I am not a car expert. However, buying a car can be a big financial decision, particularly during retirement. Some questions that typically come to mind include: How much should I spend? Should I finance a car? Where should I pull the money from if I don’t use a finance option? Given these frequently asked questions, I want to devote this e-newsletter to advice regarding car purchases.
How Much To Spend
I think the best way to decide how much to spend on a car is to consider what it really will cost you, instead of the actual payments. For example, you are looking at a new car that costs $40,000 and you will probably drive it for five years and then sell it for $10,000. So you will spend $40,000 - $10,000 = $30,000. Then, add to that the amount it costs you in gas, insurance, interest (if financed), taxes, and expected maintenance for that period of time.Once you have determined the true cost of a vehicle, then you can compare vehicle options based on each one's actual cost to you for the life of the car. This is helpful when you are considering how much value you get for a car relative to your trust cost of ownership.
I am not a fan of leasing vehicles unless you can lease it through a business, because leasing forces most people to make another expensive vehicle transaction within a pretty short period of time. The "best" value in a car's lifespan tends to be from its 3rd year thru its 10th year. These are the years that you tend to lose less in depreciation costs, while at the same time maintenance costs have not yet skyrocketed. Leasing a car through a business may allow you to expense the cost and essentially use pre-tax money to pay for it. Most leases are designed with this in mind and are therefore not great deals for those of us that don’t drive a company car.Car companies will frequently offer great financing deals. However, always always always read the fine print! If you are offered 0% financing, that is a great deal. The usual advice would be to borrow as much as you can for as long as you can at 0%. However, sometimes this 0% financing replaces other rebates. For instance, maybe I can finance $30,000 over five years at 0%. Sounds great! What if my other option is a $3,000 rebate? Well $3,000 is 10% of $30,000. The simple math is 2% per year over five years that I am giving up… It just got more complicated...
Where To Get the Money
This is the most difficult decision for many retirees and unfortunately there isn’t a great answer. This part requires looking at all the options for you personally. Often the only option is to take money from an IRA or retirement account. That can change everything. If withdrawing money for a car means paying taxes on that money and particularly if that might move you into a higher tax bracket, the decision becomes more complex. In some cases this may make financing the purchase make more sense…. It may even send you back to the beginning of the whole process.
Other Things To Consider
Before you make a major purchase, do your research. Here are five websites to visit before you buy a car:
The site I would suggest exploring first is https://www.truecar.com/ because for many of us, negotiating the price of a car is no fun. TrueCar makes it easy. These days instead of going through a long negotiation, a little research can help you quickly arrive at a decent price. Bottom Line: Making a major purchase can be stressful. Remember that we are here to help. We think it is always wise for a retiree to consult his or her advisor about a major purchase.
Please let us know if you have any specific questions or concerns. We thank you for the opportunity to serve you and your family.