The theme this week on the One Minute Retirement Tip podcast is: Retirement Rules of Thumb You Should Ignore 

Yesterday, I talked about how much I hate the rule of thumb about spending no more than ⅓ of your income on housing. It should be much lower than ⅓, especially as you approach retirement. 

Generally, if you can have less debt or no debt in retirement, it will free you up for a more active and less stressed retirement. Which brings me to today’s rule of thumb: always pay cash for cars. 

I don’t like this rule of thumb because I can think of plenty of exceptions to this rule. 

About 10 years ago, when we were emerging from the financial crisis and car companies were really struggling, I had a handful of clients with 0% car loans. If these clients would have followed this advice of always paying cash for cars, he would have paid $40m out of his precious savings to buy a car that he could have financed for free. 

If you like to buy a used Toyota Camry every 8-10 years, then always paying cash for cars makes a lot of sense, but the applicability of this rule depends a lot on your car-buying habits. 

Are you into cars? My husband is really REALLY into cars. He would rather walk around with a sharp stick in his eye than drive a 3 year old Toyota Camry every day. But I wouldn’t mind it and if I had my way, I’d probably still be driving my first car - a forest green Nissan Pathfinder. I called it her Pathy, and she and I spent many miles and many memories together in the early 2000s. 

Car loan rates are pretty low right...you can get a car loan in the 3-4% range if you have good credit. So why would you want to withdraw an extra chunk of change from your retirement portfolio, when you can make more manageable payments on a low interest car loan instead. 

Although I’m a big advocate of paying your house off before retirement, I’m not as big of a fan of withdrawing $40-50k every 8-10 years from your retirement accounts to buy a new car that will be worth ½ of it’s value in 3 years. But again, it all goes back to your car buying habits and what kind of dent a larger withdrawal will put on your portfolio. Sometimes a loan makes sense. Sometimes paying cash makes sense. 

The other consideration that most people don’t think of is something I commonly see among my clients, which is you’re not as comfortable with buying a used car at age 70 compared to say, age 40. You don’t want to be dealing with reliability issues or expensive repairs for cars out of warranty when you’re in your 70s so most of my retired clients are happy to pay a premium for a newer car, so they don’t risk being stranded by the road in snow and ice or 100 degree temperatures. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance