Do interest and dividends count agains the SWR?

[cardude]

OK, probably a stupid question but let me splain:

If I have, say, 50K of interest and dividends coming from my portfolio of 1M, and I need another 50K to live on so I draw out 50K from my cash for the year, is my w/d rate 10% or only 5%?

These are fictitious numbers to protect the innocent. No animals were harmed by this stupid question.

 

[dex]

This is a timing issue.
If, in January you have 1mm and take out 100k then it is 10% - then the 50K i/d are paid over the next 11 months
If, in Dec you have 1mm + 50K i/d then take out 100K then your W/R is 9.5%

 

[daloanboy]

10%

SWRs include dividends and interest.

 

[Moemg]

Interest & divivdends count towards the 4% .

 

[cardude]

Dang it, I thought I had figured out some new financial worm hole.

Back to cutting expenses and selling stuff on ebay...............

Sold my stupid ski boat yesterday! Yea for me! Got a deal working on my old 1929 Ford Model A Hot Rod, could go this Wednesday! Yea again! If that one goes through I just increased my FI by about 5 months. That actually sounds kind of depressing. Or, if I invest that and earn 15% I could double that money that was just sitting there doing nothing in 5 years! OK, maybe 7% and a 10 year double is more doable. Investing the proceeds instead of spending it on groceries sounds less depressing. Oh wait, but I need the cash because I have too much in equities.

More coffee...........

 

[FinanceDude]

Dang it, I thought I had figured out some new financial worm hole.

Back to cutting expenses and selling stuff on ebay...............

Sold my stupid ski boat yesterday! Yea for me! Got a deal working on my old 1929 Ford Model A Hot Rod, could go this Wednesday! Yea again! If that one goes through I just increased my FI by about 5 months. That actually sounds kind of depressing. Or, if I invest that and earn 15% I could double that money that was just sitting there doing nothing in 5 years! OK, maybe 7% and a 10 year double is more doable. Investing the proceeds instead of spending it on groceries sounds less depressing. Oh wait, but I need the cash because I have too much in equities.

More coffee...........

And a Valium cut in half........

 

[CuppaJoe]

This is a timing issue.
...

I agree, it's a very funny, well timed post.

Cardude, don't worry about it, spend, spend, spend.

Psst, Amazon.

 

[Alan]

10%

SWRs include dividends and interest.

I agree.

 

[Bestwifeever]

cardude, do you think people in your situation--car dealers who have seen business disappear--have any possibility of getting relief from the fed bailouts? I'm not sure how they might work or how far down they might trickle, but is that a possibility at all?

 

[Gpond]

I would say yes. Since my portfolio has been destroyed I am reinvesting all my dividends right now. Trying to live off my money markets interest. With the falling yield in them day after day - SQUEEZE.

It is easier for tax purposes to take the dividends but we are living in interesting times.

 

[cardude]

cardude, do you think people in your situation--car dealers who have seen business disappear--have any possibility of getting relief from the fed bailouts? I'm not sure how they might work or how far down they might trickle, but is that a possibility at all?

I haven't thought about that, but I kind of doubt it. We are not the most revered industry in the nation and I'm not sure our lobby (do we even have one?) is good enough to pull that off.

New vehicle sales in our area are dismal, and that is driving up the used vehicle market. No new sales means no trade ins, so if you are in the market for a used vehicle you better get out there quick.

 

[2B]

I haven't thought about that, but I kind of doubt it. We are not the most revered industry in the nation and I'm not sure our lobby (do we even have one?) is good enough to pull that off.

New vehicle sales in our area are dismal, and that is driving up the used vehicle market. No new sales means no trade ins, so if you are in the market for a used vehicle you better get out there quick.

One of my SIL's father has a used car lot where they hold the notes. That means they get the people that want a vehicle but don't have the credit rating to get conventional financing through a bank or credit union. He says business is booming and margins are going through the roof. The downside, of course, is that he repos about 30% of every car he sells but that's all figured into the sales price. His biggest problem is getting decent used cars because everyone selling cars his way are also having a booming business.

Good Credit or Cash = Good New Car Deal
Bad Credit = Bad Used Car Deal

 

[haha]

New vehicle sales in our area are dismal, and that is driving up the used vehicle market. No new sales means no trade ins, so if you are in the market for a used vehicle you better get out there quick.

What an interesting angle. Markets are endlessly fascinating.

Ha

 

[cardude]

One of my SIL's father has a used car lot where they hold the notes. That means they get the people that want a vehicle but don't have the credit rating to get conventional financing through a bank or credit union. He says business is booming and margins are going through the roof. The downside, of course, is that he repos about 30% of every car he sells but that's all figured into the sales price. His biggest problem is getting decent used cars because everyone selling cars his way are also having a booming business.

I did a little bit of that years ago, and found it a pretty tough business. I did not have the "back office" setup to do collections and repos, so I ended up doing it all myself with sales people helping. After a few bad repo experiences and poor collection results, I gave it up.

But, if you are tough and can listen to sob stories all day as to why the payments are late (or not made at all), you can definitely make some money on this. Plus, I only see this side of the business growing as the big "second chance" financers (Nuevelle-- a branch of GMAC, Americredit, Capital One, Citi Financial) are either getting out of the business due to funding issues or cutting back what they loan due to being prudent. The "note lots" will be where these high risk type car buyers with bad credit will have to turn to get financed.

 

[samclem]

cardude,
Don't forget that dumping the toys not only helps you raise cash, but will also reduce your expenses (insurance costs, maintenance of the toy, storage, etc). Each $1 you can reduce from these monthly expenses reduces the amount of your required nest egg by approx $300. ($1 x 12 months x 25 (inverse of 4% SWR)). The little monthly expenses can balloon your required nest egg pretty fast.

I was once looking on a "note lot" for a cheap used car. The salesman/owner lost interest very fast when I told him I was ready to pay cash. "Listen, we don't sell cars here, we sell financing."

 

[MasterBlaster]

One of my SIL's father has a used car lot where they hold the notes. That means they get the people that want a vehicle but don't have the credit rating to get conventional financing through a bank or credit union. He says business is booming and margins are going through the roof. The downside, of course, is that he repos about 30% of every car he sells but that's all figured into the sales price. His biggest problem is getting decent used cars because everyone selling cars his way are also having a booming business.

Good Credit or Cash = Good New Car Deal
Bad Credit = Bad Used Car Deal

I had the opportunity to spend a couple of hours with someone who owned such a lot. He told me the business model...

They would buy a 10-year old (or so) Honda or Toyota at auction for maybe $2k then retail it at $5k. The buyer would have to put $2k down to do the deal. So any payments that the buyer made were pure profit.

The seller claimed that the buyer would usually keep making payments until either he lost his job or the car broke and wouldn't run. That's when the repo team would be called. If his costs for the repo were less than the cost of the car (plus repairs) then he was profitable.

There is a whole class of people that can pay $100 to $200 a month, need a car, and have miserable credit. One can make the case that these lots serve a need. One can also make the case that these lots rip-off people in the worst way.

It's a pretty slimy business though.

 

[cardude]

They would buy a 10-year old (or so) Honda or Toyota at auction for maybe $2k then retail it at $5k. The buyer would have to put $2k down to do the deal. So any payments that the buyer made were pure profit.

The big trick is finding someone with that much down 12 months out of the year. In January and February it's easy due to tax refunds, but the other 10 months it's a little sketchy. Plus some of the cash from the down payment has to go to pay tax, title and license fees so it does not all go to the dealer.

The seller claimed that the buyer would usually keep making payments until either he lost his job or the car broke and wouldn't run. That's when the repo team would be called. If his costs for the repo were less than the cost of the car (plus repairs) then he was profitable.

This is all true. They only pay if the car is running and if they have a job. After that all bets are off. Many dealers install an electronic ignition shut down system that will not allow the car to start if the payments have not been made. Many have gotten sued over this as well when the car is needed for a medical emergency and will not start. Some also use GPS systems to track the cars.

There is a whole class of people that can pay $100 to $200 a month, need a car, and have miserable credit. One can make the case that these lots serve a need. One can also make the case that these lots rip-off people in the worst way.

This is a HUGE class, and getting bigger every day as traditional second-chance type lenders drop out of the market due to the credit crunch.

It's a pretty slimy business though.

I wouldn't profile the entire industry as slimy. There are slimy players, but there are also big, well financed players that run a good stores with service facalities and nice showrooms. Interest on the loans is regulated by the state so it's not like pawn shop lending or payday lending where the rates are crazy. The good operators only put good vehicles out on the street that they think have a good chance to outlive the live of the loan (typically 24 months). The sellers are a little less sophisticated to say the least, however, so some do get taken advantage of. Of course this business will probably be regulated soon so the buyer can have no brain function at all and any financial loss on their part will be covered by the government.

That last sentance is just snarky editorial comment, reflecting my new mood towards too much government intervention into every financial aspect of our lives it seems.

 

[dex]

I had the opportunity to spend a couple of hours with someone who owned such a lot. He told me the business model...

They would buy a 10-year old (or so) Honda or Toyota at auction for maybe $2k then retail it at $5k. The buyer would have to put $2k down to do the deal. So any payments that the buyer made were pure profit.

The seller claimed that the buyer would usually keep making payments until either he lost his job or the car broke and wouldn't run. That's when the repo team would be called. If his costs for the repo were less than the cost of the car (plus repairs) then he was profitable.

There is a whole class of people that can pay $100 to $200 a month, need a car, and have miserable credit. One can make the case that these lots serve a need. One can also make the case that these lots rip-off people in the worst way.

It's a pretty slimy business though.

I don't think this example gives a good picture of the situation. It is a mistake of using one example and projecting it out to the total business.

5,000
Costs associated with the particular vehicle
-2,000
-XXXX Transportation from auction to dealership
-XXXX possible car prep and repair before sale
-XXXX commission on sale
-XXXX Transaction cost of servicing debt
Costs needed to be recouped on every transaction
-XXXX Repo costs from other transactions
-XXXX Dealership overhead - rent, HAVC, legal fees, CPA etc

Used car dealers are probably just as slimy and new car dealers.

 

[MasterBlaster]

Dex:

yes of course there are overhead costs in your second level assessment. The lot that I came to know was a guy and his wife running the show from a lot that he owned outright.

So

the transportation cost was gas for the carpool/shuttling of cars

car prep and repair was usually nothing. Cars at auction have to meet certain standards.

There was no commission other than the profit generated from each sale

transaction costs of servicing debt - usually nothing (other than time) unless a repo is involved.

The other overhead was modest. This was not a big operation but nonetheless was a profitable business.

So as a first cut the numbers that I listed were valid. But as with everything there are the finer details to consider.