How Does Buying a New Car Effect Retirement Plans?

The Millionaire Next Door: The Surprising Secrets of America's Wealthy, a book by Thomas Stanley and William Danko, describes the car buying habits of the wealthier portion of the American population. The chapter "You Are Not What You Drive" elaborates on this. As the title suggests, many wealthy families do not own expensive cars. Let's use Quantext Portfolio Planner to explore why this makes sense.

Using QPP, we will consider the situation of a fictitious couple, the Millers. They are 40 years old and have saved $200,000 in their retirement account. They are planning on investing $18,000 per year going forward and plan on drawing $48,000 per year once they retire at age 69. The $48,000 does not include any benefits that they might receive from Social Security or pensions. Both the contributions and income draw are inflated 3% annually. (For more on how the Millers created this plan, please see the QPP Example entitled Creating a New Plan.)

The Millers are considering buying a new car this year for $35,000. They would be taking that money out of their retirement savings. What effect will this have on their ability to retire as planned?

In this example, we will explore the effect of this significant one-off withdrawal from the Millers’ retirement account. In order for them to accommodate such an expense, they will have to adjust at least one of these variables:
  • Annual Savings
  • Annual Income in Retirement
  • Age at Retirement
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