SUMMARY OF TRANSCRIPT BELOW:
With a chip shortage running rampant across the country, new and used cars are seeing an unwelcome surge in sticker prices. So, assuming you actually find the car you want, is it better to buy or lease a vehicle in retirement? Stick around and let's get into it.
Hello and welcome to another video from One-Up Financial. I am your host Eric Presogna here to help you increase income, reduce taxes and invest smarter in retirement.
In the personal finance community, leasing vs buying a vehicle is as divisive a topic as the active vs passive investment debate.
Everyone has their own reason as to why their buy or lease philosophy is the right one. And what makes this decision challenging is that each side has valid support for their claims.
So, which one should you choose?
Just like no one investment strategy is the same for everyone, deciding whether to buy or lease a car is specific to each person and their financial situation.
For starters, let's talk about leasing.
Leasing a Car
One of the biggest benefits to leasing a vehicle vs buying is the lower monthly payment. Since you don't actually own the car and are simply renting it temporarily from the dealer, your monthly costs are typically less than if you were to buy.
Another benefit to leasing is minimal to $0 down payment. So if you'd prefer to hold onto your cash or are still building your emergency fund, leasing may not require you to put any money down at signing.
Leases also typically include some kind of warranty protection on the vehicle. Most commonly, dealers will offer a 3-year, 36,000 mile warranty on the lease with the option to increase or enhance features at an additional cost. This benefits those who don't want to worry about large out-of-pocket repair costs.
Lastly, leaseholders can enjoy the luxury of driving the latest model ever few years, or whenever their lease is up.
Now the drawbacks of leasing...one of the most obvious is you'll need to get a new vehicle when your lease is up. This means you'll always have a monthly car payment.
Additionally, leases come with annual mileage limitations ranging between 10,000 and 15,000 miles. And if you inadvertently exceed your allotted miles, you'll be charged a fee per mile in excess over the limit.
You may also incur additional insurance costs for gap insurance which kicks in if the car is totaled or stolen and covers any difference between the value of the vehicle and the amount owed on the lease.
What to Know in 2021
Money factor, or interest rate on the lease. Money factors are quoted in terms of numbers vs percentages like interest rates. So if you're new lease has, say a .00125 money factor, you'll want to multiply that number by 2,400 which in this example, would be 3%. As a quick rule of thumb, money factors with three 0's after the decimal indicates a very competitive rate, two 0's followed by a 20 or less is closer to the average for someone with a good credit score, and anything with two 0's followed by a 25 or higher starts to get into rates that would be equivalent to 6% or higher.
The residual value of the lease is important to consider as well. This will tell you what the expected value of the vehicle is at the end of the lease and ultimately determine the amount of your monthly payment. The higher the residual value, the lower the monthly payment.
Lastly, know what's negotiable, even though it may be more difficult haggle in 2021. Negotiable lease items include the cost of the lease, i.e. capitalized cost, mileage limitations, insurance and buyout price should you want to purchase the vehicle at the end of the lease.
Buying a Car
When you purchase an asset whether it be a vacation home or a new Lexus, you own it. It's yours. And that ownership yields several benefits.
For one, your monthly payments stop at the end of the loan term (assuming you borrowed money to purchase the vehicle). So going the route of buying, you're choosing to NOT always have a monthly payment.
Owning a car also means there are no mileage limitations. So if you plan to go on a Griswold family vacation across the country every few years, buying may be the better option.
And even though cars are considered one of the worst financial assets given vehicles lose nearly 15-20% of their value when driven off the lot, you still own an asset that's worth something which can be sold or traded in for cash or another vehicle down the line.
Now the downside of ownership:
Higher monthly payments! You're accounting for the full value of the car when buying compared to only a portion of it via leasing, thus your monthly costs will (in most cases) be higher.
In addition to higher monthly payments, you may be required to put more money down at signing. Obviously the more you put down, the smaller your monthly payment. So for those with sufficient emergency funds, this may not be an issue. But for others with limited cash reserves or those who'd prefer their money appreciate in the market, this may be a harder pill to swallow.
Finally, you're responsible for the long-term maintenance costs associated with owning a vehicle. And based on a recent study done by AARP, the average cost of owning a car comes to around $.09/mile, meaning if you drive an average of 11,500 miles each year (which is the average in PA), your estimated annual maintenance cost is over $1,000, or the equivalent of $83/month.
What to Know in 2021
Although I believe this to be "transitory," some used cars are selling for MORE than new cars! Further, dealership lots are looking like barren wastelands these days making it very much a seller's market.
So I guess if you don't absolutely HAVE to buy a car in 2021, maybe consider holding off until things normalize, prices comes down and supply chains are flowing smoothly.
The Fed is in no hurry to raise interest rates so whether you decide to buy a new or used car, there's a good chance the cost of financing will still be near rock bottom in 2022.
Regardless of interest rates, it's always good to know your credit score as this will have a major impact on your monthly payment should you decide to finance.
If you decide to pay with cash, you should be aware of the opportunity cost of purchasing vs borrowing. By that, I mean what your money could be doing other than sitting in a hunk of metal on wheels. A duplex earning monthly rental income? A globally diversified portfolio? Always understand your hurdle rate, or the minimum acceptable rate of return on a specific investment. If you have a brokerage account of stocks and bonds earning a modest 4% per year and decide to pay cash for your new Infiniti when a 60-month loan costs 3%, you're losing 1% per year for 5 years.
Buy or Lease in Retirement?
Even though I hate this answer, the truth is it depends on the consumer. So if you're the type of person who...
Likes to have a new car every few years, has accounted for a monthly stipend in their retirement plan for leasing a new vehicle and indexed that cost for inflation, doesn't want to worry about major vehicle repair costs down the line and drives under or around 10,000 miles each year, leasing might be the better option in retirement.
If, on the other hand you like owning assets, take good care of your cars, prefer not to have any constraints on mileage and have accounted for wear and tear costs in your retirement plan, buying may be the way to go.
At One-Up Financial, I hope you understand that managing investments, planning for retirement and minimizing taxes is just the tip of the iceberg for what do. Increasing income, reducing taxes and investing smarter means we are required to have the personal financial expertise necessary to guide our clients through major financial decisions encountered throughout their retirement. And that includes buying/leasing a car which if done right, can end up saving you thousands of dollars just by being informed and working with a trusted advisor along the way.
Thanks as always for watching our videos. If you're interested in staying up to date with all of our market and financial commentary please subscribe to our blog at oneupfinancial.com/blog or follow us on LinkedIn and Facebook. Thanks again and we'll see ya in the next one.