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Why You Shouldn’t Finance a Car in Retirement?

Posted on May 25th, 2023
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Owning a car does come with its unique set of privileges. You reserve the liberty to cruise along the highways for long drives with your family. However, if you are already retired, it’s imperative to weigh your financial conditions carefully before investing in a new car. In fact, financing a car during retirement is a bad idea. Unless you have adequate savings stacked off for the purpose, it’s wise to refrain from getting a new car for yourself once you retire.

Do you know that car owners currently have a massive debt of $1.18 trillion in the industry? Purchasing a new car costs $32,187 on average, while you need to shell out $20,137 for a second-hand one. Are you financially resilient enough to bear the extra payments when you take a car loan? Often, retirees find it challenging to come out of their consolidated financial habits and acquire a depreciating asset.

So, unless you had considered purchasing a car in retirement as a long-term financial goal, it’s advisable to stay away from the idea. Rather, leasing a vehicle would be a logical move, given that the monthly payments would be reasonably low.

Should You Let Automobile Loans Sabotage Your Retirement Savings?

First, consider whether you had factored in the purchase cost of your car during retirement while planning for retirement. Most individuals purchase cars before their retirement and clear off the debt to retire peacefully. The worst mistake is to let your automobile loan eat up your retirement savings.

We understand that you would love to spend your retirement days in luxury, so it’s tempting to get carried away with the seemingly little indulgence. However, the monthly repayments may weigh heavy on your pockets if you haven’t already planned the purchase as a part of your long-term goal

Once financial inflow starts drying up after retirement, you must be skeptical before making any lump sum investment. Purchasing a car involves long-term planning, and you should have adequate means to finance it without compromising your lifestyle.

Why Is It A Bad Idea To Finance A Car During Retirement?

Before you reach out to the dealership, carefully evaluate your financial position and plan the additional outflow before financing a car. If you have already been saving for the purchase since your 40s or 50s, simply go ahead and buy the car. However, that’s not the case with most retirees. So, it’s wise not to let your car loan sabotage your retirement savings.

Let’s examine the prime reasons why financial experts discourage retirees from financing a car.

Car Attracts Debt

The prospect of purchasing a new car in retirement seems exciting. However, it’s equally easy to overlook your long-term financial goals and happiness. The last thing you would want to intrude on your retired life is debt.

According to a study, retirees find joy and happiness by indulging in social activities. However, they don’t like increasing their financial outflow. Now, the addition of a liability worth a few hundred dollars every month might dry up the funds you allocated for your social life. Eventually, things might not work out the way you planned. Ultimately, your social lifestyle would bear the burn, rendering you unhappy after all these years of hard work.

The first step to achieving financial freedom is to pay off your debts. Financial experts advise individuals to clear their debts early in their careers so that they remain debt-free as they retire. Why break the norms and attract disharmony in your social life by breaking the bank at the wrong time?

Wrong Investment Spread

In most cases, people tend to overlook large purchases like cars as a part of their retirement planning. If this is your case, how do you plan to manage the unplanned expense? Financing the vehicle requires taking out funds from one of your retirement accounts. This implies that you would be deprived of the high rate of interest that could have fetched you better returns in the long run. Considering the average car loan interest rate to be around 8.95%, senior citizens would end up with a negative interest spread.

Let’s say you have to shell out interest of 8% on a car loan of $40,000, which approximately equates to $266 each month. To cover the down payment, you’ve withdrawn a sum of $15,000 from an account that earned 5% p.a., which comes to around $60 per month. So now, instead of earning $60, you’ll have to spend $266 each month. This equates to a total outflow of $326.

Ultimately, you would be paying interest with no source of income. Either try to stack up the entire savings through long-term planning or go for a leased vehicle. Remember, you should have adequate investments that outperform your expenses on interest. Financing a car in retirement simply leads to a wrong spread of interest.

Besides, think of this from another perspective. As a retiree, you are borrowing to manage your current investments. In case you don’t buy a car during retirement, you wouldn’t have to pay the additional amount. 

One of the most overlooked aspects for retirees in the US is their credit score. With no fresh stream of income, you might also find it challenging to qualify for a new car loan once you retire.

Tax Implications During Retirement

Financing your new car during retirement using a car loan might fetch you a few deductions. However, have you calculated whether the interest you shell out to qualify for these deductions is worth it? Had you saved the amount in a dedicated account, the equation would have been financially justifying. Ultimately, paying high interest out of your savings isn’t worth it when you consider the paltry deductions you enjoy!

When you consult your financial expert, discuss the following aspects.

  • Considering your assets, the impact of tax on different accounts, and the amount you can withdraw from your retirement accounts. Do you have any advantage if you spread out the tax impact over several years?
  • The additional amount of tax you need to fork out.
  • If you buy the car using cash, do you jump to a higher tax bracket?

High Depreciation Rate

A typical car loses more than 50% of its value in the first five years. So, if you decide to settle for a new car after retirement, you will simply be draining your assets.

The high depreciation rate is acceptable as long as you have a steady inflow of funds to compensate for the loss. However, with streams of income limited during your retirement, how do you plan to make up for the loss after five years?

Adding to this, you have fuel and upkeep costs to factor in. Purchasing a new car also requires owners to purchase adequate insurance coverage. This would drain out another $1,500 a year.

Considering these pitfalls of financing a car in retirement, it’s wise not to indulge in the extravaganza. 

Should You Lease A Car During Your Retirement?

Leasing a car in your retirement makes sense, rather than financing a new one. Particularly when you live on a fixed income, it’s wise to lease a car. This significantly saves you from lots of expenses, including the depreciation cost.

A leased car would bring you as much freedom as an owned one. However, you can simply return the car if you feel financially stressed. Also, if you don’t travel long-distance frequently, leasing a car makes sense.

Let’s find out why leasing a car in retirement would be better than financing one.

Lower Cost

Compared to loan repayments, monthly lease payments turn out to be low. For instance, you would be paying $360 a month for a compact SUV when you lease it in the US while financing it would involve an EMI of $482.

Naturally, when you live on limited means, it’s wise to control your expenses. However, lease agreements often involve additional fees. Besides, you have some restrictions on the annual mileage. Unless you frequently travel long-distance with your family after retirement, leasing a car would be a better choice.

Latest Features

The key perk of leasing a car is the availability of all sorts of latest features. As a retiree, you would be on the hunt for advanced safety gear. Lease a car that satisfies your safety parameters with features like lane departure warnings, parking assist, global positioning systems, and rear-view cameras.

Besides, the latest models come with crumple zones, more airbags, and better safety ratings. Given that a brand-new car integrated with similar features would cost you way higher, it’s wise to use a leased car.

Warranty Coverages

For retirees, sizable repair bills for their cars can turn out to be bothersome. Leasing a car brings you mental peace, as the owner will handle the repairs. Thus, there’s no unexpected repair bill knocking on your pockets. 

When you live on calculated means, unwanted expenses like car repairs can drain your resources. Most cars that are currently leased in the US are relatively new and have a warranty protection on their parts.

Commonly, retirees will come across two types of warranties. These are powertrain warranties and bumper-to-bumper warranties. Owners with a bumper-to-bumper warranty can visit the dealership for repairs at zero additional cost when something goes wrong. Compared to a powertrain warranty, this coverage is more comprehensive. 

A powertrain warranty, on the other hand, a powertrain warranty protects only the car’s propulsion system. These are limited-time warranties, and it would be wise to opt for the other one.

A Car Loan Isn’t Worth Your Freedom!

The freedom to walk away as the lease term terminates makes leasing cars in retirement a great choice. In the end, you won’t repent selling off the vehicle at the depreciated value!

In case you are already into your retirement and love riding around the city, leasing a vehicle would be a practical idea. If you are still away from the shores of your golden years, try saving for your car or simply lease a vehicle during your retirement. 


Should You Use Cash Or Credit To Purchase A Car In Retirement?

It’s wise not to take a loan once you retire. So, if you plan to acquire a new car after your retirement, use the cash you accumulated dedicatedly. In case you didn’t have this car in your planning, it’s wise to get one on lease.

For How Many Years Can I Get A Car Loan During Retirement?

Taking a fresh car loan during retirement would be a bad idea. In general, automobile loans are available for 7 to 10 years. Your creditor will decide the tenure depending on your age and financial profile. Once you age, your credit scores dwindle, which can translate into higher interest rates and shorter tenures of loans.

Should I Buy Or Lease A Car After Retirement?

Considering the benefits of leasing a car after retirement, you should refrain from financing one. Maintaining a leased car involves lesser expenses and fewer financial commitments.

In Which Retirement Account Can I Save To Purchase A Car?

Many Americans use their savings in the 401(k) account to purchase a car during retirement. However, if you pre-plan this purchase, it’s wise not to use up your retirement savings. Rather, you can invest in guaranteed returns accounts, CDs, high-yielding savings accounts, or government bonds that would mature during your retirement.

When Should I Start Planning For My Retirement?

It’s wise to start planning for your retirement as early as possible in your career. People in their mid-twenties can also start putting aside funds for their golden days. Whether you wish to purchase a car during your retirement or prioritize any other purchase, it’s logical to start planning early.


Max Palmer

Max Palmer

I'm Max and I love helping businesses we work with to expand their businesses online. I help with invoicing, time tracking and overall business needs for business owners. If you need help contact me today.

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