When I teach retirement income planning classes I love to ask attendees to jot down how much they paid for their first house, then I ask them to write down how much they paid for their last car. While I don’t ask them to share these numbers with the class, it does start a lot of discussion. And laughter. What usually comes out of this exercise is the fact that most of the retired folks in the room paid more for their last car than they did for their first home!
Inflation takes quite a toll on the wallet. We notice this happening as the price of items rise and rise over the years; milk, gas, property taxes and, as in the example above, cars.
If you set up house at the age of 22 and retire at the age of 65 that is a span of 43 years. That gives you 43 years to earn income and invest for the future.
If you retire at the age of 65 how long do you want to plan for in retirement? Do you plan for 90 years old? 95? 100? Depending on your age, gender, health, and longevity in your family, retirement can last 25, 30, 35 or more years!
And if you plan on retiring early, you might be retired for as many years as you worked!
Let’s say you finish college at 22 and work until you are 62; you worked 40 years. If you live to 102, you would be retired for 40 years.
If you think inflation is a challenge while you are in your earning years, imagine what it is like during retirement when you are tapping into the portfolio that you created for retirement.
Here is some food for thought. Let’s take the car example from above and see what type of impact inflation has on car prices during your retirement years.
Last year and the first two months of this year, the Toyota Camry was the best-selling car in America. The 2012 Toyota Camry LE model has a base MSRP of $22,500 in today’s dollars. Not the least expensive model, the L, but not the more expensive models, SE or XLE, either.
Let’s use an example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $22,500 now and inflates at 3% a year, they want to know what a Toyota Camry LE would cost at the following ages:
At 65 years old a 2022 Toyota Camry LE is estimated to be $30,238
At 72 years old a 2029 Toyota Camry LE is estimated to be $37,189
At 79 years old a 2035 Toyota Camry LE is estimated to be $45,738
At 86 years old let’s assume they are still driving, not as much as they used to, and mostly during the day, but their family insists that they have a reliable car, so they relent and end up spending $ 56,252 on the 2043 Toyota Camry LE.
If they maintain the car well and don’t put a lot of miles on it, they could look to knock off a quarter to a third of the price with a trade in if they are trading in every seven years.
What if your tastes run more toward Lexus than Camry? Let’s look at this example with the 2012 Lexus GS (again not the most expensive model, nor the least expensive) with a base MSRP of $46,900 in today’s dollars.
Let’s use the same example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $46,900 now and inflates at 3% a year, they want to know what a Lexus GS would cost at the following ages:
At 65 years old a 2022 Lexus GS is estimated to be $63,030
At 72 years old a 2029 Lexus GS is estimated to be$77,519
At 79 years old a 2035 Lexus GS is estimated to be $95,338
And at 86, in this example as well, they listen to their family and buy a new car so they have a reliable car, making the family feel better. They end up spending $ 117,254 on the 2043 Lexus GS . The good news is, the year is 2043, so it is the Jetson’s edition so it can fly.
In discussing future plans with families, I find that car replacement during retirement years is the most frequently forgotten item when individuals plan on their own. But having read this, you know to factor it in. Many people make the mistake when planning of assuming that they can keep the same car throughout retirement. Keep in mind that you may be retired for almost as many years as you were working. Think about how many cars you owned while working and consider if it would be realistic to have one car for a period approximately as long as that. You will possibly be driving more in the early years of retirement, because retired people are the busiest people I know. They have been putting off all the things they wanted to do; now they get to do them! But the amount of driving does slow down significantly in the later years for most, but not for everyone. Also, consider if you have more than one driver, you may be replacing more than one car in retirement. Forewarned is forearmed! If you haven’t already, be sure to account for car replacement and the inflation of the car prices in your retirement projections.