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How keeping a car 15 years can pay you $230,000

Nationwide, about one in five owners of a Toyota Highlander held onto the car for at least 15 years. More than 14% of Toyota Sienna, Toyota Tacoma and Toyota Tundra owners kept their car for at least 15 years.

Want to guess what those Toyota buyers got besides a durable ride? The opportunity to redirect scarce household money to savings — and an additional nest egg of $230,000. Read on for the math on that.

What you drive — and for how long — can play a big role in what you're able to save for retirement. For many households, years without a car payment will be the key to financial security.

In a recent report from car search engine Iseecars.com, ranking models that original owners held onto for at least 15 years, the top four spots went to Toyota. The Tacoma and Tundra, by the way, were more than twice as likely to be owned for at least 15 years than the popular Ford F-150.

Nationally, the average for models owned by the original owner for at least 15 years is 7.7%. It should be a lot higher, given the increased reliability of today's vehicles and the financial rewards of holding onto a car or truck.

Yet flipping cars every few years has become a costly habit for many households. Car data site Edmunds.com reported that more than 40% of the cars traded in this past May still had an outstanding loan balance (known as negative equity). The average car loan is a smidge less than six years these days, which suggests a whole lot of people don't own their car for even that long.

Edmunds noted that trading in with negative equity might have an upside given the potential to finance a new car (and roll over your unpaid loan balance on the car you're trading in) at a lower interest rate. What that overlooks is that you've just increased your loan balance and likely just signed on for a fresh six years (or more) of new loan payments. That's time (and money) you won't have for other goals.

Luxury and sports cars are the most prone to flipping sooner. According to Iseecars.com, on average less than 6% of luxury and sports cars are held for at least 15 years. The models held longest were the Acura MDX, BMW 3, Lexus IS 300 and Audi S4, with 8% of owners holding on for at least 15 years.

Even if you're paying cash for a luxury car, there is still the opportunity cost of the big ticket purchase. According to car data resource Kelly Blue Book, the average cost recently to buy a luxury compact SUV/crossover was $47,000, compared to around $30,000 for a non-luxury model. Even if you've got the extra $17,000 in cash handy, are you sure you want to spend it on a depreciating asset? Invest the $17,000 for 25 years, and you'll have nearly $58,000, assuming a 5% annualized return. If you don't hold onto the car, and repeat this scenario one or two more times over the next 20 years, your opportunity cost — what you could have had — will cross over into six figures.

Instead of flipping your car for another new car every three, four, five years, if you keep it, you're buying yourself a lot of time without a car payment.

Paying off the loan in five years and then driving the car for, say, another 10 would give you 10 years of no payments.

Right now the average car loan payment is around $570 a month according to Experian Automotive. Invest $570 a month for 10 years and you will have more than $88,000, assuming a 5% annualized return. If that money is for retirement, and you just let the $88,000 keep compounding (again, at an assumed 5% annualized rate) it will be worth more than $140,000 in another 10 years. After 20 years it's grown to more than $230,000.

A quarter of a million dollars ready for your retirement, because you gave yourself a 10-year window where you weren't making a car payment.

On the flip side, owning a Jeep Wrangler, Jeep Cherokee or Jeep Grand Cherokee isn't exactly a retirement-friendly move. Less than 5% of those models were held for at least 15 years.

 

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