During our years of full-time employment, our choices were to save our income and pay for a car with cash, or borrow money and repay the loan with our income.
After we retire and start living off our savings, we may need to take another approach. Here are some tips on how to buy a car in retirement.
Reading: Can a retired person finance a car
What is the best way to buy a car in retirement?
The answer for some retirees is not owning a car. while that might be a simple and inexpensive solution for some, it’s not realistic for most active older adults who want to enjoy the freedom that retirement brings. And if you decide not to have a car early in your retirement and then find that living without one isn’t feasible, you’ll be forced to make an unprepared purchase decision.
so, these are the options to choose from. you can determine which one appeals to you and fits your unique financial situation.
finance the purchase of the vehicle
While I was working, getting a car loan was simple and convenient. As long as you had a job and no credit problems, you could get a car loan. however, without a job and living off the money you withdraw from retirement savings, financing can be a challenge. And even if you are approved, you need to find room in your budget for a car payment.
rent the car
A lease may have some advantages over buying a car for senior retirees. While leasing is always a source of controversy, there are a few reasons why you might want to consider it:
- monthly payments are typically lower than a loan payment
- you get a new car more often
- a warranty will always cover your car
- there may be some tax advantages
- you can withdraw at the end of your lease
withdraw funds from your retirement account
Taking a lump sum from your retirement account is another way to buy a car in retirement. remember that you will be responsible for taxes on the withdrawal if it comes from a tax-deferred account. the timing of withdrawal is another consideration as you probably don’t want to withdraw money from an investment account during a falling market.
While taking a lump sum of retirement savings is preferable to a car loan or lease, it’s still not ideal.
The best way to buy a car in retirement is to plan ahead. Of course, if you need a car right now, this method won’t work. but if you anticipate needing or wanting one in a few years, this is the way to go.
See also: No-Fault Insurance
The technical term for setting aside money for a future purchase is to establish a “sinking fund.” It’s like building the cost of a future car into your monthly retirement income plan.
This is how it works:
- decide when you want to replace your vehicle.
- how much do you estimate you will spend on your next vehicle?
- how much your current vehicle will be worth in a trade-in when you are ready to buy ? (there are online depreciation calculators to help you)
For example: Let’s say you want to replace your car in three years (36 months). You think you’ll likely spend $20,000 on your next vehicle, and the depreciation calculator says you could get $8,000 when you trade in your car.
Simple math tells you that you will need $12,000 ($20,000 – $8,000) in 36 months. dividing $12,000 into 36 equal deposits means you have to set aside around $334.00 each month.
When you’re ready for your next car, you’ll have the cash to pay for it without high-interest auto loans, lump sum withdrawals, or a big tax bite.