Buy or finance? Thinking aloud - SailNet Community
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post #1 of 44 Old 03-23-2017 Thread Starter
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Buy or finance? Thinking aloud

I have 3 years still till retirement. My boat savings account will have about $600,000 (I have a pension also). However, I had always planned to have my investments growth/div make my boat payment of ~$2500. I will be shopping for a boat in the $350k range. However, now I'm wondering if I should pay cash?

Cash and a paid off boat: Not subject to stock market declines and unpredictable drops as well as growth. I'd hate to not make a payment if the market under performs. I won't have interest on a boat loan. I can choose not to have insurance. When I quit sailing, I can sell the boat at a sizeable loss due to age and loss in resell value. It will not be enough to buy a retirement home. If I have $250K left over after purchase, then this will hopefully grow or almost double (assumption) in that 15/16 years.

Finance. My investments have "always" made more on their returns than the expected interest rates on boat loans. I.e. if my investments return 7% or more and boat loan is ~5%, then I feel I'd be throwing out 2% of $350k. I don't want to pull out money that is growing and put it into a boat that is dropping in value every year. When I retire, I will still have the investment income after the boat is sold. The investment income will allow me to purchase and make payments on a retirement home. Investments will likely cease to grow since interest/dividends will be pulled monthly to make payments.

Plan to sail for 10-15 years on a cat that will be about 7 years old.
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post #2 of 44 Old 03-23-2017
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Re: Buy or finance? Thinking aloud

My perspective on debt changes at retirement. When you have the ability to work and add resources, the market risk is more manageable. I'm a big fan of no debt in retirement, for the reasons you noted. You may not have the time to recover from a bad market, or lose your boat, if you can't make the payments. What if a health issue eats up capital, etc.

Over the long term, markets should earn more than the current cost of debt. However, one massive down year can take a long time to recover (we are at all time market highs right now). In retirement, you can't know if you have that long. If you have an adequate margin to withstand a big decline or guaranteed pensions or annuities, debt can be slightly more viable. I still say avoid it in retirement.

As to depreciation, that's going to happen either way. You need to have the wealth to take the hit. Not a factor in cash vs. debt.


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post #3 of 44 Old 03-23-2017
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Re: Buy or finance? Thinking aloud

We also had a similar decision/plans. Some things to consider:

You will have to have full insurance if you have a loan. I don't know any lender that wouldn't require this. You also may be limited by the lender in where you can take the boat, since some of them want their assets easily recoverable. Credit cards and other small debt instruments may be more difficult to get or keep because your credit rating will be grossly distorted when you no longer have a job because of the way the rating agencies score debt and income. If/when you decide to throw it all in and move back to land, this might bite you also.

The point above is a good one - we left cruising at a market high before the great crash. Went to the uninhabited parts of the Bahamas for 6 months and never had any internet or other communications. Came back out and found that we had lost over half our investments. It took 5 years to break even again.

What we did:
Took a low interest loan on the boat while we were working for the next 5 years and our investments were returning more than the loan interest. Just before casting off, we paid off the boat loan. It continues to have been the correct decision for us.

Mark
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Re: Buy or finance? Thinking aloud

If you have a way of delivering 7% at no risk, I'll pay you 1% to manage my retirement investment . First I'm checking that your first name isn't Bernie .

IMHO, buy a more modest boat for cash.

Good luck, hope your retirement dreams come true!
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post #5 of 44 Old 03-23-2017
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Re: Buy or finance? Thinking aloud

The insurance issue seems to be a bit of a red herring. Would you really ever drop coverage on a $350K boat? And how many marinas - especially of the variety that accommodate $350K cats - allow uninsured boats anymore?
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post #6 of 44 Old 03-23-2017
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Re: Buy or finance? Thinking aloud

Quote:
Originally Posted by capecodda View Post
If you have a way of delivering 7% at no risk, I'll pay you 1% to manage my retirement investment . First I'm checking that your first name isn't Bernie .
I'm hoping his name is Warren!
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Re: Buy or finance? Thinking aloud

To the OP, I think you have the issues pretty well defined. The only thing you didn't note is that a boat can qualify as a residence, and so the mortgage interest can be deductible. Now it is just a matter of deciding what your priorities and preferences are.

My wife and I are in the same camp as Minnewaska. I understand all of the math, but for us there is real value in owning our home and being debt free. Hence, when we buy our next boat it will be with cash, or perhaps a very small loan that we will pay off before we head out over the horizon.

Good luck.
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post #8 of 44 Old 03-23-2017
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Re: Buy or finance? Thinking aloud

Good points made above, especially on debt-free retirement. As Minnewaska notes, the markets are at/near all-time highs now. Might be a good time to take some profits and to buy in cash with net proceeds.

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Re: Buy or finance? Thinking aloud

I've always figured that if I couldn't pay cash for something, I couldn't afford it.
We owe no money to anyone, not even a cc company. Our debit card works equally well out here to purchase things or get cash.
Upon retirement I liquidated all my assets and bought an annuity so that I would have a minimum fixed income for the rest of my life. The payments go into two accounts; one for living expenses and the other is for emergencies.
With the remainder of my assets I bought this boat and paid for the upgrades I wanted to do to it.
We fell into a niche charter business, but it's much less about the income than sailing. It's so easy to fall into the 'sitting around in lovely tropical anchorages" mode down here and my wife wanted to do more sailing, so the chartering seemed a good way to do it. The charter income covers the more costly charter insurance and added wear and tear on the boat.
A lot of our friends are constantly on the edge, needing the charter income to pay their boat mortgage, which is a lot of added pressure. We can and do refuse charters we don't feel will be successful, which is a big plus in this industry. If someone's very first contact with us, through the website, is more about needing gallons of fresh milk every day (a rare item down this way) than about the sailing, we know this person would not be happy sailing with us.
If one of us should become ill and we were forced to stop chartering, we would not lose our boat (home) because of a lack of income. As mentioned above, should one be relying on their investments to support their cruising, a downturn could be disastrous.
However, unlike the OP, we have no intention of selling this vessel to purchase a house, anytime in the future. After all, a house is just a poorly built boat that won't go anywhere, and we don't want one of those!
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Re: Buy or finance? Thinking aloud

Quote:
Originally Posted by denverd0n View Post
The only thing you didn't note is that a boat can qualify as a residence, and so the mortgage interest can be deductible.
Yes, this is a good point I forgot to make when describing how we approached the issue. The mortgage deduction when our taxes were high made the boat loan almost free.

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