Should I keep our money in savings or pay off our car?
We have about $47,000 in savings. We have a monthly income of about $3,000. Our ages are 75 and 77. With the economy as it is and the way it looks in the future, should I pay off our 2015 car debt of $20,000 or keep our money in savings?
This can be a very subjective question. What I mean by that is opinions will vary depending on who you talk to and how much they understand human behavior. I will get straight to the point. In my professional opinion it would be better not to pay off the car. Why? Because you may need some of that savings in case of a "real" emergency. It is very difficult to save a nice nest egg of $47,000 and in comparison it is fairly easy to unload a car that you may no longer want because of expenses. There is nothing that feels quite as good as knowing that you always have a choice to payoff the car if you wish, although you have not opted to do so. You will also sleep better at night. :) To have your savings account decrease to $20,000, I believe, will not set well with you after you spend your hard earned money on a wasting asset (automobile). Keep in mind that if you are really concerned about the debt at this time you could also reduce your debt substantially by finding a clean, reliable, used car. There are many that you can get for under $5,000. I hope this helps and enjoy that retirement!
Being debt free is a really good place to be during the retirement years! But there are three factors to consider:
1) Investment income vs. interest on the car loan - If you are earning say 3% on your savings, but paying 2% on your car loan, you should probably favor keeping the car loan open. But if the situation is reversed, you may want to pay the car off. After all, it makes little sense to keep say, a 5% car loan if you're only earning 3% on your savings.
2) Emotional considerations - If having the debt is keeping you awake at night, and paying it off would give you greater peace, than that's the way to go.
3) Cash flow - If it's a struggle to make the car payment each month, it will likely be best to pay it off, but if you can easily afford to pay it, you may keep it open.
You should also consider the tax implications, if any. If your savings are in a tax sheltered retirement plan, like a traditional IRA or a 401k, you will have a tax liability on the withdrawal of funds to payoff the car. But if it's outside of a plan, or held in a Roth IRA, there will be no tax consequences on the withdrawal. I hope this helps.
If the interest rate in your savings account is less than the one on your car payment, it would be better to pay off the car. If your interest rate is less than inflation (about 3%), you may want to consider investing in a conservative to moderate ETF portolio to help fight inflation. If your car payment has an interest rate of less than about 3%, you may be better off investing it in that ETF portfolio as the input from the investment could be greater than the output in interest on the car payment.
If the savings is liquid and available (not in an IRA account, or highly appreciated investment) and it is not a 0% loan - then pay off the debt. Assuming your 3000 in income roughly equates to your expenses, than you will still have well over 6 months worth of savings for emergencies, a good position to be in. I don't understand the logic of "don't pay off the loan because the car will depreciate". The car will depreciate whether you pay off the loan or not! Ridding yourself of the debt will improve your cash flow and free you of obligation to the creditor. That is good enough for me.
You can now use the extra cash flow you will have from not making car payments, and put that back into savings. By the end of the loan, you should be better off than you are now.
Note, I provide this feedback only based on what you have told me here. There may be information I am not privvy too. You may want to find a financial coach, budget counselor, or similar who can dig a little deeper into your budget and cash flow needs to better advise you.
If you were both still working I would say go ahead and pay off the car- assuming the interest rate on the car note is higher than what you are earning in interest at the bank.
Since you both are retired, I would be a bit more careful making sure you have an adequate emergency fund and are prepared for things like Long Term Care if it is ever needed.
Assuming your income is secure, paying off the care will still leave you with a few months of expenses if something out of your normal monthly budget comes up.
Live for Today, Plan for Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles retirement planner with DRM Wealth Management. He has been helping people reach their financial goals for over a decade. Follow him on Facebook, or via his website www.davidraefp.com. Also make sure to check out the Fiduciary Financial Planner LA blog.