Retirement is a time to kick back, relax, and enjoy the fruits of your labor, but it’s also important to be careful with your finances. One mistake we often see is the lack of planning for major purchases, such as buying a new car.
Now, we know what you’re thinking – “But Marc, I’ve been driving the same beat-up old car for the past 20 years, I deserve a shiny new ride!” And you know what, you’re right! You totally deserve it.
But before you head down to the dealership and buy a brand-new car, let’s talk about why this can be a problem.
Outliving your savings
One of the biggest risks of making a big purchase in retirement is the possibility of outliving your savings.
Even if you have saved a significant amount of money, a large purchase can significantly reduce your nest egg and leave you without enough to cover your expenses for the rest of your retirement.
Be care of the tax
To illustrate this point, let’s consider an example.
Tim has $500,000 in a RRIF; his only other income sources are the Canada Pension Plan and Old Age Security. He wants to buy a new car but is interested in financing it at an 8% interest rate.
Instead, he decides to withdraw $40,000 from his RRIF to pay for the car.
However, when you withdraw money from a RRIF, a portion of the withdrawal goes toward taxes.
Based on the size of the withdrawal, the following amount of taxes will be withheld.
- 10%: $1-$5,000
- 20%: $5,001-$15,000
- 30: Above $15,000
If Tim wants $40,000 to buy a car, he’ll actually need to withdraw $57,142 because 30% of his withdrawal, or $17,142, will need to go towards taxes.
This means that Tim has withdrawn over 11% of his retirement savings to purchase a vehicle.
If Tim is early in his retirement, this withdrawal can have a significant impact on the sustainability of his funds.
Plan for major purchases
So, how can you avoid this mistake? The key is to ensure that any major purchases align with your long-term financial goals. Before retiring, it’s important to plan for large purchases in addition to your regular day-to-day spending. By doing so, you can be confident that your retirement won’t be derailed when it’s time to make a big purchase. And you’ll still be able to enjoy that shiny new ride without breaking the bank.