Last Week’s Question of the Week: What percentage of Americans do not have a will? Is it 68% or 48%?
ANSWER: 68% do not have a will.
HOST: As you sit with clients doing retirement planning, I assume you also get basic questions as to whether it is better to lease or buy their next vehicle and other tips to consider when car shopping?
KLAAS FINANCIAL: Yes, we are asked this question quite often because well, as we love to say, it depends on your situation. Going car shopping can give you big sticker shock, especially since many Americans are holding on to their cars longer, while others are regularly leasing their vehicles. To purchase a new vehicle today you are looking on average at cars ranging from $15,000-$70,000+. According to Kelley Blue Book, in July 2020, the average price for a light vehicle in the United States was $38,373. “Light” vehicle means a motor vehicle commonly referred to as an automobile, van, sport utility vehicle, or truck having a manufacturer’s rated capacity of 1 ton or less.
Tips to Know and things to consider before you go car shopping:
You should understand the pros and cons of both buying and leasing to see what works best in your current situation. Leasing a vehicle (essentially renting a car for a longer period) has greatly changed. Car leasing was once an option reserved for businesses and customers wanting luxury cars. Today it’s common in all classes of the market, from subcompact cars to pickups and luxury SUVs.
Previously, leasing represented about 1/3 of the new car market; however according to JD Powers, the trend has continued to rise, and in 2020, over 50% of all new cars are leased.
Compare monthly costs: On one hand, buying involves higher monthly costs, but you own something in the end. A lease has lower monthly payments but may get you into a cycle where you never stop paying for a vehicle.
Understand that cars (the ones we use for basic transportation) are not good investments since a new car depreciates or loses value almost immediately after you drive it off a dealer’s lot. As a quick rule of thumb, a car will lose between 15% and 20% of its value each year according to bankrate.com.
You will likely still be driving in your 80’s and maybe 90’s, so when we hear people say they are buying their last car as they enter retirement we know that this is likely not the case.
HOST: What are some of the biggest differences between buying and leasing?
KLAAS FINANCIAL: Some of the obvious differences include:
- Ownership: When you are buying you obviously own the vehicle as long as want to keep it. With leasing, you don’t own the vehicle (like renting) you get to use it, but you must return it at the end of the lease unless you decide to buy it.
- Up-Front Costs: Buying is the cash price, the down payment, taxes, registration, and other fees. Leasing includes the first month’s payment, a refundable security deposit, an acquisition fee, a down payment, taxes, registration etc.
- Monthly Payments: Loan payments are usually higher than lease payments because you are paying off the entire purchase price of the vehicle plus interest and other finance charges, taxes and fees. Lease payments are almost always lower because you’re only paying for the vehicle’s depreciation during the lease term, plus interest charges, taxes and fees.
- Mileage: When you own the car you are free to drive as many miles as you want. But keep in mind that higher mileage lowers the vehicle’s trade-in or resale value. Most leases limit the number of miles you may drive, often 12,000 to 15,000 per year. (You can negotiate a higher mileage limit.) Many are offering 10,000 miles per year, especially with people now working from home. You will have to pay charges for exceeding your limits, but they aren’t usually unreasonable.
- Want to change vehicles? You can sell or trade your purchased vehicle at any time. When you own your car you will have to deal with selling it on your own, or trading it in, whereas with a lease you simply return it at the end of the lease, pay any end of lease costs and walk away. In a lease, if you end the lease early, charges can be as costly as sticking with the contract.
- End of Term: At the end of the loan term, you have no further payments and you have built equity to help pay for your next vehicle. At the end of the lease (usually two to three years), you can finance the purchase of the car, or lease or buy another.
HOST: So, what are some other car shopping tips that we should be aware of?
- Do you want to buy a new car or used car? Used cars are going for record amounts, averaging about $20,000 in the U.S. due to supply and demand. Many companies are offering incentives for new car purchases which include zero percent financing and other incentives.
- Plan for your trade-in if you have one or do you want to sell your current car privately or to a family member?
- Consider financing considerations: How much of a down payment can you afford? Consider getting a car loan in place before you go shopping. Look at how monthly payments may figure in with your monthly budget. Auto loans over 60 months are not the best way to finance a car because, for one thing, they carry higher car loan interest rates. Experian reveals that 42.1% of used-car shoppers are taking 61- to 72-month loans while 20% go even longer, financing between 73 and 84 months.
- Fuel Economy: Are you sensitive to getting good mileage per gallon of gas? While gas prices remain at some of their lowest, what happens when they aren’t? Mileage can vary from 12 mpg for trucks to 50+ miles for hybrid cars, to over 100 miles for electric cars. Perhaps an electric car like a Tesla interests you? Just make sure to understand the upfront costs and the paybacks associated with the variations of the cars available.
- Latest technology and safety features: Research new safety features that are important to you. Today the latest models are loaded with advanced safety features such as rear-cameras, and advanced driver assistance technology, such as automatic emergency braking, adaptive cruise control, lane keep assist and blind spot monitoring. Consider bells & whistles; heated car seats, heated steering wheels, and remote starting.
- Warranty Coverage and Maintenance: What type of warranty do you need or want? Warranties, in general, can cover a wide variety of damages and repairs that may occur to your vehicle. Understand what the different types of warranties available for your new car cover.
- Factory Warranty: These warranties come with new cars, and they cover whatever the manufacturer deems appropriate. Many of these are offered 36,000 miles/3 years while many are 50,000 miles or more today.
- Extended Warranty: Extended warranties function similarly to factory warranties, sometimes offering coverage beyond the factory warranty.
- Bumper-to-Bumper Warranty: A bumper-to-bumper warranty offers comprehensive coverage for every part on a vehicle that’s manufacturer-approved. That means every part of a vehicle that you’ve made no modifications to.
- Powertrain Warranty: Covers repairs for basic drive components, such as the driveshaft, engine, transmission, and axles.
- Car Maintenance Warranty: This warranty covers general routine maintenance costs, such as oil changes, air filter replacements, and general tune ups and sometimes free car washes.
HOST: Jeff from our Money in Motion Listener Corner asks: How much should I be setting aside for my future retirement?
KLAAS FINANCIAL: We would say begin with a goal of 10% to 15% of your pretax income. But rules of thumb are just that, and how much you should save for retirement will depend a lot on your future, both the known and unknown parts, such as:
- Your life expectancy.
- Your current spending and saving levels.
- Your lifestyle preferences in retirement.
- Other income sources in retirement.
Consider the fact that you may want to replace 70-80% of your current income in retirement.
This Week’s Question of the Week: What is the average price for a new “light” vehicle in the U.S. in 2020? Is it $15,000 or more than $35,000?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.