What That New Car Really Costs You in Retirement Dollars

New cars are already expensive, with Kelley Blue Book revealing that Americans paid an average price of $49,855 for a new car in July. The average pickup truck cost $66,980, but the most expensive cost isn’t on the window sticker.

The real cost is opportunity cost. It reflects how much your money could have grown if you put it in the S&P 500 or a similar benchmark instead of using that capital to buy a new car. When viewing finances from this lens, the average new car actually costs a lot more than $49,855 — find out exactly how much below.

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Calculating Opportunity Cost

The most standard way to calculate opportunity cost is to assess how your $49,855 could have grown elsewhere. For instance, the S&P 500 has produced an annualized 14.5% return over the past 10 years. 

If you averaged a 14.5% return over the next 20 years with $49,855, it would turn into $747,856.81, according to the Investor.gov compound interest calculator. Even with a more modest 8% annualized return, that money could have still turned into $232,372.02.

Granted, people who are buying a new car may still need a vehicle. It’s an essential purchase for most people, especially people who live in suburban and rural areas. Getting a used car instead can significantly reduce costs and you can invest the difference in an index fund or another asset that can compound over time.

Hidden Auto Expenses Add Up Too

Auto expenses don’t end the moment you buy a new car. Some people take out loans, which come with origination fees, interest and other expenses. Auto loans can keep you in debt longer, especially if you refinance your loan in the future and higher interest rates do not help with this matter.

Since a new car is more expensive than a used vehicle, you will pay more interest over time if you get a loan. Insurance is also higher for new vehicles since they have higher market values than used cars. It doesn’t cost the insurer as much money to replace an old $20,000 vehicle as it would cost to replace a new $49,855 car. 

You will save money on maintenance with a new car, but it’s still an expense that shows up. Although older vehicles are more expensive in this regard, the other ways used car owners save money can balance out this inconvenience if you don’t get a lemon.

All of these expenses increase the opportunity cost of investing in index funds. However, some expenses are necessary and a car is certainly one of them. Granted, that doesn’t mean you have to buy the newest or most expensive vehicle.

How the 4% Withdrawal Rule Impacts Retirement Flexibility 

While miscellaneous costs will add up, focusing on the more conservative $232,372.02 figure shows what someone can miss out on by purchasing a new car. Using the 4% withdrawal rule, a retiree can take out an additional $9,294.88 per year. If you use the more aggressive $747,856.81 figure, the 4% withdrawal rule allows for $29,914.27 in annual withdrawals.

Those are real figures that preserve your nest egg, couple nicely with Social Security and give you the option to retire sooner. 

Buying a used car is a good middle ground, but some couples can do fine with a single car, especially retirees. It’s a bit more difficult to have just one vehicle if both spouses have commutes and multiple kids who all have sports and club activities. 

It’s good to assess how often two vehicles are used simultaneously before deciding if a replacement is warranted. Uber and similar apps are available for rare scenarios when the family is using two vehicles simultaneously, but if it’s more common, getting a second vehicle may be a worthwhile investment, as long as you don’t overpay. 

All of these calculations are for a new car. The opportunity costs, vehicle price and ongoing expenses you incur are much higher if you buy a pickup truck. This vehicle is a nice-to-have that you shouldn’t go into debt for unless it is an important part of your business. Pickup trucks do not make financial sense for most people, especially when they primarily use it for basic transportation that any car can do.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.

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