Retiring: Should You Buy or Lease Your Car?
With average human life expectancy continuing to increase, it shouldn’t come as a surprise that the older population is making up the largest population of active drivers.
With average human life expectancy continuing to increase, it shouldn’t come as a surprise that the older population is making up the largest population of active drivers. In fact, over 45 million drivers are aged 65 and above, which is a significant increase from two or three decades ago. What that means is that you or your loved one will have to consider buying a car after retirement.
Driving a personal car allows older adults to maintain their mobility and independence later in life. However, deciding whether to buy a used/new vehicle or to lease a car is a huge decision, particularly for retired individuals living on a fixed income. You will need to consider your priorities and how well they fit into your retirement plan. Read on to find out whether you should consider buying or leasing a car in your retirement.
Benefits of leasing a car in your retirement
Leasing a car might not be of prime importance for an older adult, but it can be a better option than buying a new vehicle for some. Here are a few benefits to consider when deciding whether leasing a car is the right choice for you.
Lower monthly payment
Leases aren’t as simple or cheap as advertisements make them out to be, but they tend to be lower than auto loan payments. Reduced monthly payments could make a lot of financial sense for people in retirement since most seniors live on fixed incomes. For instance, for a compact SUV, you would be paying around $360 per month in the US when you lease it, while financing would include a $482 EMI.
Leasing may also not require you to put any money down at signing, which is an added advantage if you want to hold onto your cash or are still building your emergency fund. All you require is the first month’s payment, car title and registration fees, and other small fees, which are accumulatively less than a down payment.
While the monthly payments are lower, keep in mind that there will always be car payments if you continue to move from one lease to another. This can be challenging for people who no longer get a regular paycheck.
Therefore, take into account additional fees and expenses while budgeting for a lease. Fees for exceeding mileage limits, for instance, can be an issue if you plan to be doing a great deal of traveling or road-tripping.
Seniors who choose to lease a car and are still working part-time while in retirement can benefit from tax deductions. They can be able to deduct a part of their lease payment on tax returns, as well as the car's depreciation and the cost of vehicle upkeep by using their cars to work.
However, note that this option is only available to older adults with part-time employment and who cannot finance an outright purchase of a vehicle. You can consult your accountant to determine whether you qualify for tax deductions under your lease.
Warranty protection on the car
Owning a car comes with many financial implications, but one of the biggest challenges is the likelihood of an unforeseen breakdown. This can be especially troublesome for older adults since many are on fixed monthly incomes.
Most car leases have warranty protection on them, meaning any expected repairs the vehicle will require are covered and won’t come out of your pocket. For instance, a bumper-to-bumper warranty, also known as a comprehensive warranty, covers major damages to your vehicle. However, you will typically have to pay for minor maintenance such as oil changes, wear and tear on tires, or worn-out brakes and brake pads.
Driving the latest model of a car
Leasing a car allows older adults to drive new models with advanced features that enable a luxurious and safer driving experience. New vehicle technologies such as heated seats and steering wheels can make driving easier for seniors and may alleviate back and joint pains while driving.
Adaptive headlamps designed to help you find your way through corners can be beneficial to older adults with visual impairments. The latest car models also come with enhanced security features such as GPS, rear-view cameras, and parking assistance, which can guarantee your safety parameters and significantly improve your quality of life. Since a brand-new car integrated with these features would cost you way more, it’s best to use a leased car.
A short period of commitment
Leasing is an easy and effective way to get a car you don’t need for a long time. Car leases usually last two to five years, but the most common one is a three-year lease. This allows you to let go of your vehicle when the lease period is over, especially if you expect a lifestyle change in the near future.
A short-term car lease can be the best solution if you need a vehicle fast but can’t find the perfect one for your financial situation and lifestyle. It allows you to get behind the wheel quickly and with minimal commitment. In the interim, you can continue researching and test-driving different cars to find one that is worth your investment.
Why buying a car in your retirement might be a bad idea
Everyone would love to spend their retirement days in luxury, so it’s tempting to be carried away with apparently little indulgence. However, the monthly payment of a car loan might break your pockets, especially if you haven’t planned the purchase as part of your long-term goals.
When you buy an asset, whether it is a new home or a car, you own it. Nevertheless, that ownership comes with its drawbacks. Here are some downsides of buying a car in your retirement.
High depreciation rate
A regular car loses up to 60% of its value in the first five years. Therefore, if you decide to buy a new car after retirement, you will simply be emptying your assets.
The high depreciation rate isn’t bad if you have a steady income to compensate for the loss. However, with sources of income a bit low during your retirement, it’s more difficult to plan to make up for the loss after three or five years.
Moreover, you have to factor in the fuel and upkeep costs. Buying a new car also requires you to purchase adequate auto insurance coverage, which could cost you hundreds or thousands of dollars a year.
Financing a new or used car during your retirement may lead to a few unfavorable consequences, such as taxes, early withdrawal charges, and an impact on your future pension revenue. Furthermore, car loans usually come with high-interest rates, which might not be worth what deductions can ultimately come from it.
If you are looking to finance a car purchase, consider your assets, the amount you can withdraw from your retirement account, and the impact of tax on different accounts. You should also consider any additional tax you need to pay out.
Wrong investment spread
Financing a car requires you to take out money from one of your retirement accounts. That means you would be deprived of the high-interest rate that could have earned you better returns in the long run. Since the average auto loan interest rate is around 8.95%, older adults might end up with a negative interest or wrong spread if they choose to finance a car in retirement.
Buying a car allows you more freedom, and you can drive as many miles as you would want. You can also sell your vehicle or trade it in. However, as an older adult, things are a little different, and there are many benefits to leasing than buying a car. Leasing will be a great idea if you are already into your retirement and love riding around the city.
That said, whether you decide to buy or lease a car, be sure to consider all the available options, along with your retirement plan and personal finances. Consider using an auto loan calculator to get started and discuss your concerns with an expert financial planner.