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Old 01-11-2017, 11:33 PM   #1
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It's been a long time since I purchased an auto. Been retired 10 years, 66 yrs old. The thing is I'm not sure the best way to buy is. Should I take most or all the money out of 401k or should I finance. How much should I finance and for how long? Used to buy auto for 3 years and windup paying it off way early. Now they talk like 84 months is normal. Is there a sweet spot where it should be?
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Old 01-11-2017, 11:57 PM   #2
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I would question taking all out of a 401K at once, just because of the taxes you would pay.
You would need to run the numbers but, financing it over means you could take out the money spread over 2 or 3 or even 4 yrs
And the interest you pay is pretty low these days.

Remember if you take SS currently and your income rises too much, then instead of 50% of SS taxable, 85% will be taxable, plus the tax you pay on the 401K withdrawal.
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Old 01-12-2017, 12:40 AM   #3
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If I draw it out over years what is the best, to go long or short. The thing is it has always bothered me to owe on a vehicle and not pay it off early
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Old 01-12-2017, 06:09 AM   #4
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If I draw it out over years what is the best, to go long or short. The thing is it has always bothered me to owe on a vehicle and not pay it off early
Look for what deal gives you the lowest interest rate. I hardly ever finance a car, but when I have it was with a 0% offer, so no interest at all. I agree that it feels better to pay if off sooner, though.
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Old 01-12-2017, 07:50 AM   #5
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We are in the middle of buying a new car, not by choice, but we got rear ended and the car was totaled. No injuries. We are also trying to explore our financing options. The dealer is not offering 0% on the car we want (another Honda Civic). And we really do not want a loan.

We decided to use insurance money + cash + sell some stock from taxable account.

Our individual stocks have done well and we thought it was a good time to take some profit. We found a few in our portfolio where we could limit our capital gains.
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Old 01-12-2017, 07:54 AM   #6
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Purchased two new vehicles in the last couple of years, financed them both for 60 months. Logic was the cost to finance (1.99% rate on both) was less than portfolio dividend return (2.6%).
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Old 01-12-2017, 08:37 AM   #7
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We are in the middle of buying a new car, not by choice, but we got rear ended and the car was totaled. No injuries. We are also trying to explore our financing options. The dealer is not offering 0% on the car we want (another Honda Civic). And we really do not want a loan.

We decided to use insurance money + cash + sell some stock from taxable account.
If you pay cash, you should be getting a lower price of the car in lieu of not taking the manufacturer's 1.9% interest program. It's one or the other.

An average automobile to day costs $32K and at normal interest rates on 60 months you're looking at a $650 monthly payment. Dressed up pickup trucks are often pushing $50K, and they're looking at $950 monthly payments. Average Joe just cannot afford such payments since he's had little real income increase in recent years.

And anyone that finances any depreciating asset longer than it's useful lifespan (84 mos.) is really not dealing with good judgement. That just means it's an unaffordable purchase.
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Old 01-12-2017, 12:35 PM   #8
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Purchased two new vehicles in the last couple of years, financed them both for 60 months. Logic was the cost to finance (1.99% rate on both) was less than portfolio dividend return (2.6%).
It is more complicated than that. The finance cost (1.99%) can't be written off as an expense on your taxes (unless the vehicle is for business), while the portfolio dividend return is taxed. For instance, if you are in the 15% qualified dividend bracket, your 2.6% return is reduced to 2.21%.

There is also a risk factor in that the investments generating the 2.6% return are subject to market risk.

I'm not saying what you did is a bad idea (in fact I did something similar on my last purchase), just that there is more to the story.
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Old 01-12-2017, 02:40 PM   #9
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I only finance if I can get a rate lower than what I can earn in a guaranteed account...today that's about .5% LOL.


IMO, if I didn't have enough liquid to pay cash, I would not buy a new car....I'd buy used and pay cash.
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Old 01-12-2017, 02:50 PM   #10
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I would question taking all out of a 401K at once, just because of the taxes you would pay.
You would need to run the numbers but, financing it over means you could take out the money spread over 2 or 3 or even 4 yrs
And the interest you pay is pretty low these days.
What he said - run the numbers both ways. Taking it out of a 401k could well push you into a higher tax bracket and negate the value of not paying interest. It may well mean that taking the loan would be the cheaper option.
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Old 01-12-2017, 02:57 PM   #11
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I've bought two new vehicles in the last 18 months.

For the first one, I "shopped" all dealers within 150 miles for an "out-the-door" price for the make and model that I wanted. I found a dealer about 100 miles away that was very good price. I told my local dealer that he needed to "sharpen his pencil". The local dealer said that he would "lose money" at that price and the best he could do was $200 more (on a $30k vehicle). I ultimately decided that I preferred to "buy local" and since the lower dealer was in another state I would avoid the hassles of having to register it myself in my state. After we agreed on the price, I found out that the manufacturer offered 1.9% financing and I took it because my overall portfolio return is much more than that and I would not adjust my AA for the withdrawal for the car.

On the other vehicle, the local dealer was able to offer me a better deal if I took their 5.5% financing with a local bank and I made a few months payments and then paid off the loan. I have had that happen in the past where I got a good discount for financing and then just paid it off after a few months.

If you have to take out of a 401k to not finance then in many cases the tax cost isn't worth buying for cash... finance at as low a rate as you can find and just increase your withdrawals to cover the car payments to spread out the tax bite.
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Old 01-12-2017, 03:02 PM   #12
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I only finance if I can get a rate lower than what I can earn in a guaranteed account...today that's about .5% LOL.


IMO, if I didn't have enough liquid to pay cash, I would not buy a new car....I'd buy used and pay cash.
WADR, unless you are adjusting your AA to reflect the withdrawal then you're just playing mind games on yourself.
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Old 01-12-2017, 03:04 PM   #13
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It is more complicated than that. The finance cost (1.99%) can't be written off as an expense on your taxes (unless the vehicle is for business), while the portfolio dividend return is taxed. For instance, if you are in the 15% qualified dividend bracket, your 2.6% return is reduced to 2.21%.

There is also a risk factor in that the investments generating the 2.6% return are subject to market risk.

I'm not saying what you did is a bad idea (in fact I did something similar on my last purchase), just that there is more to the story.
But even if you are looking at the after-tax cost vs after-tax return then copyright made the right decision 1.99% is less than 2.21% (and 2.6% if he is in the 0% tax bracket for qualified dividends).
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Old 01-12-2017, 03:10 PM   #14
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WADR, unless you are adjusting your AA to reflect the withdrawal then you're just playing mind games on yourself.
Not sure what you are saying....but if you have a portfolio of $2.5M, spending $40k on a car is not going to affect your AA very much.
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Old 01-12-2017, 03:12 PM   #15
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It is more complicated than that. The finance cost (1.99%) can't be written off as an expense on your taxes (unless the vehicle is for business), while the portfolio dividend return is taxed. For instance, if you are in the 15% qualified dividend bracket, your 2.6% return is reduced to 2.21%.

There is also a risk factor in that the investments generating the 2.6% return are subject to market risk.

I'm not saying what you did is a bad idea (in fact I did something similar on my last purchase), just that there is more to the story.
Ah ha...that....IMO, is the key point.

People will say "My portfolio is making much more than the interest rate on the loan"...when they should say "My portfolio has made in the past much more than the interest rate on the loan". So long as you are comfortable with the risk...which I was when I was younger...then go for it.
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Old 01-12-2017, 09:08 PM   #16
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Back in 2000, I got a bonus at work. Coincidentally, I needed a new car at the time, and the bonus would have paid for the one I wanted. But being such a financial wiz, I financed the car and put the bonus into tech stocks. I kicked myself a time or two over the next few years.
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Old 01-13-2017, 08:12 AM   #17
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Not sure what you are saying....but if you have a portfolio of $2.5M, spending $40k on a car is not going to affect your AA very much.
If you are going to keep the same AA then the relevant rate to compare to your after-tax interest rate is the after-tax investment earnings rate, not the after-tax earnings rate on guaranteed accounts as you suggested because once you rebalance the overall portfolio return is what you would no longer be receiving.

If you pay for the car from guaranteed accounts and don't rebalance, then you have implicitly changed your AA, and the correct rate to use for comparison is the after-tax earnings rate on guaranteed accounts since that is the return that you would no longer be receiving.
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Old 01-13-2017, 09:03 AM   #18
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Not sure what you are saying....but if you have a portfolio of $2.5M, spending $40k on a car is not going to affect your AA very much.
From a logical standpoint, I agree with this. However, I've noticed that the older I get, the more adverse I'm becoming to the idea of having to buy a car.

The first new car I bought was a 2000 Intrepid. $22,389 out the door, in November, 1999. At the time, I probably had a net worth of $40-50K, at best. I financed that car at 0.9% for 60 months, so it only cut me to the tune of $347 per month. But still the purchase price of that car represented almost half of my net worth. Somehow, that didn't seem to bother me in the least, though.

When that car got totaled, I replaced it with a low-mile 2000 Park Avenue that was around $8100 out the door. By this time, my net worth was probably close to $450K. So by this time, the purchase price was only about 2% of my net worth. But, spending that money still bothered me, even if realistically it was a small impact. I dunno, maybe the circumstances behind it were different...back when I bought the Intrepid, I wanted a new car. But this time around, I didn't want a new car; I was sort of forced into it.

In 2012, I bought a new Ram pickup. It was around $20,700 out the door, although we used my uncle's beat-up Silverado as a trade, so that knocked it down to $19,400. By this time my net worth was up to around $750K, so that truck only represented around 3% of that. But still, it felt like it "hurt" more than back when I bought that Intrepid.

I wonder if it's just human nature to get a bit more risk-adverse to buying cars, as you get older? I've been toying with the idea of getting another car, as the Buick is now knocking at death's door, and I use the Ram all the time, and it's a bit of a guzzler, hard to park, etc. But, I just hate the idea of parting with that money, even though I could easily afford it.
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Old 01-13-2017, 09:23 AM   #19
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..........I wonder if it's just human nature to get a bit more risk-adverse to buying cars, as you get older?......... .
I don't buy green bananas anymore.
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Old 01-13-2017, 09:30 AM   #20
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On a more serious note, I'm in a similar situation. I have just 5 years before RMDs and 2 years before I start to draw spousal SS, so I need to get as much money out of my IRAs as I can before I'm kicked back up into the 25% bracket (due to dual pensions and SS income). I've decided to take the money for the car out of my IRA this year and do a Roth conversion to the top of the 15% bracket next year.
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