Cars! For some, cars are a status symbol, for others cars are an A to B transportation system.  For all of us, cars are an integral part of living in a modern society.  Many of us make a car purchasing decision every few years.  

During our working years, we either save up our income and pay cash for a car, or we borrow money and use our income to pay off the loan.  

Once retired, and living off savings, that buying decision changes.  

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

Don’t buy one!

One option would be to simply not purchase another car. I hear this suggestion from clients occasionally, and I’m not sure how feasible it is.  Cars don’t last forever and not having a plan is planning to fail.  If you aren’t planning ahead of time to replace your car, and the wheels literally fall off, you will be forced into a buying decision you aren’t prepared for.   Any quick decision on an expensive item is a recipe for disaster.

Finance it!

During your working years, financing your purchase is the easiest and most popular option. However; taking out a loan is not without its drawbacks.  Borrowing money for a large purchase usually means you will end up spending more, as rebates are often available for buyers that decline financing.

Financing can be a challenge once you quit your job and are retired!  While working, if you can produce a few pay stubs and a decent credit score, you won’t have any trouble financing a car. While rare,  I have seen retirees have difficulty gaining financing for large purchases due to their unpredictable income, which happened to be liquidating investments for monthly cash flow.

Take a Lump Sum From Your IRA

Taking a lump sum from your retirement is a common way to purchase a car in retirement. Taxes should be a consideration anytime large sums are withdrawn from a tax-deferred account (401Ks, IRAs).  The total withdrawal amount will be totaled with other income sources and normal income taxes will be owed.

**Tip!**If you’re planning a large IRA withdrawal, consider withdrawing half in December and half in January.  This trick will allow you to spread the tax burden over two tax years.  Just one more benefit of planning ahead.

Market timing is another consideration for withdrawing a lump sum from an IRA.  Waiting for your IRA to recover after a market downturn could cause you to wait too long between purchases.  Like mentioned above, waiting too long could force a spontaneous purchase when your car’s wheels suddenly fall off.  A situation that should be avoided.

Taking a lump sum from your retirement accounts to buy a car is better than financing, but still not the best way.

Best Option, Plan Ahead.  

The absolute best way to purchase a car in retirement is to plan ahead and build the cost into your monthly retirement income plan.  

This process is commonly known as a ‘sinking fund’.

Sinking Fund

Noun

  1. a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset.

Step one:  Decide how often you will be replacing your vehicle

Step two: What will you likely spend to replace your vehicle?

Step three: Once it’s time to purchase your next car, what will be your current car’s ‘trade in’ value? (Use a depreciation calculator) 

Once we do a bit of math, we will know (approximately) how much money we will need and when we will need it.  From there we can build that goal into our retirement budget.

For example: I want to replace my vehicle in four years (48 months). I’ll probably spend $25,000 to replace my current vehicle. I use a depreciation calculator to guesstimate that I’ll be able to ‘trade in’ my current car for $10,000.

I now know that I’ll need $15,000 ($25,000 -$10,000) in 48 months.  If I add $312.50 to my retirement budget each month, I’ll have the $15,000 in 48 months!

All without debt, lump sums, or out-sized tax bills!

Be sure to set the money aside in an account  separate from your primary checking account.  You could add the additional monthly amounts to your emergency account, or open a separate savings account.  

With a small amount of planning ahead, you’ll be able to pay cash for your next vehicle without interrupting your retirement income stream.