Should Retirees Buy or Lease Cars?

The debate over whether to buy or lease a vehicle is a seemingly endless one. Credible arguments can be made in favor of either option. Buying a car gives you the freedom to drive as many miles as you want, allows you to pay off the vehicle and end your monthly payments, and leaves you with an asset that you can sell for money or trade in for credit when it's time for a new one. These are the primary reasons financial experts recommend buying a car rather than leasing one.

However, as people reach retirement and move beyond, a lease has some age-related advantages that may make it more attractive than buying a car outright. Here are some things for retirees to consider about car leases:

One of the benefits of leasing a car is that you can almost always get a current model year vehicle with all the bells and whistles for lower monthly payments. This has many advantages for people whose reaction time may be slowly slowing – notably, the latest in safety features, such as parking assist, lane departure warnings, rearview cameras, and global positioning systems.

Newer vehicles also come with more airbags, crumple zones and better overall safety ratings than older models. Therefore, people who lease get a very safe vehicle for less than it would cost to buy a brand new car.

Leases are not as simple or cheap as they are often made out to be in advertisements. But monthly lease payments are, on average, lower than car loan payments. For people living on a fixed income in retirement, lower monthly payments could make financial sense.

The website Edmunds.com has calculated that the average cost to lease a mid-sized sedan in the U.S. is $294 a month versus $400 a month to buy the same car. However, note that many lease agreements tack on additional fees at the end of the lease term, including those for exceeding the maximum number of miles allowed per year (typically 10,000 to 12,000 miles annually). If you're planning to use early retirement to make lots of road trips to family and friends – or to enjoy your new lifetime national parks Senior Pass at Yellowstone or Yosemite – you might want to wait on leasing a car until you reach a time when you're driving mostly to local errands.

But if you don't drive an excessive amount and would appreciate lower monthly payments, then a lease could be for you. Websites such as MarketWatch allow you to do a cost comparison between leasing and buying a car.

In addition to lower monthly payments, not having to worry about automotive repair bills can be a huge financial and emotional relief for people in retirement. One of the biggest problems with owning a car is being hit with a large and unexpected repair bill. This can be especially worrisome to a retiree carefully managing a monthly budget.

Because most cars that are leased are new, they come with warranty protection. There are two types of warranties available: bumper-to-bumper and powertrain. With a bumper-to-bumper warranty, you can bring your car into the dealership where you leased it and have it repaired at no additional cost should (nearly) anything go wrong. This warranty is more comprehensive than the powertrain warranty, which only covers the car’s propulsion system and tends to last for a shorter amount of time. Keep in mind that most lease agreements include a clause that leaves you on the hook for "excessive wear and tear" on the vehicle.

If you are easing into retirement and continuing to work part-time and lease a car for that work, you can deduct a portion of your monthly lease payment, as well as the vehicle’s depreciation, on your income taxes. The Internal Revenue Service provides information on its website as to how people who are leasing a car can go about getting this tax deduction. The deduction includes the percentage that the car is used for business, the monthly lease payment, and expenses associated with the vehicle, such as gas and general maintenance (commuting costs don't count). It is not available to people who finance a car purchase or buy a car outright. Be aware of this tax deduction on car leases if you continue to work in semi-retirement. 

While it is true that you won't have an asset to sell or trade in at the end of a lease term, a lease agreement does offer you the ability to simply return the vehicle and walk away. Having a car dealership take a car you’ve been leasing off your hands may be the perfect hassle-free option for retirees. It also comes in handy for seniors who reach the point where they no longer want, or are able, to drive a motor vehicle.

Just be aware that returning a leased car early, before the end of the term period, can result in penalty fees. In many cases, you’ll be responsible for paying out the remainder of the lease.

Even if you turn in the car on time, there is always a settling of the account at the end of a lease. Expect final charges such as paying for additional mileage, wear and tear, and other costs identified in the fine print of the contract.

Leasing a car does not always make sense. But for retirees on a fixed income who are getting older, leasing a vehicle rather than buying one may be the way to go.

Regardless of the decision you reach, be sure to crunch the numbers, consider all options and weigh the pros and cons for your particular situation. The final choice you make should be one that meets both your automotive and financial needs.