Finance, Boats, Retirement how do you decide?

[mvweebles]

We used the equity in our house to refi and take out enough money to buy our Grand Banks 36. Interest write off is part of the house payment and interest rate is that of the house loan which is enormously less than a standard boat loan. We were careful to take out more than we needed for the actual purchase price after carefully itemizing all work/new gear we would be putting into the boat.

Question. What happens if you sell the house before you sell the boat, especially if there isn't enough equity in the house to pay off the boat?

 

[backinblue]

One thing I would caution about, and is hard to estimate, is longevity. If you are 65 and in reasonably good health, it's reasonable to plan for another 20 years. But IMO, if you are 45, it's hard to guess your life expectancy. By the time you turn 65, many things that kill us today may no longer exist (cancer, Alzheimer's, Parkinson's, heart disease, etc.) Even aging itself will probably be solved at some point. Technology accelerates change and innovation. It fuels itself. Nobody knows, but 20 years from now, a 65 y.o. may have to reasonably plan for another 40-50 years.

 

[Recb]

It sounds like two separate and general questions: how to go about life financial planning and then boat budgeting. Of course the second is a subset for the former. For the former there are tools on line for retirement planning. These should have input options for age (current, retirement and life estimate), salary, savings, expenses, pension, investments, etc. I found such tools to be very useful for financial planning and planning retirement. Of course overall financial planning is more accurate if numbers are know for things like a boat purchase and annual related expenses. Where there are two people involved this means that an agreement is required for what is wanted in a boat, how much is budgeted for purchase and expenses. Experience or referring to someone with appropriate experience can help answer such questions.

 

[Wangtang]

Actually, I know what you are talking about.

 

[Pete Meisinger]

I think if someone has $250,000 sitting in the bank, maybe earning 5%. And that same person wants to buy a boat for the same amount ($250,000) and they can borrow that money at 4% . They rationalize that they can make $2,500 a year by financing the boat and investing the money.

OK, that works, if the $2,500 means that much to a person. Go ahead and finance the boat, maybe the Admiral will fall for your logic. But then, Hmmm, maybe you want to get adventurous and invest the quarter of a million in something which pays better. Maybe real estate or a start up or whatever. Maybe you can make 10%, maybe 15%. Now it's looking better, right?

Then, your start up or real estate or whatever goes into the toilet. Let's pretend it is suddenly gone, or mostly gone, or even just partially gone. Where are you now?

You are sitting with no cash reserves, little liquid assets, and a boat payment and boat expense. Not a great place to be.

Pay cash for toys.

pete

 

[fgarriso]

Unless you have a lot of steady retirement income, say from patents, rentals or royalties you really don't want a big boat payment. None at all is best for retirement.

I may be wrong, and if I am I'm sure the other, more experienced members will tell me in short order but here goes. I think the type of boat you are looking for will cost you about the same to purchase as a decent home in your area. I would further go out on a limb and say that it will cost you about the same to live on as that similar house.

The ten percent rule carries a certain amount of credibility here. (10% of the cost of the boat is about what it costs to maintain and use, annually)

good luck, welcome aboard

pete

 

[FWT]

I think if someone has $250,000 sitting in the bank, maybe earning 5%. And that same person wants to buy a boat for the same amount ($250,000) and they can borrow that money at 4% . They rationalize that they can make $2,500 a year by financing the boat and investing the money.

OK, that works, if the $2,500 means that much to a person. Go ahead and finance the boat, maybe the Admiral will fall for your logic. But then, Hmmm, maybe you want to get adventurous and invest the quarter of a million in something which pays better. Maybe real estate or a start up or whatever. Maybe you can make 10%, maybe 15%. Now it's looking better, right?

Then, your start up or real estate or whatever goes into the toilet. Let's pretend it is suddenly gone, or mostly gone, or even just partially gone. Where are you now?

You are sitting with no cash reserves, little liquid assets, and a boat payment and boat expense. Not a great place to be.

Pay cash for toys.

pete

Yeah, in that scenario pay cash. I agree.

On the other hand, assume the money is sitting in stocks long enough where the cost basis is 10% of the market value, and the dividend yield is 10%+ of the cost basis. The tax cost to liquidate the investments to buy the boat just hiked the cost of the boat decision. A lot. Maybe finance a chunk of it.

 

[Seevee]

This is a VERY individualized subject, but could suggest the following:


I could argue to have enough income, that will cover all expenses plus a reserve that will grown at LEASE 5% per year. At least long enough to address some of the high debts and inflationary items this country has.


And have a cash reserve (some very stable investment not tied to the stock market that YOU control) for those rainy days.


Figure out YOUR cost of boat ownership:
Purchase price is easy (when you write the check)
For maintenance, go right to the book schedule, add up all the supplies you'll need for a year and that will be your normal maintenance. Add in labor for the non do it yourself.
Put a budget for non scheduled maintenance.... that will be harder, but if everything is new on your boat, that number will be low. Get ideas on what breaks. You could add up the cost of all your appliances and figure a 10 or 20 year life span for starters. My boat is 15 years old and all the AC units are working fine, zero problems but won't last forever. All the pumps, fresh and salt water ones have been replaced. Etc.
Figure on your insurance going up way more than inflation... my went up 40% this year, and never less than 10%. Government fees will probably exceed 10%, dockage who knows (I don't pay for that).



So, I'd bet that your "boat house" will be somewhat comparable to your "dirt house" to a point. There's an argument to have a cheap ass dirt home on the water for your boat and rent the house out. You'll save tons on marina costs and have an appreciating asset should the proverbial S... hit the fan.


Perhaps a financial planner who owns a boat could give good advice.

 

[Transpacdan2442]

Equity in House

Question. What happens if you sell the house before you sell the boat, especially if there isn't enough equity in the house to pay off the boat?

For us not a problem. Still have enough equity to pay off boat loan. Everyone has to assess all of the parameters so obviously might not work for everyone.

 

[mvweebles]

For us not a problem. Still have enough equity to pay off boat loan. Everyone has to assess all of the parameters so obviously might not work for everyone.

So the holder of the boat loan has a seat at the table when the house settles. Makes sense.

I will retire this year. All I can say is I sleep much better with as much paid off as possible. My background is finance so I fully understand leverage. But for me, I'm much more comfortable with a paid off boat than a mortgaged one even though I could afford it.

As has been said before, a small boat and a briefcase of cash beats a large boat tied to the bank.

Peter

 

[smitty477]

I think if someone has $250,000 sitting in the bank, maybe earning 5%. And that same person wants to buy a boat for the same amount ($250,000) and they can borrow that money at 4% . They rationalize that they can make $2,500 a year by financing the boat and investing the money.

OK, that works, if the $2,500 means that much to a person. Go ahead and finance the boat, maybe the Admiral will fall for your logic. But then, Hmmm, maybe you want to get adventurous and invest the quarter of a million in something which pays better. Maybe real estate or a start up or whatever. Maybe you can make 10%, maybe 15%. Now it's looking better, right?

Then, your start up or real estate or whatever goes into the toilet. Let's pretend it is suddenly gone, or mostly gone, or even just partially gone. Where are you now?

You are sitting with no cash reserves, little liquid assets, and a boat payment and boat expense. Not a great place to be.

Pay cash for toys.

pete

There are a number of reasons why taking a loan for a boat or for other purposes is a real winner.
Whether of not those apply to each person or whether they have the inclination to take advantage of those loans is a personal choice. Unless of course they do not realize there is a choice.

 

[KevinSkinner]

So the holder of the boat loan has a seat at the table when the house settles. Makes sense.

I will retire this year. All I can say is I sleep much better with as much paid off as possible. My background is finance so I fully understand leverage. But for me, I'm much more comfortable with a paid off boat than a mortgaged one even though I could afford it.

As has been said before, a small boat and a briefcase of cash beats a large boat tied to the bank.

Peter

Oh yeah! This is what I wanted to say!

 

[backinblue]

I also paid cash for my current boat, and yes it's a nice feeling, but not sure it is truly the wisest. I always was taught that it's better not to spend money if you can borrow it at a lower rate than you can earn. I understand there may be some risk in that, but if it's a risk that you can accept it, that could be a smarter move. It's especially true if the loan interest is a tax deduction. I still have a small mortgage on my house, but it's at 3% interest so I don't have an incentive to pay it off. Having that money invested instead, has earned much more than I will ever pay in interest.

 

[Njlarry]

Thank you all for your honest advice especially FTW for your detailed sage advise.
I am not a finance knowledgable person so this is a question I have. Given the utility fiasco in Texas recently would not insurance industry stock funds be safer? I only ask because there are investment guros in our area that pitch insurance stocks as a safe return instruments.

 

[ktdtx]

would not insurance industry stock funds be safer? I only ask because there are investment guros in our area that pitch insurance stocks as a safe return instruments.

Are you talking about mutual funds or ETF's that invest in mostly insurance companies or are you talking about an insurance guru that is giving an annuity sales pitch?

 

[FWT]

Thank you all for your honest advice especially FTW for your detailed sage advise.
I am not a finance knowledgable person so this is a question I have. Given the utility fiasco in Texas recently would not insurance industry stock funds be safer? I only ask because there are investment guros in our area that pitch insurance stocks as a safe return instruments.

I don't want to get into stock picks, but there are a couple of broad points that have to be thought about and absorbed:

1) NOTHING is without risk.

2) NO ONE can forecast the future. Any guru you find that says after the fact "it was obvious" isn't to be trusted. Ignore them permanently. The most you can observe is that there are pressures of some sort in one direction or another that might tend to give something a push.

3) When bond yields go up, the price (market value) of bonds goes down. Hence my point about a 50-50 split of stocks and bonds. Why own something that pays almost no interest and from rates near zero cap losses are more LIKELY (not certain) than cap gains?

4) The point about utilities is really one about going for something stable with dividend yield. There are good ones and bad ones. I don't want to get into names here.

5) Insurance stocks? Life insurance is different than health insurance which is different than general property-casualty. And like utilities there are good ones and bad ones.

6) Many have gone to REIT's for interest / dividend income. I confess I have a very strong bias against them. That's just me. That area is a minefield and I would rather not try to pick the few that may be worthwhile. Often, sectors get painted with a single brush so if you do find a good one it might still be sold off and hurt you.

7) If you choose to ignore the point on bonds, then for heavens sakes buy a bond and NOT a bond fund. That has to do with the structure of bond funds. And hey, not liking bonds is just my opinion. No one is always right on everything. The choices are all yours to make.

8) If you follow my suggestion on annuities, you simply have to understand it is the single highest commission product there is. You have to understand the structure of it, is you hand a company a mountain of your cash and they dribble it back to you over time. You had better be shopping for a strong insurance company to do that with. The best "deal" is very often the worst risk.


I hope that helps a little bit.

 

[FWT]

One last point worth mentioning

9) This is a Warren Buffet point. If you want to make money, concentrate your investments in your few best ideas. If you want to avoid losing money, diversify. Retirement funds are about a decent return with risk management. Diversification is your friend.

 

[backinblue]

I don't think anyone should give or take investment advice on a boating forum! Form my own personal experience, and not as advice, I have invested most of my savings in mutual funds. With a modest income and regular investments, that has grown to a few million so far (my age 62). That includes doing some not-so-smart things a few times like taking out money to pay credit card debt and paying cash for my current boat.

If you expect t have a boat and a loan for awhile, I think there are some fairly low risk ways to earn more than loan interest, assuming you are planning more than a couple years. Never zero risk, agreed, but reasonably small IMO.

 

[FWT]

I don't think anyone should give or take investment advice on a boating forum! Form my own personal experience, and not as advice, I have invested most of my savings in mutual funds. With a modest income and regular investments, that has grown to a few million so far (my age 62). If you expect t have a boat and a loan for a number of years, I think there are some fairly low risk ways to earn more than loan interest, assuming you are planning more than a couple years. Never zero risk, agreed, but reasonably small IMO.

I completely agree. Hence the desire to answer a fellow boaters question while stopping way short of giving specific advice.

And I completely agree that for most people the stock portion of investments is best done in a mutual fund or ETF.

 

[Njlarry]

Totally agree and thank you for the clarification of your points.

 

[Bryant]

Retirement boat

Wow. Great advice all around. Thank you all.

I am retired so I can give you an opinion based upon experience, for what it's worth.

Honestly, I think the boat you own in retirement should be one that you can pay cash for without hurting your financial security. You will spend 10% of the boat's purchase price annually for fuel/maintenance/berthing/insurance and "stuff". That doesn't include unforeseen repairs and replacement of systems and upgrades to the boat itself to make it "your boat", assuming you are buying an older boat and not a new one. Your first few years of ownership will be very expensive doing all the above. If you are retired with limited assets and a fixed income, you don't want a boat payment on top of that. When you are done with the boat, plan on getting 50% of what you paid for it. People occasionally do better but plan for the worst and hope for the best.

 

[mvweebles]

One last point worth mentioning

9) This is a Warren Buffet point. If you want to make money, concentrate your investments in your few best ideas. If you want to avoid losing money, diversify. Retirement funds are about a decent return with risk management. Diversification is your friend.

Notable that Warren Buffet, the Oracle of Omaha, doesn't own a boat.

 

[FWT]

I am retired so I can give you an opinion based upon experience, for what it's worth.

Honestly, I think the boat you own in retirement should be one that you can pay cash for without hurting your financial security. You will spend 10% of the boat's purchase price annually for fuel/maintenance/berthing/insurance and "stuff". That doesn't include unforeseen repairs and replacement of systems and upgrades to the boat itself to make it "your boat", assuming you are buying an older boat and not a new one. Your first few years of ownership will be very expensive doing all the above. If you are retired with limited assets and a fixed income, you don't want a boat payment on top of that. When you are done with the boat, plan on getting 50% of what you paid for it. People occasionally do better but plan for the worst and hope for the best.

For most people, most of the time, that is good advice. My opinion.

 

[backinblue]

Notable that Warren Buffet, the Oracle of Omaha, doesn't own a boat.

Smart man! A boat is never a good financial decision, but often a great emotional one!

 

[Seevee]

I am retired so I can give you an opinion based upon experience, for what it's worth.

Honestly, I think the boat you own in retirement should be one that you can pay cash for without hurting your financial security. You will spend 10% of the boat's purchase price annually for fuel/maintenance/berthing/insurance and "stuff". That doesn't include unforeseen repairs and replacement of systems and upgrades to the boat itself to make it "your boat", assuming you are buying an older boat and not a new one. Your first few years of ownership will be very expensive doing all the above. If you are retired with limited assets and a fixed income, you don't want a boat payment on top of that. When you are done with the boat, plan on getting 50% of what you paid for it. People occasionally do better but plan for the worst and hope for the best.

Bryant,


Good points. There is CERTAINLY a strong argument to not have any sort of undo financial burden in owning a boat.


However, your 10% for maintenance needs to have more details..... and that depends on a LOT. If one gets an old clunker in disrepair, perhaps, but a boat in good condition should be a fraction of the 10%. I could strongly argue that the "maintenance" only part.... scheduled and unscheduled is probably more like 1 or 2%, especially for the single engine, do it yourself folks which is probably most of us.



Berthing or slip rental is a whole nuther story.... some spend a fortune and some spend zero. I prefer zero and like it.



Insurance is in the 1 to 2% of hull value range, at least what I'm familiar with, but will let the insurance guys comment on that one.


As for the first year of "fix up" items. I could argue that one put that into the "acquisition" column, but there's always a few "new" things we add to boats over the years, but pretty much a choice.


I don't think there's any magic number of boat ownership, like a percent of net worth or income. A full time live aboard with a Fleming and no house or car might spend a large part of their net worth, where a guy who buys his boat with pocket change and uses the rest for his 3 homes, Gulfstream and mistresses might spend a lot less. That's just a choice we make.


One thing we retirees need to pay attention to, is inflation. Especially if we rely on mostly fixed income. I could argue that the basic cost of living will double in the next 10 years (after our recession) and most of the boat costs will, too. Hopefully, that inflation rate will soften after we get our country in better order and reduce our debts, but who knows.


Boating is still better that a LOT of other activities!

 

[backinblue]

Seevee, you make a lot of sense and I agree with you. The 10% of value is a bad estimate even if it sometimes works out that way. Compare a new or fairly new boat for $500K in excellent shape vs. a very old boat for $80K. The difference in annual costs could be 1% vs. 25% so I don't put a lot of faith in the 10% rule of thumb. Fuel and maintenance and marina fees vary greatly depending on how you plan to use the boat. I guess what I am getting at is that there are no general rules that apply accurately to an individual situation.

 

[klee wyck]

Close-out

Just as one individual data point around the subject of this thread:
I never looked at this while I owned the boat, but in some year-end exercises today I ran across the deposit from the Klee Wyck transaction and thought it might be interesting to do the math. The subject comes up here from time to time.

For general landmarks, I owned the boat for ten years and paid around a quarter million when I bought it.

I looked at capital cost which I considered to be purchase cost minus proceeds of sale+ large maintenance and improvement spending+ the time value of money at 4%.
That cost over the ten years was $371k or an average of 37k/year

Non- fuel operating costs consisted of moorage, insurance, license, tax, and registrations. That total was around 160k or 16k/year.

Fuel and fluids/routine maintenance (bottoms, fluid changes, batts, etc) total around 84K so about 8.5k per year.

These are rough numbers, but the all-in cost of owning KLEE WYCK for ten years then was around 600k total, 60K per year, or 5K per month.

I will grant you that we were not careful, and we moored in a high rent district, but I always cringe when I see this 10% of purchase price as annual ownership cost over the life of your ownership. I think more like 20% could be more realistic.
For a frame of reference, the difference between purchase price and sales price was only 13% of total ownership cost and fuel was only 3.4% of total cost.

It was worth it....

 

[SteveK]

Funny thing about %%%
It can go up/down depending on the original purchase cost if the same expenditure is made on a lower/higher cost purchase.
Your 20% may be 30% for someone else. Does that mean cost effectiveness is a lower % because of a higher purchase cost, or the same overall cost of purchase + costs to maintain?
I think fuel, routine maintenance, moorage costs are very similar for a variety of vessels but the % to purchase value is +/- different. It is the unexpected costs that skew the tally.

 

[TomCat]

Thanks for posting this Klee wyck. This is some really helpful math...for those in what I would consider the higher-end of the trawler world. I'd be interested to see real world calculations for a more modest (older) GB 36 single and the like.

 

[kthoennes]

I think I've posted this before, but I happen to be a government bureaucrat with a deep attachment to Microsoft Excel. I track every single boat-related expense on Excel, meticulously, right down the $42 annual state park pass we buy for two family cars because our marina is inside a state park. Would we buy the pass anyway, even if we didn't own a boat? Probably, but at least at this point we buy that pass because of the boat, so I include it as a boat expense. It's very helpful in lots of indirect ways, like I can tell how long it's been since I changed the impellers from the last time I bought new ones. Anyway, one time I wrote a very easy cell formula using that little sigma-symbol to do a summation of boat expenses for any given period. I was so shocked I've never done it again.

But when my wife and I are having drinks on the aft deck watching the boys leap off the swim step into the water, or they're sleeping like logs in the forward berth during a loud thunderstorm, or I watch one of them motor away in the dinghy all by himself for the first time, whatever that sum may be, it's worth it. Still, owning especially bigger boats is not for the faint of heart or light of wallet.