Whether an elderly person should buy or lease a car depends on their driving habits and financial goals. Leasing offers lower monthly payments, minimal maintenance, and the latest safety features (e.g., automatic braking, blind-spot monitoring). Conversely, buying is better for long-term ownership, driving high mileage, and avoiding penalties for dings.
For retirees, buying a car offers long-term savings, no mileage limits, and eventual ownership, but it requires more upfront cost. Leasing can ease budgeting with lower monthly payments and access to newer models with better safety features.
Car leases are often a bad financial decision because to use her words again ``you're pouring in money each month with nothing to show for it at the end of the day.'' When you lease a car, you don't own it, it's more like you are renting the same car for an extended period of time.
The "1% lease rule" is a guideline in both real estate (rental income should be 1% of property cost) and auto leasing (monthly payment ideally under 1% of MSRP), used for quickly assessing potential deals, though it's a simplified benchmark that doesn't account for all expenses or market variations. In car leasing, a $40,000 car should ideally lease for around $400/month (before tax), while for real estate, a $200,000 home should aim for $2,000/month in rent.
Alternative Financing Options for Retirees
Retirees have multiple financing options at their disposal, from taking out car loans to leasing and paying cash. One important alternative is utilizing Social Security income as a source of payment for vehicles or other purchases they need.
Yes, retirees can get auto loans! Like anyone applying for a vehicle loan, you'll need to show proof of income and have a credit score acceptable to the lender. If you plan to finance your vehicle, getting pre-approved for an auto loan allows you to go shopping with confidence and knowledge of what you can afford.
The lease payment for a $45,000 car typically ranges from $300 to $500 per month, depending on factors like the down payment, lease term, residual value, and interest rate.
The 90% rule in leasing is an accounting guideline for classifying leases, stating that if the present value (PV) of a lessee's minimum lease payments equals or exceeds 90% of the leased asset's fair market value (FMV), the lease should be treated as a finance lease (or capital lease) rather than an operating lease, reflecting essentially a purchase for accounting purposes. This rule helps determine if the lease transfers substantially all the risks and rewards of ownership, requiring balance sheet recognition of the asset and liability.
Here are some red flags to watch out for when signing a lease:
Excess mileage fees
Most leasing companies charge 15 to 25 cents per mile you drive over your lease's limit. For example, if you end up driving 15,000 miles on lease with a 12,000-mile annual limit, you might pay $450 to $750 in overage fees for those 3,000 extra miles.
Yes – of course you can lease a car if you're retired, and there is generally no age restriction when it comes to car finance. We find lots of older people discount leasing without really considering it, as they assume they'll be turned down.
The "1% lease rule" is a guideline in both real estate (rental income should be 1% of property cost) and auto leasing (monthly payment ideally under 1% of MSRP), used for quickly assessing potential deals, though it's a simplified benchmark that doesn't account for all expenses or market variations. In car leasing, a $40,000 car should ideally lease for around $400/month (before tax), while for real estate, a $200,000 home should aim for $2,000/month in rent.
A lease on a $70,000 car typically costs $700 to $1,200+ per month, depending heavily on your credit, down payment, lease term (e.g., 36 months), mileage allowance, and the car's residual value (what it's worth at lease end). Expect to pay several thousand dollars upfront for fees and taxes, with the monthly cost reflecting depreciation, interest (money factor), and taxes.
But according to personal finance expert and New York Times bestselling author Suze Orman, you should never lease one. “Leasing a car is the biggest waste of money out there. You only get to drive at 12,000 miles. You have to have a lease gap insurance.
They Think Long Term. The average car on the road today is over 12 years old, meaning people keep vehicles longer than ever. Wealthy people factor this into their decision-making. If you're planning to keep a car for more than six years, buying almost always makes more financial sense.
The $1,000 a month rule is a retirement guideline suggesting you need about $240,000 saved for every $1,000 per month in desired income, based on a 5% annual withdrawal rate (5% of $240k is $12k/year, or $1k/month). It's a simple way to set savings goals, but it doesn't account for inflation, taxes, or other income like Social Security, so it's best used as a starting point, not a complete plan.