For many Americans, retirement means freedom: The flexibility to hit the links whenever the sun shines, or even to take a road trip to visit parts of the country you’ve never seen or far-flung family members.
But once you retire and start living off a fixed income, slowly drawing down your savings, you need to be careful about how you spend your money — especially if you’re still carrying a mortgage.
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Of course, you’re far from alone in this. Data from the Federal Reserve revealed 64.8% of households ages 65 to 74 carried debt in 2022, which is a significant increase from the 49.7% of older households in debt in 1989. Average debt also surged from $10,150 per household ages 65 to 74, up to $45,000 between 1992 and 2022.
If you’re just carrying mortgage debt, you’re doing pretty well for your demographic. However, unexpected expensive purchases can take a toll on your budget. Say you’ve been retired for two years since you packed it in at 65 and all those road trips to visit family have taken a toll on your current vehicle. It’s time to replace it. You’re willing to opt for used, but you’re still feeling a bit of sticker shock at what it costs to buy even secondhand these days.
If you’re now trying to decide if you should borrow for a car, though, you should be aware that you’ll be joining the ranks of retirees with non-mortgage debt. And you’re right to be nervous about doing that, as committing to making monthly payments while you’re on a fixed income can be tough since you’ll have less money to spend going forward once you do that.
If you need transportation, you may feel like you have no choice, though — but before you move forward, there are a few things to think about first.
How to decide if you can afford a vehicle on a fixed income
The first thing you’re going to need to do is to make sure that your vehicle will be 100% affordable if you borrow for it. You do not want to increase your retirement account withdrawal rate above a safe withdrawal rate, which Morningstar analysts now agree is 3.7%, although it used to be 4%.
If you can afford car payments while sticking to a safe withdrawal rate, either because you have wiggle room in your budget already or because you can cut back on non-essentials, then you can go forward with borrowing if you must.
You also can’t forget about the costs of maintenance and insurance, though, which you’ll want to ensure you can afford on your budget before moving forward. You can get insurance quotes before you buy to estimate these expenses.
Make sure you don’t borrow too much
If you do the math and the car payments, maintenance, and insurance costs seem reasonable, there are still a few caveats to consider.
First, experts recommend you aim to make a down payment of at least 10% if you’re buying a used car and 20% if you’re buying new. This will help you avoid ending up “underwater” or owing more than the car is worth.
If you don’t put money down, the car can depreciate or decline in value faster than your loan balance, and this creates big problems because you can’t easily sell the car or refinance if you need to. You would need to bring cash to the table to pay off your loan.
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You also want to avoid taking a very long car loan, as this makes your debt payments last longer and increases your total interest costs, and you’ll want to make sure you understand the terms of your loan, including the total costs over time.
Experian reports the average monthly auto loan payment in the last quarter of 2024 was $742.
Further, the typical loan term for has risen to 67.98 months. Being in debt for nearly six years for a vehicle is a long time when you’re 67, especially if your payments are anywhere near this high.
To avoid committing your older self to such a big payment, which could become less affordable as you begin to incur more expenses due to the effects of aging, aim to limit your loan to the shortest term possible and the lowest amount possible — even if that means your car isn’t the fanciest.
Alternatives to a car loan in your 60s and 70s
If you find that a car loan is simply too expensive, or if you’re still concerned about how it will impact your finances, you should consider alternatives before moving forward with borrowing.
Looking for a cheap used car you can pay cash for could be your best option — but remember, don’t take too much out of your retirement accounts and drain your balance. Instead, work on saving over time from your regular monthly income.
Leasing a car could come with cheaper monthly payments, but keep in mind you’re essentially renting a car and won’t end up owning it, and you’re restricted in how much you can drive the car and what changes you can make. You could also get stuck either paying a lot to buy the car at the end of the lease, or leasing for the rest of your life and having ongoing payments forever.
If you can’t pay cash for a car or find an affordable one within your budget, then buying a car simply may not be in the cards. Many older adults get discounts on public transportation, and some communities help them out with low-cost or no-cost rides to stores and medical appointments. While going without a car may seem like a pain, it’s a lot better than going without other necessities like food or medicine.
If you do decide to buy, be sure to shop for a car loan before you go to the dealer to see if you can get better rates and terms. Focus on affordability by taking the entire cost into account, not just the monthly payment, and don’t take out a long loan or a loan you don’t fully understand, or you could end up with serious regrets.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
