‘I’m 32, married with two kids, and I’ve blown half my 401(k) on my cars. Am I screwed?’

A few weeks back I got an angry email from an occasional reader, complaining that too many articles were about people with $1 million or more. Most people in America have nowhere near that amount, he said.

He has a point. So today meet “HugglesGamer,” who is 34, a married father of two, and has a household income of $80,000.

He wants to achieve “FIRE” — i.e., “Financial Independence, Retire Early.” But so far he’s accumulated a 401(k) of just $42,000. But, he adds, he has debts. He owes $8,000 on his credit cards mostly due to “misfortune” with car problems, he says. He has another $8,000 loan. He and his wife owe $8,000 and $4,500 on their car loans. Oh, and he has $12,500 in student debt.

“Am I screwed?” he asked in a Reddit subforum.

In his situation, he should be worrying less about “early retirement,” and more about being able to retire normally, according to Sandra Gilpatrick, a wealth manager in Boston. “FIRE is a difficult strategy for many people, especially those with debt, children, and an income too low to maximize retirement plan contributions,” she said.

HugglesGamer, it seems, has all three.

“My advice would be to focus more on building an appropriate cash reserve rather than to worry about FIRE,” Gilpatrick said. “It would help give him the resilience he is lacking for unexpected expenses,” such as his car troubles, she added.

Meanwhile, what of his savings?

His 401(k) balance of $42,000 may not seem like much — and it is certainly not something that puts him on track for financial independence or early retirement. But even that low amount is ahead of the average for his age bracket.

Among those aged 25 to 34 with a 401(k), the median balance is just under $11,400, according to Vanguard data. Among those aged 35 to 44, it’s around $28,300. It gives you an idea of the mountain most people have to climb.

Unfortunately, when you add them up, HugglesGamer’s debts — not counting his mortgage — come to $41,000, or just $1,000 less than the balance of his 401(k). The true picture is even worse than that, because the money in the 401(k), unless it is in a Roth, will have an implied tax liability as well — because even when you are old enough to take the money out without a penalty you still have to pay tax on it as income.

He should talk to the administrator of his 401(k) to see if they allow loans. He may be able to borrow up to 50% of the balance, or $21,000, and use that to pay off any high-interest loans. Yes, you then need to pay the loan back to your 401(k), with interest, but there are two advantages to this. The first is you’re paying interest to yourself. The second is that typically the payments are deducted automatically from your paycheck — making it forced saving. (He should take advice before taking the loan. Also, that loan comes with tax and penalty risks if it’s not paid back in time.)

The good news is that he has plenty of time. If you start at 34 with $1,000, add just $5,000 a year, and earn an average compound return of 5% a year after inflation, which is the historic average for stocks, you end up at age 65 with just under $360,000 (in today’s dollars). 

If you manage to contribute $10,000 a year, you’ll end up with more than $700,000, again in today’s dollars. That’s way ahead of most people.

At that rate, you can’t retire early, but you can retire normally. By the time this guy is in his 60s, that may be an aspiration all on its own. The median 401(k) balance for those over 55 is just $70,000. 

When saving for your retirement, time is magic. Small and steady investments made over a long period of time will produce results. If you can’t start rich, start early.

Meanwhile, a lot of this guy’s financial problems were caused by one thing, or rather, two things: The family’s two cars. He and his wife have $12,500 in combined car loans. And he says the credit card debt is mostly due to car trouble as well. In other words, his cars alone account for more than $20,000 of his debts — half the total (not counting the mortgage) and half the value of his 401(k). The guy has basically blown half his retirement plan on his cars.

And that’s just the debt those two vehicles have racked up. What are the running costs? 

The AAA reckons the annual cost of owning a car is now just over $12,000 a year. But that’s for a new car, and includes about $4,500 a year in depreciation of the purchase price. If you buy a used car your depreciation will be way less than that. But the other running costs, including fuel, insurance, maintenance and the like, still add up to $7,500 according to the AAA.

For a two-car family, that’s $15,000 a year.

“This guy should get a car that is less expensive to maintain,” suggests Gilpatrick. “Also, do they really need two cars?”

Every time people tell me real estate in the city is too expensive, I point out that if you live downtown you can save on car costs — especially in these days of online shopping and Uber. 

At a mortgage rate of 5.5%, that $15,000 a year would be enough to pay the interest on a $270,000 loan. 

During the pandemic, when rates dropped as low as 2.5%, a $15,000 saving was enough to pay the interest on a loan of $600,000. Yet people were lining up to move out of the city. Go figure.

In the case of HugglesGamer, the $20,500 in debts he and his wife have racked up on their two cars, in addition to whatever else they spend on them, suggests an obvious way to cut costs, cut debt, and get ahead of the eight ball.

And, given the amount that so many people spend on cars, he is far from alone. On the contrary, he is probably slap-bang in the middle of the mainstream.

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