings and perhaps a car loan.
OPPORTUNITY COST: By withdrawing retirement savings to purchase a car, you are swapping an appreciating asset — your retirement account — for a depreciating asset. The difference can be dramatic.Example: Let’s say you are 49 years old, and you can earn an 8 percent return in your retirement account, and your money will roughly double every nine years, (RULE OF 72) you are potentially missing out on the future growth of that investment. If you are 49 years old, by the time you are 67 and ready to retire, that $30,000 today that you are spending on the new car, could have grown into $120,000 or more. Raiding your retirement can have serious ramifications, however, both in terms of actual cash penalties and lost opportunity cost.
TAXES: Remember any distribution from a retirement account is taxable as ordinary income, with the sole except being a Roth account. If you plan on taking distributions from your traditional IRA or 401(k) plan, you must report your withdrawals when you file your income tax. If you don’t have extra cash in your accounts to pay the taxes — and you probably don’t if you need to tap your retirement to buy a car — you’ll have to withdraw an even larger amount in order to pay the taxes.
PENALTIES: Unless you are already retired, you’ll usually have to pay an additional penalty to access your retirement accounts. The IRS levies an early distribution penalty of 10 percent on withdrawals before age 59 1/2. While there are a few limited exceptions, buying a car is not one of them.
HOST: So, it doesn’t sound like you are suggesting that we should take money from our retirement accounts, and perhaps not even a loan?
KLAAS FINANCIAL: Well, you will have to make the best choice in your situation. If you are cash heavy with dollars in savings accounts which have little to no return, cash from this portion of your portfolio or from money that you have put aside in your replacement vehicle fund would be the best place to start.
From a savings and budgeting perspective, it makes sense to review these types of purchases because it’s the big financial decisions that can help or hurt your chances of compounding your capital.
Personal finance experts love to discuss how much money you can save by avoiding that daily Starbucks habit or packing a brown bag lunch every day at the office. There is no doubt that you could add to your bottom line somewhat by cutting back on the little things, the reality is that this stuff doesn’t move the needle all that much, it is the large purchases will have a much greater impact on your bottom line.
If you can right-size your housing and transportation costs on a monthly basis, everything else becomes easier from a saving and budgeting perspective.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.