Finance: How to Buy a Car in Retirement

During our years of full-time employment, our options were to either save up our income and pay cash for a car or borrow money and repay the loan from our income.

After we retire and start living off our savings, we might need to take another approach. Here are some tips on how to buy a car in retirement.

What is the best way to buy a car in retirement?

The answer for some retirees is not to own a car. While that might be a simple and inexpensive solution for some, it isn’t realistic for most active older adults who wish to enjoy the freedom that retirement provides them. And if you decide not to have a car early in retirement and later find out living without one isn’t feasible, you’ll be forced into making a buying decision without having prepared for it.

So, here are the options from which to choose. You can determine which one appeals to you and fits into your unique financial situation.

Finance the vehicle purchase

While you were working, taking out a loan for a car was simple and convenient. As long as you had a job and no credit issues, you could secure a car loan. However, without a job and living off the money you withdraw from retirement savings, financing might be challenging. And even if you are approved, you have to find room in your budget for a car payment.

Lease the car

A lease could have some advantages over buying a car for older adults in retirement. While leasing is always a source of controversy, there are a few reasons you might want to consider it:

• The monthly payments are typically lower than a loan payment
• You get a new vehicle more often
• A warranty will always cover your car
• There may be some tax advantages
• You can walk away at the end of your lease

Withdraw the funds from your retirement account

Taking a lump sum from your retirement account is another way to purchase 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 the withdrawal is another consideration since you probably don’t want to take money out of an investment account during a down market.

While taking a lump sum from retirement savings is generally preferable to a car loan or lease, it still isn’t ideal.

Planning ahead

The best way to buy a car in retirement is to plan for it. Of course, if you need a car right now, this method won’t work. But if you anticipate needing or wanting one a few years into the future, this is the way to go.

The technical term for putting aside money for a future purchase is setting up a “sinking fund.” It amounts to building the cost of a future car into your monthly retirement income plan.  

Here is how it works:

• Decide when you want to replace your vehicle.
• How much do you estimate you’ll spend on your next vehicle?
• What will your current vehicle be worth on a trade-in when you’re ready to buy? (There are depreciation calculators online to help you)

For example: Say you want to replace your car in three years (36 months). You think it’s likely you’ll spend $20,000 on your next vehicle, and the depreciation calculator indicates that you might get $8,000 when you trade-in your car.

Simple math tells you you’ll need $12,000 ($20,000 -$8,000) in 36 months. Dividing $12,000 into 36 equal deposits means you must set aside about $334.00 each month.

When you are ready for your next car, you will have the cash to pay for it without high-interest car loans, lump-sum withdrawals, or a big tax bite!